HMRC is concerned that some individuals use tax avoidance schemes through their companies, such as contractor loan schemes. When the scheme fails, leaving the company with a significant tax debt, the company becomes insolvent and the tax is never paid to HMRC.
This draft provision will make the company’s directors, and others connected to the company, jointly and severally liable for the tax debts owing by the company when it is subject to an insolvency procedure.
However, all of the following conditions must also apply:
- the tax liability is expected to arise from tax avoidance, tax evasion, repeated insolvency, or is a penalty for facilitating tax avoidance or evasion;
- the company began insolvency proceedings so that some or all of the tax liability would not be paid to HMRC; and
- the individual was responsible for the company’s abusive actions, or he or she received a benefit from the result of those actions.
This is a very wide-ranging measure which is aimed at tax avoidance (undefined) as well as tax evasion (illegal actions). Tax avoidance could include the incorrect application of the IR35 rules, ie ignoring the requirement to pay tax on a deemed salary.
Instead of the tax debt dying with the company, this law would allow it to be transferred to; directors, shadow directors, and participators in the company who are shareholders but not directors. There will be a right of appeal against these measures.
The law will take effect for tax periods ending on or after the date the Finance Bill 2020 is passed, and for tax penalties determined and issued after that date.
Written by the Tax Advice Network