Joint and several liability notices for tax avoidance and tax evasion cases
When HMRC will issue a joint and several liability notice to individuals involved in tax avoidance or tax evasion when their company has started, or is likely to start, insolvency.
This guidance is about companies that have engaged in tax avoidance or tax evasion and HMRC believes there is a risk that their tax liability will not be paid, due to insolvency.
Conditions for giving a joint and several liability notice
An authorised officer may give a joint and several liability notice to an individual if they are satisfied that all 5 of the conditions A to E set out in the legislation have been met.
A summary of the conditions are:
- the company has entered into tax avoidance arrangements or has engaged in tax evasive conduct (Condition A)
- the company is subject to an insolvency procedure, or there is a serious possibility of it becoming subject to one (Condition B)
- the individual was responsible for the company’s conduct which they took part in, facilitated or assisted or from which they knowingly benefited (Condition C)
- there is, or is likely to be, a tax liability relating to the tax-avoidance arrangements or to the tax-evasive conduct (Condition D)
- there is a serious possibility some or all of this tax liability will not be paid (Condition E)
Condition A
The company has entered into tax avoidance arrangements or has engaged in tax evasive conduct.
For the purposes of the legislation, ‘tax avoidance arrangements’ means arrangements:
- for which a notice of final decision has been given under the general anti-abuse rule (GAAR) legislation stating that the tax advantage is to be counteracted under the GAAR
- for which a follower notice has been given and not withdrawn (a follower notice may be given by HMRC in certain circumstances when they consider there is a judicial ruling which is relevant to the tax arrangements used)
- that are notifiable under the disclosure of tax avoidance schemes (DOTAS) legislation and any one of the following apply:
(a) they were disclosed under DOTAS
(b) they implemented a proposal that was disclosed under DOTAS
(c) they are substantially the same as arrangements to which HMRC allocated a scheme reference number following the disclosure in (a) or (b)
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that are notifiable under the disclosure of tax avoidance schemes VAT and other indirect taxes (DASVOIT) legislation and one of the following applies:
- HMRC has allocated a scheme reference number
- the promoter must notify the client of the scheme reference number
- for which a relevant tribunal order has been made stating that the arrangements are notifiable, or should be treated as notifiable, under DOTAS or DASVOIT rules, whether or not the arrangements have been disclosed
- that are substantially the same as arrangements for which a relevant tribunal order has been made (whether involving the same or different parties) and the promoter is the same as the one specified in the application that HMRC made to the tribunal for the order
For the purposes of the legislation, ‘tax evasive conduct’ means doing one or both of the following:
- giving any deliberately inaccurate return, claim, document or information to HMRC
- deliberately failing to comply with an obligation to notify liability to tax as set out in paragraph 1 of Schedule 41 to the Finance Act 2008
Condition B
The company is subject to an insolvency procedure, or there is a serious possibility of it becoming subject to one.
A company is ‘subject to an insolvency procedure’ if any of the following apply:
- it is in liquidation, administration, or receivership
- it is subject to company voluntary arrangements or other arrangements
- it has been wound up
- it has been wound up or dissolved under the law of a country or territory outside the United Kingdom
- its name has been struck off the register
A ‘serious possibility’ means HMRC has good reason to believe that an event or occurrence is likely. This might happen, for example, if the company does not have enough assets to cover its liabilities even though formal insolvency proceedings have not started.
HMRC will not give a joint and several liability notice unless there is clear evidence of the serious possibility of insolvency. The aim of the legislation is to deter individuals from misusing the insolvency rules to avoid paying their tax liability.
By giving joint and several liability notices where there is a serious possibility of an insolvency procedure, HMRC will make directors, shadow directors or connected persons aware of the implications early in the process.
Condition C
The individual was connected in a relevant way to the conduct of the company and occupied a relevant role in relation to the company.
In detail, Condition C is satisfied if either of the circumstances in the following 2 points apply:
- At a time when the individual was a director or a shadow director of a company or a participator in it, one or both of the following apply. They:
- were responsible, alone or with others, for the company entering into the tax-avoidance arrangements or engaging in the tax-evasive conduct
- received a benefit which they knew arose (wholly or partly) from those arrangements or that conduct, a person is treated as knowing anything which they knew or could be reasonably expected to know
2. The individual took part in, assisted with or facilitated the tax avoidance arrangements or the tax-evasive conduct at a time when the individual was one or both of the following:
- a director or shadow director of the company
- involved directly or indirectly, in the management of the company
A shadow director is defined in company law as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
A participator is any person having a share or interest in the capital or income of the company.
The involvement of an individual in a company will be a question of fact in each case. The authorised officer will look at the evidence of the individual’s involvement in the company or their management of it.
Condition D
There is, or is likely to be, a tax liability relating to the tax-avoidance arrangements or to the tax-evasive conduct. This means a liability has already been established, for example by a tax assessment, or HMRC has good reason to believe that there will be a tax liability.
For example, if both of the following apply:
- a compliance check is in progress into the company return
- HMRC has identified a deliberate inaccuracy in that return, which means there is likely to be a tax liability
Even if the amount of tax liability has not been established, HMRC may still give a joint and several liability notice. HMRC will then give a further notice showing the amount of tax liability once it has been established.
This is to make individuals aware, as soon as possible, that they will be jointly and severally liable for amounts the company owes to HMRC.
The legislation calls the ‘tax liability’ the ‘relevant tax liability’.
Condition E
There is a serious possibility some or all the relevant tax liability will not be paid.
Where a company is subject to an insolvency procedure it will normally be clear whether that company will be able to pay the amounts it owes HMRC.
HMRC will decide, based on the evidence available, whether to give a joint and several liability notice to the individuals. If, at any point, it becomes aware there’s a serious possibility that some or all of the tax liability will be unpaid, HMRC may give a joint and several liability notice as long as the other conditions have been met.
For example, if HMRC find that directors are stripping assets out of the company and the company is unlikely to have enough assets to pay what it owes, then HMRC may issue joint and several liability notices.
Example: giving a joint and several liability notice in a tax avoidance case
Mr J and Mrs S are directors of J&S Ltd. In the accounting year ending 31 December 2020, J&S Ltd used a tax avoidance scheme notifiable to HMRC under DOTAS Rules.
This scheme involved the company settling money into an offshore trust with both directors receiving loans from the trustee a short time later.
HMRC’s view on these payments is that in reality they are disguised remuneration and the amounts should be subjected to PAYE.
In 2022, following a tribunal decision in another case, a follower notice is sent to the company as HMRC believes that it has used the same arrangements.
The company accept that their circumstances are the same and agree to settle liabilities of £500,000. An assessment is made on the company, who do not appeal.
Several months later the amount is still outstanding despite a number of requests for payments from HMRC, including visits from HMRC’s Debt Management team.
Mail addressed to the company is now being returned marked “ceased trading – return to sender”. Further investigation reveals that the company has become insolvent.
An authorised officer considers whether a joint and several liability notice is appropriate and looks at each of the conditions:
- Condition A – met, the company entered into a tax avoidance scheme notifiable under DOTAS
- Condition B – met, the company is subject to an insolvency procedure
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Condition C – met, because:
- Mr J and Mrs S were directors of the company and directly involved in setting up the disguised remuneration scheme
- they personally received substantial tax-free sums in the form of loans from the scheme
- Condition D – met, the company had not settled a tax liability arising from the tax avoidance arrangements
- Condition E – met, the company is insolvent and HMRC discover that there are insufficient assets within the company to pay what it owes
All 5 conditions are met, so the authorised officer gives joint and several liability notices to Mr J and Mrs S making them both jointly and severally liable for the outstanding amount of £500,000.
Both Mr J and Mrs S appeal their notices on the grounds they believe all the conditions to give them are not met.
Their appeals are heard by the First-tier Tribunal, which upholds the notices. Mr J and Mrs S are jointly and severally liable for the whole amount owed.
If the debt is not paid by the company, HMRC will pursue both Mr. J and Mrs. S for the amount owed.
The joint and several liability notice
The joint and several liability notice must:
- state the company to which the notice relates
- set out the reasons why the authorised officer considers that each condition has been met
- explain what the giving of the notice means to the individual
- offer a review by HMRC and explain how this works
- explain the individual’s right of appeal
- specify the amount of the relevant tax liability if the existence and amount of that liability have been established
The effect of giving a joint and several liability notice
If HMRC gives a joint and several liability notice to an individual for a tax avoidance or tax evasion case, that individual is jointly and severally liable with the company (and with any other individual who is given a notice) for the relevant tax liability.