HMRC Insolvency Powers from April 2020

From 6th April 2020 new measures regarding insolvency will be introduced by the 2019-20 Finance Bill meaning HMRC will have increased powers.

It is proposed that Finance Bill 2019-20 will contain measures to ensure that from 6 April 2020 where a company becomes insolvent with unpaid tax liabilities which it holds in trust to pay to HMRC, these liabilities will take priority over other unsecured or floating charge creditors.  

Taxes that a company holds in trust for HMRC include VAT, PAYE Income Tax, Employee’s National Insurance Contributions and Construction Industry Scheme deductions.  Other company tax liabilities such as Corporation Tax and Employer’s National Insurance Contributions will not be affected by the measure.  HMRC will remain below preferential creditors.

Diane Dunion, Partner from Begbies Traynor Stoke has helped to expand on what exactly this means for businesses:

“The draft legislation proposes to amend The Insolvency Act 1986, giving HMRC priority in the recovery of VAT and certain other debts owed to HMRC in insolvency proceedings; by creating a new category of creditor for the purpose of the distribution of assets. 

When a business enters formal insolvency proceedings, the order in which assets are distributed is prescribed by law.  Currently, HMRC ranks as an unsecured creditor.  The introduction of the legislation will allow HMRC to rank as a “secondary preferential” creditor, which places them in a better position on the creditor hierarchy.

However, HMRC will remain an unsecured creditor, for taxes levied on businesses such as Corporation Tax and Employer NIC.

The Explanatory Note to the Legislation notes that “the Government does not believe it is fair that taxes paid by employees and customers should be diverted to other creditors, when these are only held temporarily by businesses whose role is to transfer these payments to the Government. The Government view is that this is a fair approach that balances the interests of creditors and the Exchequer, which relies on these taxes to fund public services.”  

Monies collected in respect of those taxes paid by employees and customers, are essentially held on trust for HMRC.  On that basis and in the event of formal insolvency proceedings, these funds will be paid over to HMRC – to “benefit the wider population by being utilised for their original purpose” (i.e. to fund public services).”

The new finance bill will also allow HMRC from 6 April 2020 to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency. It is designed to prevent individuals benefitting from avoidance or evasion through the insolvency of their business when unable to pay its debts to HMRC.

The conditions for a joint liability notice are:

  • Insolvency is underway for the company or there is serious threat of insolvency
  • A company has entered into tax avoidance arrangements, or engaged in tax evasive conduct.
  • The person either was responsible for the company/LLP (perhaps as a director or shadow director), enabled the avoidance or evasion or benefited from it
  • A tax liability is expected to arise from the avoidance or evasion and there is a serious possibility that some or all of that tax will not be paid

The new rules will also allow HMRC to issue a joint liability notice to individuals whose companies have been involved with repeated insolvency or non-payment of tax with limited liability

There is a common misconception that directors/members will not be personally liable for anything, because their business has limited liability (either Limited Company or Limited Liability Partnership).  This is not always the case and more people may find themselves held accountable for their actions as a result of the changes.