HMRC have opened a consultation “ Tax abuse and insolvency” focussing on the exploitation of the insolvency procedures to avoid or evade taxes.
- HMRC considers that some taxpayers are misusing insolvency to escape their tax liabilities.
- One of the challenges to HMRC relates to how debts are established under the tax framework
- Most creditors establish that a debt is owed to them when they invoice the company for the provision of goods or services
- There is scope for a company to go into insolvency after a tax liability has arisen but before the debt is enforceable as there is a time difference between:
- when a tax return is filed and
- when an assessment or determination establishing liability is issued by HMRC following an enquiry into that return
The focus of the consultation document is those taxpayers who, in respect of corporate insolvencies (and this relates to all limited liability entities):
- Try to exploit the insolvency procedures to avoid or evade taxes and/or payment of taxes and duties; and
- Attempt to protect or hide the gains of tax avoidance or tax evasion; and/or
- Repeatedly accumulate tax debts without payment by running them through a succession of corporate vehicles (also known as “phoenixism”).
There are examples in the consultation document of what HMRC considers to be avoidance, evasion, and phoenixism in insolvency situations.
- In 2016 a new Targeted Anti-Avoidance Rule was introduced specifically to deal with phoenixism and applying to distributions in respect of share capital in a winding up.
- There are provisions within the Insolvency legislation that allow assets to be clawed back for the benefit of creditors in certain circumstances.
- HMRC has some powers to address attempts to abuse the insolvency rules to avoid paying tax however, these powers apply unevenly across the taxes.
- For example deliberately unpaid PAYE can be transferred to directors under Regulation 72 however unpaid corporation tax cannot.
Therefore, HMRC now wishes to take further steps in this area.
Transfer of liability:
The power to transfer liability of certain tax debts to company directors and could be extended to transfer liability to the persons responsible for the avoidance, evasion or repeated non-payment of taxes when there is a risk the funds will be lost in insolvency.
Joint and several liability:
This principle would enable HMRC to hold the persons responsible for the avoidance, evasion or repeated non-payment of taxes jointly and severally liable for tax debts in the event that the company could not meet the tax debts.
Both of the above could be extended to apply evenly across all taxes in prescribed circumstances, and with appropriate safeguards and clearly defined scope to ensure that businesses who are in genuine difficulties unrelated to tax avoidance or evasion are not impacted.
HMRC would also welcome suggestions on other ways to tackle this form of abuse. Responses to the consultation should be sent to
- Do you agree that HMRC should be tackling this behaviour? Are there any other forms of abuse of insolvency in relation to tax that ought to be tackled?
- To what extent do you consider that one of the above approaches could provide a helpful model for tackling the abuses outlined in this document?
- What do you think might be the key issues with applying one of these approaches to tackle the abuses outlined in this document?
- What views do you have for alternative approaches that could be adopted to tackle the forms of tax abuse outlined in this document?
- What safeguards should apply to ensure taxpayers’ rights are protected?
- Do you consider that the above parameters for scoping the measure are appropriate?
- Are there any other safeguards you think should be considered to ensure that genuine insolvencies are not impacted by any proposal to tackle these abuses?
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