Against a Backdrop of Rising Corporate Insolvencies HMRC Joint and Several Liability Notices: Should Directors be Concerned?
It is widely anticipated that the next twelve months could be a challenging period for many businesses in the UK and that there could be a significant rise in the number of companies in financial distress.
Where this is the case, the directors of those companies will need to be increasingly mindful of the duties they have to the company's creditors, as well as to its shareholders.
One important creditor in this regard is often HMRC. This is because HMRC was recently elevated to preferential creditor status for certain debts and granted powers to issue joint and several liability notices ("JLNs") against directors of insolvent companies.
What are Joint and Several Liability Notices?
JLNs make individuals (such as directors) jointly and severally liable for a company's (or an LLP's) tax liabilities. This means that any one of those individuals may be pursued for all or part of the tax debt, unless the company (or LLP) no longer exists, in which case the individual is wholly responsible for the debt. This can obviously have significant implications for any individuals who are served with such notices.
The Finance Act 2020 empowered HRMC with effect from 22 July 2020 to issue JLNs to directors where, subject to the satisfaction of certain other conditions:
- the company of which they are a director (i) has entered into tax avoidance arrangements or engaged in tax-evasive conduct and (ii) is subject to an insolvency procedure or there is a serious possibility of it becoming subject to one; or
- the directors have, at any time during the five-year period ending with the giving of the JLN, been involved repeatedly with companies which entered into an insolvency procedure with unpaid tax liabilities.
An ‘insolvency procedure’ for these purposes is relatively widely defined and includes:
- A winding-up / a liquidation
Note that a members' voluntary liquidation is only treated as an insolvency procedure if "a period of 12 months beginning with the day on which the winding up commenced has expired without the company having paid its debts in full together with interest at the official rate" or the company has been wound up without paying its debts in full.
- An administration
- A receivership
- A company voluntary arrangement or scheme of arrangement (but not a Part 26A Restructuring Plan)
- A corresponding overseas insolvency procedure equivalent to any of the above.
However, an ‘insolvency procedure’ does not include a Part A1 moratorium, the new corporate 'breathing space' restructuring tool introduced as part of the Corporate Insolvency and Governance Act 2020 reforms.
Importantly, JLNs may only be given in cases of repeated insolvency where the total unpaid tax liabilities from the old companies (i) exceed £10,000 and (ii) represent at least 50% of the total amount of those companies' liabilities to their unsecured creditors.
In addition to the powers set out above, if a company is subject to an insolvency procedure or there is a serious possibility of it becoming subject to one, HMRC may, in certain circumstances, also issue JLNs to the directors to recover COVID-19 support payments which that company was not entitled to receive.
Anyone who receives a JLN may ask for either an HMRC internal review or appeal the JLN within 30 days of the notice being issued.
Why is this particularly relevant now?
The level of corporate insolvencies is expected to rise in 2023 as more and more businesses struggle with the post-pandemic economic landscape. Contributing factors have been high energy prices, elevated inflation, rising interest rates, labour shortages and global economic weakness following the coronavirus pandemic.
According to National Statistics by the Insolvency Service, the total number of corporate insolvencies in England and Wales in February 2023 was not only 6% higher than the previous month's figure but also 17% and 33% higher than the corresponding figures for February 2022 and February 2020 respectively.
Volatility in the global economy has been highlighted recently with the dramatic developments in the banking sector, including the collapse of Silicon Valley Bank and the emergency rescue of Credit Suisse by UBS.
Alongside the backdrop of this financial uncertainty, there has also been increased focus by the UK Government on the investigation and recovery of sums incorrectly obtained under the COVID-19 loan support scheme.
With these heightened levels of financial stress and, by extension, the potential for an increase in the number of corporate insolvencies, directors of companies may find themselves at greater risk of being issued with a JLN. This risk extends to shadow directors (i.e., those individuals who, although are not registered as directors, may nevertheless be deemed to direct or instruct a company) and certain other individuals concerned with the management of the company.
What can I do?
As shown from the above, JLNs can have a wide application and lead to serious financial consequences for those involved. Therefore, directors and anyone who might run the risk of being issued with a JLN need to be aware of the provisions and the risks involved.
If you are concerned about your company's ability to meet its tax liabilities or its liabilities generally, particularly in today's challenging economic times, and/or have any concerns that you may be at risk of being issued with a JLN, we would always recommend seeking expert financial and legal advice as soon as possible and invite you in the first instance to contact members of RPC's Restructuring and Insolvency team.