HMRC tax collection powers in distress and insolvent situations

The measure

The Chancellor announced two provisions focused on tax recoveries from distressed and insolvent entities.

Protecting taxes in insolvency

Companies withhold or collect certain taxes from employees and customers such as income tax, employees’ national insurance, VAT and amounts under the construction industry scheme as agent for HMRC. Going forwards, HMRC will claim those taxes as a priority payment on insolvency, in priority to other unsecured or floating charge creditors.

Making directors liable for company taxes owed

For many years HMRC has been concerned by ‘phoenixism’ – situations where a company runs up significant debts, enters insolvency and sells the business to a new company, leaving significant tax liabilities amongst the debts left unpaid.

In early 2018 the government released a consultation document looking to target this issue and provide draft legislation enabling HMRC to pursue directors and officers of a company in certain situations. The intention to address this issue has now been confirmed.


Who will be affected?

Companies which become insolvent with unpaid tax liabilities.


When will the measure come into effect?

The provisions to give HMRC priority over other creditors for certain unpaid tax labilities in an insolvency process will come into effect from 6 April 2020.

The provisions to allow HMRC to make directors jointly and severally liable for company tax liabilities in certain situations will have effect from Royal Assent of Finance Bill 2019/20.

Our view

It is important to distinguish between the behaviour HMRC are concerned about and the vast majority of insolvencies, which are not artificial, and relate to genuine commercial difficulties.

Whilst we support any attempt to address tax evasion, we remain concerned that the draft legislation could be applied far more broadly in commercial circumstances that are not abusive, with negative economic effects. For example the uncertainty of the present arrangements could easily discourage turnaround directors with the risk of an unmanageable personal exposure, when their role is specifically to bring specialist skills on board to save business after business.

There are already a range of alternative remedies already available to address genuine avoidance.  It is to be hoped that the new measures will target inappropriate behaviour carefully and clearly.