Directors Firmly in the Crosshairs of HMRC – Finance Act 2020

6th August 2020 Restructuring & Insolvency

The Finance Act 2020 (FA2020) came into effect on 22 July 2020 and introduces provisions which make directors personally liable for the tax of a company (or in the case of an LLP, its members) in certain circumstances, namely (i) tax evasion; (ii) tax avoidance; and (iii) repeated insolvency and non-payment. This note focusses on tax avoidance and repeated insolvency/non-payment.

Such a liability arises upon an authorised office of HMRC issuing a notice to the director under FA2020, known as a joint liability notice (‘JLN’). The officer can give a JLN to an individual if it appears to the officer that certain conditions are met.

Tax Avoidance

Tax avoidance schemes are presently a hot topic following HMRC’s successful crack down and challenges to them, depriving companies of the benefit from such schemes. Further litigation has arisen where companies involved in such schemes have entered an insolvency process, with the officeholders (usually a liquidator) pursuing the directors for misfeasance in causing a company to enter into such a scheme.

The conditions which may give rise to a JLN being issued to an individual are that it appears to the officer that:

  • The Company has entered into a ‘tax-avoidance arrangement’ as defined by FA2020;
  • The Company is subject to – or there is a serious possibility of the Company becoming subject to – an insolvency procedure (including striking off the Register);
  • The individual was a director of the Company and (i) responsible (alone or with others) for entering into the tax-avoidance arrangement or (ii) received a benefit which to his knowledge arose from the arrangement or (iii) took part in, assisted with or facilitated the arrangement;
  • There is – or likely to be – a tax liability referable to the tax-avoidance arrangement and there is a serious possibility that some or all of the liability will not be paid.

Repeated Insolvency and Non-Payment of Tax

The conditions which may give rise to a JLN being issued to an individual are that is appears to the officer that:

  • There are at least two companies (‘the Old Companies’) in relation to which the individual was a director within 5 years of the JLN being issued (‘the 5 Year Period’);
  • The Old Companies became subject to an insolvency procedure during the 5 Year Period;
  • The Old Companies at the time of the insolvency procedure (i) had a tax liability or (ii) failed to submit required returns, declarations, applications or other documents which were relevant to the tax liability, relevance being relevant to the question of whether the company had a tax liability or how much its tax liability was;
  • Another company (‘the New Company’) is or has been carrying on the same or similar trade previously carried on by the Old Companies, and the individual has been a director of the New Company during the 5 Year Period;
  • At the time when the JLN is given at least one of the Old Companies has a tax liability and the total tax liabilities of the Old Companies is (i) more than £10,000 and (ii) represents over 50% of the Old Companies’ liabilities to their unsecured creditors.

The effect of the notice is that the director is jointly liable (i) with the Old Companies for any tax liability as at the date of the JLN and (ii) with the New Company for (a) any tax liability of the New Company as at the date of the JLN and (b) any tax liability arising in the 5 year period following the JLN.

The Repeated Insolvency JLN must be issued within 2 years of HMRC becoming aware of facts sufficient for them reasonably to conclude that the conditions for a JLN are met.

Individuals who are issued with a JLN have a right of review by HMRC, failing which a right of appeal to the First-Tier Tax Tribunal, both of which have deadlines for initiating.


The Repeated Insolvency JLN is designed to tackle directors of phoenix companies who trade without paying some or all of their companies’ tax liabilities, whilst paying trade creditors, leaving HMRC as the majority unsecured creditor in repeated insolvencies.

All that is required during a 5 year period is two failed companies where HMRC has been left as the majority creditor, and a third new company not in an insolvency process but which carries on the same or similar trade to the old companies.

Directors who have presided over two failed companies during a 5 year period, should seek advice on their exposure before embarking on a third venture.

The Tax-avoidance Arrangement JLN vastly increases the risk to directors of their companies participating in such schemes, if those schemes ultimately fail. The schemes are typically used to avoid substantial tax meaning that the potential liability to a relevant director will also be substantial.

Any director considering a tax-avoidance arrangement for a company should seek specific advice on their exposure to HMRC should such a scheme fail.​​​​​​

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Alejandro Worthington is a Partner located in Londonin our Restructuring & Insolvency department

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