The Finance Act 2020 came into force recently and has introduced a number of changes to the administration and structure of the UK’s tax system. Among these are new measures designed to tackle instances where individuals repeatedly (whether intentionally or not) use or benefit from company insolvency procedures to withhold tax that would otherwise be payable to HMRC – effectively depriving the public purse of valuable revenue for their own gain.
The new rules give HMRC the power to hold individuals liable for unpaid tax under a range of specific circumstances in cases where a company enters insolvency, specifically:
With this legislation, the government is making a well-intended effort to promote good corporate citizenship and clamp down on poor tax behaviour. Interestingly, the definition of insolvency excludes the moratorium and restructuring plan regimes introduced by the Corporate Insolvency and Governance Act 2020.
However, the legislation’s broad scope means that some individuals – including turnaround, interim and non-executive directors – may find themselves in situations that could conceivably put them in scope of a liability notice, without them being the intended target.
The legislation’s explanatory notes do state that notices will not be issued against individuals such as ‘turnaround specialists’ whose ‘relevant connection with companies is part of a genuine attempt to save the company from failing’. However, pending any further guidance, it neither defines who counts as a turnaround specialist, nor explains how turnaround specialists are technically out of scope.
With this in mind, it is important that those who may hold directorships as part of turnaround or advisory work understand how their day-to-day work could interact with the new rules.
The first of the three circumstances noted – the ‘repeated insolvency’ rules – appears to target so-called ‘phoenixism’ but could equally hold serious implications for turnaround professionals that occupy a series of directorship roles.
To trigger the ‘repeated insolvency’ rules, an individual must have:
The very nature of turnaround specialists’ roles means that they could:
From the legislation’s perspective, where two or more businesses that a turnaround professional has held directorship roles in end up entering insolvency proceedings, this could put them within scope of the measures.
For some individuals this could pose an enhanced risk. For example, interim directors who regularly take on nominee directorships to support the rescue of a business via a pre-pack administration put their name to the process instead of the company directors. Key here will be showing that the nominee appointment was specifically for the ‘greater good’ and that the appointee is not a serial offender.
Similarly, it is also conceivable that the rules could be triggered in a case where a person is a director of at least three similar companies within a corporate group that – either at the same time, or in quick succession – enter insolvency. However, the wording of the legislation is not clear around whether this would indeed be the case.
Whilst the legislation is virtuous in its intent by increasing motivation to individuals around good corporate governance and robust accounting practices, there is a risk that we could see the resignation of respected directors from boards. This could include those who are considered to have expertise in stressed and distressed situations that, due to concerns over to a company’s practices or because they are unable to obtain the necessary information / appropriate comfort around their level of risk, feel they can no longer continue in their appointment.
Relying on the available appeal process to review a liability notice is clearly not comforting, but we hope that further information will be forthcoming to clarify how relevant individuals will be treated. In the absence of such clarity, there is a risk that consideration restructuring options could be influenced by the risk of personal liability.
Nevertheless, with the law now in force, those who undertake turnaround, nominee or interim directorships must ensure they understand the legislation’s contents and are taking steps now to minimise their personal risk.
Although it appears they are not the primary focus of the legislation, those who hold directorship roles as part of turnaround efforts should be aware of situations that could trigger a liability notice under the Finance Act’s new rules.
There are a few practical steps that we recommend to those acting as turnaround specialists or on the board of distressed companies: