Draft legislation on tax in insolvency

Included in the draft Finance Bill clauses published on 11 July 2019 are two measures aimed at protecting tax revenues in insolvency:

Changes to protect tax in insolvency cases

The impact of this measure, which is expected to apply from 6 April 2020, is that when a business enters insolvency, HMRC will be a secondary preferential creditor in respect of certain tax debts held by a business (this includes individuals and partnerships).

The measure will apply to the following taxes:

  • VAT
  • PAYE income Tax
  • employee National Insurance contributions
  • student loan deductions
  • construction industry scheme deductions

The rules will remain unchanged for taxes owed by businesses themselves, such as:

  • corporation tax
  • employer National Insurance contributions

The government has also published a summary of the responses to the consultation which ran from 26 February 2019 to 27 May 2019. Disappointingly the measure is being enacted as originally proposed and does not take into account the concerns raised by ICAEW in its representation 53/19 and others. The ICAEW representation stated that “This proposal is at odds with government efforts to foster an enterprise culture in recent years. It can be expected to deter lending and have other adverse consequences that have not been sufficiently considered in the proposal.”

Tax abuse using corporate insolvencies
The object of this measure is to prevent the abuse of corporate insolvencies by making directors and other persons connected to those companies jointly and severally liable for the avoidance, evasion or phoenixism tax debts of the corporate entity. The measure is expected to be operative from the date of Royal Assent.

The government published a discussion document on this measure on 11 April 2018 and a summary of responses on 7 November 2018. ICAEW responded to the proposals in representation 72/18.

The draft legislation sets out five conditions that must be met where an authorised HMRC officer issues a joint liability notice to an individual and three conditions that need to apply in repeated insolvency and non-payment cases for a notice to be issued. There is provision for an individual to appeal against a notice to the First Tier Tribunal.

ICAEW will review the legislation in detail and make representations as appropriate. Please send any comments on the draft legislation to caroline.miskin@icaew.com.

  • I'd just like to say that, personally, I feel quite a bit more than "disappointment" over HMRC's return to preferential status.  "Outrage" would be nearer the feeling.  HMRC has granted a mere crumb to respondents to the first consultation, in dropping their proposal that interest and penalties will also be preferential.  Their justification for this whole proposal is laughable and probably doesn't convince anyone that they're doing it to be fair to employees and customers who have "paid" taxes to insolvent entities on trust.  Bravo, ICAEW, for your incisive response to the first consultation.  We all had to try!