Joint and several tax liability notices explained

Most people are familiar with the idea of a ‘phoenix company’. This is when a business becomes insolvent and is wound up. The old company’s business is transferred to a newly set up company. However, the debts are not transferred and usually remain unsettled. What many people don’t know, though, is that HMRC has quite significant powers to hold directors of insolvent companies personally liable for its tax debts. It can do this via a ‘joint and several liability notice’. In this post, we look at what joint and several liability notices are and the circumstances in which they can be served.

What is a joint and several liability notice?

HMRC has the power to issue joint and several liability notices under the terms of Schedule 13 of the Finance Act 2020. They hold directors, shadow directors and certain others connected to a company personally liable for its tax liabilities.

When this happens, HMRC pursues all individuals for the money that’s owed. It may take debt recovery action against any person with sufficient assets to pay. It doesn’t matter who pays, or how much they pay, as long as the debt is paid in full between them. The tax debt also takes precedence over an insolvent company’s other debts. In other words, it must be settled first before suppliers and other creditors.

It’s worth noting that a notice can only be served in relation to tax debts incurred after 22 July 2020.

A joint and several liability notice can be issued for the following reasons:

• Repeated insolvency and non-payment
• Tax avoidance and tax evasion / Where a penalty is charged for facilitating avoidance or evasion.

We’ll take a closer look at these circumstances in a moment. First, though, it’s worth looking at how common joint and several liability notices are.

How common are joint and several liability notices?

While we don’t have details of how many joint and several liability notices HMRC issues, we do know they are becoming more common. The amount of tax directors were required to settle in 2022/23 was £2.3 million. In 2023/24 this rose to £15 million. That’s a sixfold increase.

In other words, if HMRC thinks you’re using a company’s insolvency to avoid paying tax debts, it’s increasingly likely that you’ll be held personally responsible.

Repeated insolvency and non-payment

The first ground for serving a joint and several liability notice is repeated insolvency and non-payment of tax.

Let’s take an example. Mr Smith and Mr Jones are joint directors of a restaurant. It is wound up with an unpaid VAT debt of £15,000. They then set up a new company and transfer the business, but not the debts to it. A year later, this is also wound up with a unpaid VAT debt of £10,000. They then set up a third company, again transferring the business to it but not the debts.

In this case HMRC is likely to serve a joint and several liability notice for the full VAT bill, plus penalties. This means that, between them, Mr Smith and Mr Jones have to pay the full amount. They are also personally liable for any tax debts incurred by their third company.

Facilitating tax avoidance or evasion

This is when a notice is served on directors of a company that has made use of tax avoidance schemes under the terms of Disclosure of Tax Avoidance Schemes (DOTAS).

In these cases, the company needs to disclose the scheme. HMRC will then apply to a tribunal to determine a penalty. If the penalty relates to a period ending after 22 July 2022, and HMRC has initiated proceedings after that date, it can then issue a joint and several liability notice.

However, if the scheme ended before 22 July 2022 or HMRC initiated proceedings before that date, it cannot serve a notice.

Need help?

The best way to deal with joint and several liability is to make sure you’re not served with one of these notices. For this reason, if you need advice on how to wind up a company, set up a new one or comply with the terms of DOTAS, please talk to one of our accountants today. They’d be delighted to make an appointment to discuss your requirements in detail.