HMRC’s consultation document considers several behaviours related to misuse of corporate insolvency – tax avoidance, tax evasion and 
repeated non-payment of tax – to identify potential solutions. These could potentially include legislation, operational measures or other action.
This consultation only targets corporate bodies that exploit insolvency in this way and is not aimed at any particular size or type. Companies that enter insolvency for genuine commercial reasons will not be affected, the focus is on fraudulent insolvency.
The consultation closes at 11:45pm on 20 June 2018 and more information can be found on the .Gov website.
HMRC undertakes a range of compliance activities, from full tax enquiries to a variety of targeted interventions aimed at a particular activity or aspect of a taxpayer’s affairs. When HMRC finds underpaid, undeclared or understated tax, they issue assessments to the taxpayers concerned, or amend the incorrect return or claim. They may also charge penalties and interest if appropriate.
These actions formally establish a tax liability which the taxpayer is required to pay, subject to any appeals they might wish to make when payment of the tax may be postponed in some circumstances. Once the liability is established, most companies in this position pay what is due.
Additionally, HMRC may issue an Accelerated Payment Notice (APN) to people we believe have used tax avoidance schemes. APNs seek payment of disputed tax in advance of a case being settled. Recipients must pay the tax owed within 90 days – they pay now, dispute later. In all cases, if companies face problems paying the liability, HMRC will work with the company, to explore affordable payment arrangements, including offering more time to pay if appropriate.
However, a tiny minority seek to escape their liability even at this stage by misusing insolvency to retain their avoidance or evasion gains, or to benefit from repeated non-payment.
The insolvency regime exists to support restructuring and rescue for businesses in financial distress. Where this is not possible, it provides an orderly and fair winding-up of the business’ affairs and distribution of available assets to creditors. The winding-up of a business’ affairs will often involve HMRC as most companies will have some tax liability at the point they become insolvent.
In the event that a company commences formal insolvency proceedings during HMRC’s compliance activity, the company’s assets will be divided between creditors – including HMRC. This approach ensures that company owners have a limited liability in the event that their company can no longer continue.
However, HMRC is aware that some people are misusing insolvency to circumvent their tax responsibilities. These people own or manage companies and then cause or allow their companies to engage in tax avoidance, tax evasion, or repeated non-payment of taxes due. They might do this in a number of ways, for instance:
- the director/shareholder/controlling mind uses tax avoidance or tax evasion to extract value from a company
- the company accumulates tax debts, but pays its suppliers to ensure their support so that the director/shareholder/controlling mind can continue the company’s business through a successor if necessary;
Then:
- the company becomes insolvent (whether formally or functionally) holding no assets with which to meet its liabilities (including tax liabilities), often because those assets have been dissipated in anticipation of the winding up;
- the director/shareholder/controlling mind may continue acting in another guise (e.g. same trade, using the same customers/suppliers etc.)
The Bedrock team has experience of working with companies that have faced legitimate insolvency whilst managing HMRC’s interest in their tax affairs. If your company is in this position why not give us a call today to discuss how we may be able to help you.
