Draft legislation included in the Finance Bill 2019-2020 will potentially make directors and certain other individuals closely connected to a company jointly and severally liable for a company’s tax liabilities that arise from avoidance, evasion or repeated insolvency and non-payment of tax debts or tax-related penalties of the company.

The legislation is targeted at individuals closely connected to companies that:

  1. exploit the insolvency regime to avoid or evade tax payments or conceal the gains arising from tax avoidance or evasion;
  2. repeatedly accumulate tax debts without payment by passing these through a succession of corporate entities which are then made insolvent (so-called phoenixism); and/or
  3. seek to get avoid penalties under certain tax avoidance or evasion provisions by going into insolvency.

The new rules will be effective in respect of accounting periods that have not closed before the Finance Bill receives Royal Assent or tax-related penalties incurred after that date.

The proposed measures

Company engaged in tax avoidance or evasion

In the case of tax avoidance or evasion, an HMRC officer can issue a joint and several liability notice (a notice) to a relevant individual if:

  1. the company has entered into an insolvency procedure or there is a serious possibility that it will;
  2. the company has engaged in tax avoidance or evasion;
  3. the recipient of the notice was responsible for the avoidance or evasion, took part in, assisted or facilitated it or benefited from it (knowing that this arose from the avoidance or evasion);
  4. there is, or it is likely that there will be, a tax liability due to HMRC resulting from the avoidance or evasion; and
  5. there is a serious possibility that the tax liability will not be paid.


For phoenixism cases (i.e. cases of repeated insolvency and non-payment of tax), a notice can be issued where:

  1. the individual is connected to two or more companies which became insolvent in the five year period prior to the notice (the old companies) and at the time of insolvency the old companies had unpaid tax liabilities;
  2. the individual has a relevant connection to another company (the new company) during the same five year period and the new company carried on a trade similar to at least two of the old companies;
  3. one or more of the old companies has an outstanding liability to HMRC at the time the notice is issued; and
  4. the amount outstanding is not less than £10,000 and is at least 50% of the total amount due to creditors.

The relevant individual can then be jointly and severally liable for amounts owed to HMRC from the new company when the notice is issued or which arise within five years of the issue. The individual is also jointly and severally liable for amounts still owing from the old companies. The individual will have a relevant connection with the old companies if he or she is a director, shadow director or participator in the company. For the new company, the individual will also have a relevant connection if he or she is concerned, directly or indirectly, or takes part, in the management of the company.

Company subject to penalty for promoting or facilitating tax avoidance or evasion

Where a company has been involved in the promotion or facilitation of tax avoidance or evasion, an individual can be made liable any penalty charged to the company if:

  1. a penalty has been charged (or First-tier tribunal proceedings to charge a penalty have commenced) under particular statutory tax avoidance regimes;
  2. the company is subject to an insolvency procedure or there is a serious possibility that it will be;
  3. the person was a director or shadow director of, or participator in, the company when the act or omission giving rise to the penalty occurred or penalty proceedings began before the tribunal; and
  4. there is a serious possibility that the penalty will not be paid by the company.

Impact of the new rules

Although HMRC states that the legislation is aimed at the small minority of taxpayers who artificially and unfairly seek to reduce their tax bill through the misuse of insolvency, the broad drafting means it may catch a larger range of situations than this.

In particular, HMRC notes that where an individual is impacted by the legislation by being a “participator”, a notice will not be issued where the individual acted in good faith and had no influence over the company’s affairs. This is helpful, however, there remains uncertainty as to what HMRC will determine as sufficient influence for this purpose.

There is further ambiguity in the drafting with “serious possibility” not being defined. HMRC has stated that it would seek to implement the rules where there is “serious risk” of insolvency, but this is not reflected in the drafting.  There has also been concern expressed that this is another piece of anti-avoidance legislation under which HMRC has sought to conflate tax avoidance and tax evasion as being equivalent when previous legislation and decisions of the Courts have sought to transfer liability of limited companies to their directors and shareholders only in the case of deliberate and fraudulent acts.

It is hoped that further guidance will be published that will more clearly set the scope for when these rules might be used.