Directors are again at risk in relation to Increased Personal Financial Risk, including Personal Liability for Company Tax Debts is on the horizon.

 

It is inevitable that as a result of the recent high-profile company failures (e.g. Carillion, BHS, Mothercare), the UK Government continues to target poor corporate governance, through its Consultation on Insolvency and Corporate Governance (‘The Consultation’).

The response to this Consultation (published in late 2018), is more bad news for the director, as we believe it will result in reforms which will increase the risk for the Director, especially Increased Personal Financial Risk. In this article, we look at these reforms and their likely implications.

 

The Aim of the Proposed Changes

 

The objective of the changes is to stop the practice of Directors setting up Phoenix companies. This is where the old company is liquidated, owing debts to trade creditors and HMRC. Then the Directors set up new a company doing practically the same trade as the old company, with the same customers and suppliers but debt free.

 

Areas which are likely to be pursued

 

The following factors are likely to evolve out of the Consultation:  

 

• Director Disqualification – An extension of provisions under the current Company Director Disqualification Act 1986, to include investigation of the conduct of Directors of dissolved rather than liquidated companies. Very little attention is currently placed on such companies, even though many of them cease trading loaded with debt. It appears that this may now change

• An enhanced obligation being enforced on Directors to protect shareholders in the sale of a distressed entity

• In the future, individuals with a connection to the company (including Directors, Shadow Directors and LLP members) may become jointly liable for some of the company tax liabilities, in respect of periods after 06 April 2020 and/or on default owing after that date.

 

The Conditions

 

1. Generally, the conditions are fulfilled in two or more companies where it can be

demonstrated that the individual has a relevant connection within the five years prior to a notice of liability being issued; or the companies have entered into insolvency within that five year period; and/or at the time of insolvency they had unpaid tax liabilities; or failed to submit a return/document as required; or

• A new company is created which is carrying on the same trade or activity                

similar to the two entities, during the five-year period and the individual has a relevant connection with the new entity and/or

• At the time notice of liability is issued by HMRC to the individual, one of the original

entities has an unpaid tax liability of more than £10,000.00 and that tax liability amounts to more than 50% of the total liabilities of the relevant companies.

 

When a Notice of Liability is issued by HMRC?

If A Notice of Liability is issued, the individual will be jointly liable together with the new company for any tax liability of the new company (that is unpaid on the day on which notice of liability is given). They will also be accountable for any tax liability that the new company incurs during the five-year period following the notice being issued.

Conclusion

 

HMRC are undoubtably, the largest unsecured creditor in many liquidations within the UK. If these personal liability proposals become law, then we can foresee that many Directors who currently avoid responsibly paying HMRC when their company goes into liquidation, will no longer be able to do so. 

These proposed changes do not even attempt to hide their emphasis or direction. 

Next Step

If you want to find out anything further about this topic then please feel free to call me on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com

This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.