Pinning down Directors and Shadow Directors
S.100 and schedule 13 FA 2000 enable HMRC to issue notices to transfer tax liabilities of companies and limited liability partnerships to directors, shadow directors and other individuals connected with managing the business. Section 251 of the Companies Act 2006 provides that a shadow director is a person in accordance with whose directions or instructions the directors of the company is accustomed to act. These notices impose ‘joint and several’ liability. The result is that tax liabilities of a company or LLP are transferred to those who:
- Are registered directors
- Are shadow directors
- Who are otherwise involved in the management of the company.
The new joint and several liability provisions apply to those suspected of tax avoidance or evasion, fraudulent COVID-19 support claims and repeated corporate insolvency. There is a right to an HMRC internal review and/or to appeal the notice within 30 days of the notice being issued.
Notices will only be issued in circumstances where there is a serious possibility that the corporate will go into insolvency, and that the tax charges will not be met by the corporate.
It is important to note that the company does not actually have to be in liquidation. HMRC can make a judgement call as to whether a company does or does not have enough assets to cover its liabilities even though formal insolvency proceedings have not started. One can see the potential for plenty of argument here between those served with joint and several notices and HMRC. In particular, HMRC will have to justify the reasonableness of any decision taken.
Even when tempted, we at Levy and Levy try hard not to rub our hands together when the prospect of the tax environment becoming even more likely to give rise to litigation, such as with this legislation, looms large. Nonetheless, the legislation is likely to generate plenty of controversy.