Tax Abuse And Insolvency

Published April 2018

On 11 April 2018 HMRC issued a discussion document entitled Tax Abuse and Insolvency seeking views, on how to tackle the small minority of taxpayers who they believe abuse the insolvency regime, by trying to avoid or evade their tax liabilities.  The consultation ends on 20 June 2018 and is being led by the HMRC Counter Avoidance Directorate.

The document acknowledges that the overwhelming majority of taxpayers meet their obligations. However, since 2010, HMRC has secured over £175 billion in additional compliance revenue as a result of its actions to tackle tax evasion, tax avoidance and non-compliance.  HMRC are now focussing on those who seek to misuse insolvency by running up tax liabilities in a limited liability entity then avoid paying them by making the company insolvent – and setting up a new company to carry out the sale practice again - sometimes known as “phoenixing” or “phoenixism”.

HMRC recognise that although Insolvency Practitioners have a number of legal actions available to them to clawback assets from directors/shareholders and/or to impose personal liability, pursuit of these proceedings are:

  • Expensive;
  • Reliant on the provision of information available;
  • Subject to litigation risk; and
  • Dependant on the officeholders’ appetite for such litigation.

Consequently, even if proceedings are instigated, commerciality kicks in and such proceedings often end up in a discounted settlement being reached.

Four examples are given in the document of the type of behaviour that HMRC is looking to address which includes; Tax Avoidance; Tax Evasion; Phoenixism; and Employment Intermediary and then asks whether respondents to the documents agree that HMRC should be tackling these types of behaviour.

HMRC then sets out possible approaches to tackling abuse. Through three further questions they seek views on the usefulness of the approaches set out, the key issues with applying such approaches and invite views of any alternative approaches.

HMRC recognise that there needs to be safeguards and that taxpayers and other creditors’ rights are protected. As a final question, they ask what safeguards should apply to ensure taxpayers’ rights are protected.

The full document can be found at;

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/698173/Tax_Abuse_and_Insolvency_A_Discussion_Document.pdf

At Cranfield, although we support HMRC’s efforts to ensure all taxpayers meet their obligations, better monitoring of corporate taxpayers’ affairs and more timely action to collect overdue tax will yield far better results. In our opinion this will reduce the losses HMRC suffers through insolvency procedures, rather than trying to close the barn door after the horse has bolted.

We would be pleased to hear from other professionals as the effectiveness of HMRC’s current collection performance – just contact us on 02476 553700.

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