Joint and several liability – ‘phoenixism’

HM Revenue & Customs (HMRC) recovery powers have been further extended by the Finance Act 2020, which has introduced measures to enable HMRC to recover outstanding sums owed to it. The Act confers powers on HMRC to issue joint and several liability notices (JSLN) to directors, shadow directors and certain other connected parties to a company. They can issue a JSLN in the following circumstances:

• Tax avoidance arrangements or tax evasive conduct
• Repeated insolvencies of companies and the formation of new companies together with the non-payment of tax liabilities (known as phoenixism because the new company rises from the ashes of the old)
• Cases involving penalties for facilitating tax avoidance or tax evasion.

Here we focus on JSLN measures in relation to phoenixism.

If HMRC issue a JSLN, the individual and company in question are made jointly and severally liable for the debt, unless the company no longer exists, in which case the individual is wholly responsible for the debt. The following conditions must be satisfied before HMRC issue a JSLN in the case of phoenixism:

• the individual being issued with the JSLN has a relevant connection to at least two companies that were subject to an insolvency procedure within the last five years, and those companies had outstanding amounts owed to HMRC
• at least one of the companies subject to an insolvency procedure had unpaid tax liabilities of more than £10,000, and the unpaid tax liability exceeded 50% of the amount owing to creditors at the time the JSLN is issued
• the individual has a relevant connection to a new company during that five year period, which trades in a similar vein.

HMRC is time-limited in issuing a JSLN; it must be issued within two years from when they became aware that the above conditions were satisfied.

It appears that HMRC are trying to prevent circumstances where they are left as majority creditors as a result of phoenix companies that continue to trade and meet their other liabilities, but fail to pay part or all of the liabilities owed to HRMC.

Given the significant potential liability for directors and other individuals connected to the company, these provisions must be considered in the context of any restructuring or insolvency involving significant HMRC liabilities.

Directors should seek legal advice if they intend to use insolvency procedures to restructure or reorganise their companies in order to manage any potential tax liabilities that may incur as a result of a JSLN.