Lifting the corporate veil

Lifting the corporate veil

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October 30, 2018

It seems that the protection afforded by Limited Liability has received a body blow in the Budget with an announcement that directors may face personal liability for their company’s tax liabilities:

“Tax abuse and insolvency – Following Royal Assent of Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency. (69)”

The language is perhaps a little confused. Insolvency is, after all, a measurable financial position, defined in statute with reference to two established tests, so not something that is “deliberately” entered, per se. It’s also not entirely clear which company is being referred to – the one with the liabilities or the successor. At a guess, the provisions are aiming at behaviours that cause or contribute to the insolvency of a company, but viewed with hindsight of an insolvency proceeding.

But leaving aside the semantics, there could be some significant and tangible impacts for business owners looking to avail themselves of the entrepreneurial encouragement to “have another go” that Limited Liability is intended to afford. Whilst there is no great surprise that tax evaders should be targeted, interestingly, both avoidance and phoenixism (like them or not – both currently legal practices), appear to be encompassed also.

We will have to await further details before the impact of this on the advice provided to directors of insolvent companies can be fully assessed. However, if the trigger for personal liability is the act of starting again (i.e. phoenixing), these provisions may have the unintended consequence of discouraging business restarts at a time when the economy is likely to be sorely in need of them. They may also impact the saleability of distressed assets, where often a connected party is the only interested purchaser. If such a purchase risks the imposition of personal liability for the debts of the predecessor company, the well-advised might reasonably look to buy their stock and fixtures and fittings elsewhere, or at the very least, be willing to pay rather less for them!

Alison Curry
Director, Insolvency Support Services 

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