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UK anti-phoenixing legislation will pierce corporate veil

Monday, 30 September, 2019

New powers against directors of insolvent companies, which are about to be granted to HMRC in the Draft Finance Bill 2019-2020, are an unprecedented extension of piercing the corporate veil, according to tax advisors RPC.

HMRC will be able to issue notices making a potentially insolvent company's directors jointly and severally liable for its tax liabilities if they have been involved in tax avoidance or evasion. The provisions also apply to 'phoenixism', where companies have been involved with repeated insolvency or non-payment of tax. If the company no longer exists when the joint liability notice (JLN) is issued, the individual is wholly responsible for the tax debt if it is connected with the tax-avoidance arrangements or to the tax evasive conduct. The powers will be available immediately on enactment of Finance Bill 2019-2020.

This, says RPC, treats a person's use of certain tax-avoidance arrangements as if they had engaged in criminal conduct or dishonesty. Moreover, liability under a JLN extends beyond directors to any persons who took part in, assisted with or facilitated the tax-avoidance arrangements while taking part in the management of the company.

According to RPC, ‘tax avoidance’ is defined in the draft Bill by reference to various anti-avoidance rules, including but not limited to:

  • the general anti-abuse rule (GAAR); i.e. arrangements in respect of which a final counteraction notice has been given after considering the opinion of the GAAR advisory panel;
  • DOTAS arrangements; and
  • arrangements in respect of which a follower notice has been given.

Recipients of a JLN can appeal against it, or the amount it specifies, by asking HMRC to review its own decision. A further appeal can be made to the First-tier Tax Tribunal, although the appellant cannot challenge the existence or amount of the alleged tax liability as a ground for this appeal.

According to RPC, the proposed rules would be a 'very considerable extension to HMRC’s power’, introducing a special tax exemption to extend the exception of piercing the corporate veil to circumstances where criminal conduct is not alleged. This, it says, overrides a hundred years of company law established by the House of Lords in Salomon v Salomon (1897 AC 22).

Exceptions to the rule distinguishing companies from their shareholders have since then been narrowly construed, as in Rossendale Borough Council v Hurstwood Properties (2019 EWCA Civ 364). According to the UK Supreme Court in Prest v Petrodel (2013 UKSC 34), the corporate veil has only really been pierced in two cases, both of which were based on the 'evasion principle', in which the individual concerned sought to evade a legal obligation or liability by interposing a company under his control.

Provisions already exist to shift the burden from company to individual in certain limited circumstances, says RPC. Personal liability notices can already be issued to directors that had fraudulently failed to pay income tax debts or certain VAT penalties. But the courts and tribunals have generally been observant of the corresponding strict duty on HMRC to prove that deliberate or dishonest behaviour has taken place. There is no such requirement in the new draft Bill provisions.