The Finance Act 2020 and tax liability: what turnaround and interim directors need to know

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:

1. cases where an individual is connected to a pattern of repeated insolvency and non-payment of tax
2. tax avoidance and tax evasion
3. cases involving a penalty for facilitating tax avoidance or evasion

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.

Why is this important?

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:

1. Had a ‘relevant connection’ – defined as being a director, shadow director or a ‘participator’ in the company – with at least two companies that, at some point in the last five years, became subject to an insolvency procedure. The companies (referred to as ‘old’ companies) must have had an outstanding tax liability when they did so.
2. During the same five-year period, the individual must have had an additional ‘relevant connection’ with a ‘new’ company that’s involved in the same, or similar, business as the old. Here, ‘relevant connection’ also includes any role in running the company and its affairs, directly or indirectly.
3. At least one of the old companies must still have an outstanding tax liability when the liability notice is issued, and their combined tax liability must be more than £10,000 and more than 50 per cent of the companies’ liability to their unsecured creditors.

The very nature of turnaround specialists’ roles means that they could:

1. Occupy multiple director positions over a relatively short period of time, including within group structures. Portfolio interim directors could even hold a number of positions across more than one business simultaneously.
2. Repeatedly work with companies involved in a very similar, or identical, business as a result of being experts in a specific sector or
3. Genuinely be recommending and then implementing crucial restructuring strategies without which the opportunity to rescue businesses and preserve employment would be lost.

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.

Susan Moor, Director of FRP Transition outlines what relevant professionals might need to consider

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:

1. Undertake and maintain a rolling review of any previous directorships held to understand whether the repeated insolvency rules could make an individual susceptible to a liability notice.
2. Being able to demonstrate that they genuinely are a ‘turnaround specialist’ – the language used by the legislation’s explanatory notes, and a group that will be out of scope – will likely put them in a stronger position should they face a liability notice. Membership of professional organisations – such as the Institute for Turnaround (IFT) or the Turnaround Management Association (TMA) – could help a professional bolster their credentials. However, factors such as having a demonstrable track record in turnaround practice will also likely come into play.
3. Putting an increased focus on conducting thorough pre-appointment due diligence for any role they are considering will help them better understand the current state of the company and thoroughly assess the risks before making any decision to step into a role. Reviewing a prospective company’s tax liabilities or forecasts, and getting an early view of likely outcomes, can support this process.
4. Securing the backing of all relevant stakeholders and keeping detailed minutes of any board meetings they attend to document what decisions are taken by whom and when will mean they’re able produce a record of how decisions have been made during their tenure.
5. Carefully tracking the tax position of a business from the moment they enter a director role to the end of their tenure could also be useful if they ever need to show how a company’s tax situation has changed – for better and for worse – during the period they were connected to the business.