What are the joint and several liabilities for directors and LLP members?

The Finance Act 2020 (“the Act”) came into force on 22 July 2020 allowing HMRC to hold company directors, shadow directors, or members of Limited Liability Partnerships jointly and severally liable for the company’s tax liabilities, albeit in limited scenarios involving insolvency or potential insolvency.

The Act provides that such liability arises where the individual is given a Joint Liability Notice (“JLN”). If a valid JLN is issued then the individual(s) and the company will become joint and severally liable for the company’s tax liabilities unless the company ceases to exist in which case the individual becomes solely liable. There are generally three occasions when this kind of notice will be given:

1. Tax avoidance and tax evasion cases

HMRC may issue a JLN to an individual if a company has entered into tax avoidance arrangements or engaged in tax evasive conduct and that the company is insolvent or there is a serious possibility of the company becoming insolvent. The JLN can only be issued to individual(s) responsible for the company entering the arrangement/engaging in the conduct or to individual(s) receiving a benefit which the individual knew came as a result of the arrangement/engagement. Finally, the JLN can only be issued in the event that there is, or is likely to be, a tax liability as a result of the arrangement/engagement and that there is a serious possibility that some or all of the liability will not be paid.

2. Repeated insolvency and non-payment cases

HMRC may also issue a JLN to an individual who has been ‘connected’ to two or more separate companies that were each subject to an insolvency procedure at the time they had a tax liability or had otherwise failed to account to HMRC. The individual will only be subject to a JLN if they are also connected to another new company that is carrying on a similar trade or activity to the two “old” insolvent companies. There are some additional time limits and minimum value requirements that HMRC will have to consider before issuing a JLN but in essence this provision restricts the ability of directors to start new ‘phoenix’ companies to succeed failed business ventures.

3. Cases involving penalty for facilitating avoidance or evasion

The final circumstance in which HMRC can issue a JLN occurs when a penalty has been imposed by HMRC on a company under a number of specified provisions linked to tax avoidance or evasion. These specified provisions are detailed in the Act. If the company then becomes subject to an insolvency procedure, or is in real danger of doing so, then an individual can be issued with a JLN if they were a director or shadow director at the time the act or omission leading to the penalty took place and there is a serious possibility that some or all of the penalty will not be repaid.

Those in receipt of a JLN have a limited ability to request a review or appeal to the First-tier Tribunal providing that they do so within 30 days. Directors should seek legal advice on their potential personal liability if they are considering a restructuring or insolvency procedure as the impact of a JLN could be devastating. Shadow directors, managers, shareholders, lenders or other connected parties could also theoretically be held liable due to the broad scope of the legislation and should also obtain legal advice if they are concerned about the solvency of their company.