Insolvency will not afford tax evasion excuse from 2019

The government is to press ahead with legislation in 2019/20 to allow HMRC to make directors and other persons involved in company tax avoidance, evasion or phoenixism jointly and severally liable for tax liabilities that arise from those activities where the company becomes insolvent, following a consultation on the issues

The consultation, which ran from April to June, focused on what HMRC describes a ‘small minority’ who run up tax debts through avoidance, evasion or repeated non-payment and side-step their payment requirements through insolvency.

Respondents were broadly supportive of HMRC’s plans to crackdown on this kind of tax abuse, although some argued that powers already exist to tackle aspects of this problem.

In response, HMRC said existing powers are often disparate in nature and focussed on particular, narrower, issues while a more coherent approach is required.

The government believes that extending joint and several liability to directors, company officers and other relevant related parties offers the greater flexibility to appropriately target the measure and would act as a stronger deterrent to those tempted to dissipate the fruits of their non-compliance. Joint and several liability will enable HMRC to take targeted and proportionate action prior to insolvency proceedings, when it is clear that revenue is at risk. Making relevant persons jointly and several liable for corporate liabilities at this stage will discourage them from causing their company from becoming insolvent unnecessarily.

In contrast, the option of introducing director bonds and an offence of criminal liability did not offer the flexibility of the proposed joint and several liability, and are likely to impose a higher administrative burden.

The extension of joint and several liability to directors, company officers and other relevant related parties will only be available in cases of tax avoidance, evasion and repeated non-payment of tax to ensure that this measure does not stifle enterprise in genuine commercial businesses.

In response to consultation requests for clear safeguards set out in legislation and a right of appeal to the tribunal, the government says it is proposing an appeal right to prevent disproportionate outcomes, together with clear definitions to determine when and to whom the measure will apply, to ensure it is appropriately targeted.

Scope

The measure will only apply where HMRC considers that avoidance or evasion has taken place, or where there is evidence of phoenixism. HMRC will only be able to collect a charge when there is an established liability and it is clear that the liability has arisen through avoidance, evasion or phoenixism.

The government intends for the general anti abuse rule (GAAR) and disclosure of tax avoidance scheme (DOTAS) provisions to be included as definitions of tax avoidance for the purposes of this measure. Additionally, the government intends to ensure that this measure would also address those who, as a result of seeking to enable or facilitate others to avoid or evade tax, have incurred certain HMRC penalties and then move into insolvency as a way of avoiding paying those penalties.

The government therefore proposes that penalties raised on facilitators of avoidance under DOTAS, disclosure of avoidance schemes VAT and other indirect taxes (DASVOIT), promoters of tax avoidance schemes (POTAS) and avoidance enablers, and penalties on facilitators of evasion should be brought within scope.

Consultation outcome Tax abuse and insolvency released 7 November 2018.

Report by Pat Sweet

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