A Discussion Document' launching a public consultation on the 'need to tackle the small minority of taxpayers who abuse the insolvency regime in trying to avoid or evade their tax liabilities through the use of companies or similar structures.'
It does not require a huge leap to see that this consultation is a further element of the sustained efforts of successive Governments' over the last decade to tackle tax avoidance in all of its various hues.
Those with a keen memory may recall that I wrote just over a year ago on this very topic and the various measures being used by HMRC to decrease the tax gap; the shortfall between the tax estimated to be due in any tax year and that received. I pointed to the £1.8bn, which had been invested in boosting HMRC's compliance capabilities and the increased proliferation of security/bond demands, accelerated payment notices (APNs) and personal liability notices; all being very visible signs of policy implementation.
In autumn 2017 the Government reported further success in narrowing the tax gap to £34bn, being 6% of all revenue and the lowest percentage level in any tax year dating from 2005. Revealed in the statistics however is the fact that SME's are responsible for £15.5bn of the shortfall, and hence point to why there is now spotlight on how the use of an insolvency process may be seen as a means by which such businesses 'avoid' paying tax.
An interesting dichotomy arises in the intended operation of the insolvency regime and tax regimes, where a company is served with but cannot meet an APN. In such circumstances HMRC has a stated willingness to discuss with any tax payer their ability to pay and will assess and make allowance for the hardship that may arise; indeed there is still some doubt as to whether in addition to the imposition of a penalty, HMRC would/can seek to enforce the non-payment of an APN as a 'debt' capable of founding the basis for a winding up proceedings. Conversely a Board considering the liabilities of the company and taking into account future, prospective and contingent liabilities cannot fail but take into account the APN when reviewing its solvency. As a result this and other measures taken by HMRC may well result on pressures placed on the company which may lead the directors to conclude that the company is insolvent, on at very least, a balance sheet basis. When faced with the possibility of wrongful trading a prudent strategy might well see the use insolvency processes that would see the business being saved but leaving the liability behind. Is this intentional tax avoidance?
The tension that exists in any insolvency in restructuring/saving the business vs the interests/payment of creditors is always evident but perhaps has been amplified by the loss of Crown preference, one of the major innovations of the Enterprise Act 2003. HMRC is just another unsecured creditor, required to take their chances of recovery on the operation of the insolvency regime and the actions of the officeholder. I have written previously about the disparity of creditor demands and willingness to fund actions, with the increasingly common situation faced by office holders that the insolvent estate has little to fund investigations let alone proceedings. Instead the commercial risk of proceedings rest on the insolvency practitioner, who may use insurance, CFA's or funding to minimise risk; ultimately however they will still bear the commercial risk of their own cost recovery.
It is within this tension however that the consultation document betrays some potentially pernicious views of the insolvency industry. In describing that office holder have the power to clawback assets and impose personal liability it is stated that such proceedings are:
- Reliant on the provision of information to the officeholder and/or HMRC
- Subject to litigation risk
- Dependent on the officeholders appetite for such litigation
While undoubtedly these are all factors relevant to recovery actions, the document contains the following statement…'even if proceedings are instigated they often end up in a 'commercial' or discounted settlement being reached…..meaning those who choose to misuse insolvency may receive a significant discount on the tax liability or pay nothing at all, enabling them to retain the fruits of tax avoidance, tax evasion and/or commercial advantage of repeated non-payment.'
Two inferences are being drawn. Firstly a company that is insolvent and using a process may be seen to have 'avoided' tax liability. Secondly that the professionals involved in conducting the insolvency process and thus seek to make recoveries from incompetent and dishonest directors, are commercially motivated and therefore indirectly permissive of tax avoidance.
This attack is misconceived and misdirected. The insolvency regime provides an office holder with significant powers of investigation and equips them with a wide range of measures that can provide recovery to the creditors as a whole. The problem however is one of funding and risk. Where investigations and claims can be funded or at least partly funded by creditors, there is a sharing of risk. Currently the private sector, which of course needs to be motivated by profit, is expected to bear the risk of proceedings. Thus the recovery of tax and the returns that HMRC may receive through this method of 'enforcement' are less, as there is a need to compensate for that risk, tied to the costs associated with litigating in this manner (i.e. the need for insurance and the payment of uplifts/success fees).
A key proposal contained in the consultation paper is of pushing corporate tax liability to the individual director (with a transfer of liability and/or joint and several liability being imposed on persons responsible for tax avoidance). However this may cause unwanted and or unlawful behaviour with a director unfairly 'preferring' the tax authorities over other creditors. For the dishonest director the likelihood that they are sitting on the fruits of tax avoidance is fanciful. It is likely that one would still end up having to use the personal insolvency regime to seek to get to dissipated assets.
Another important limb to funding is the lack of investment in directors' disqualification, there is a regime and penalties for directors who successively abuse the privilege of limited liability and cause HMRC shortfall. The effectiveness of the regime is dependent on whether directors see it as an effective deterrent; but conversely the lack of funding, expertise and experience in this very important area of public enforcement may be seen by rogue directors as a charter for abuse.
The consultation paper is instead seeking views on further legislative change that would see increasing transfer of corporate liability to HMRC to individuals leading to joint and several liabilities for persons deemed responsive for tax avoidance, tax evasion and repeated non-payment. A consultation is just that and contributors are asked to comment or provide alternative solutions by 20 June.
Questions to consider
It's time to think radical. Would a more joined up approach see some of the funds that are being spent on compliance being earmarked for effective collections through insolvency? Would a full working partnership with the private sector, involving both insolvency practitioners and litigation funders, tendering for recovery and enforcement work and receiving funding offer a better return? Could we see a concept of funder recovery, not only of costs but in priority to other creditors? Any other suggestions?