The proposals were set out in a consultation document designed to seek views on how to tackle "those who own or manage" companies who cause the companies to engage in "tax avoidance, evasion or repeated non payment of taxes" and then use the insolvency process so that the company avoids paying the tax. In some cases the business may continue to be operated through another company. This is referred to as 'phoenixism'.
The consultation period closed in June, but the government is expected to publish a consultation response and draft legislation in the autumn.
HM Revenue & Customs (HMRC) already has power to make directors liable for company tax liabilities in certain situations. In addition insolvency law allows assets which have been distributed to be clawed back in some circumstances.
However, HMRC's powers do not apply to all taxes. The government is therefore proposing that HMRC's power to transfer liability for tax debts to company directors and officers should be extended to transfer liability to tax debts "to the persons responsible" for the avoidance, evasion or repeated non payment of tax when there is a risk the funds will be lost to insolvency. They also propose making these people jointly and severally liable for the company's tax debts.
Corporate tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-law.com, said: "If enacted these proposals could pierce the corporate veil if, as HMRC seems to be suggesting in the consultation document, the liability could attach to shareholders as well as company directors and officers. That sounds logical enough where the shareholders and directors are the same people, but would set a dangerous precedent as a broad brush principle."
"Where will the line be drawn? Will the burden of proof be reversed so a shareholder has to prove they weren't aware of what was going on? And at what size of business do we say the shareholders should not reasonably be expected to know?" she said.
The 'corporate veil' is a term used to refer to the principle that shareholders are not liable for debts of a company.
"Another concerning aspect of the proposals is that tax avoidance seems to be being set alongside tax evasion and phoenixism as if they were all the same thing. They are not. Tax evasion is a crime – it involves deliberately dishonest behaviour such as not declaring taxable income. Tax avoidance is entirely legal planning – it may take advantage of a loophole in the legislation, it may be applying the law of the land as it was not quite originally intended, at least according to HMRC, but it is not, and never has been, a fraud on creditors," said Walker. "Any new rules should only apply where there has been tax evasion on the part of the insolvent company or it is clear that the individual has previously been involved in phoenixism in relation to another company he or she controlled."
"This is another attempt by HMRC to reverse the effect of changes going back to the noughties, when Crown preference over other creditors was abolished. If the government goes ahead with the proposals it will face uproar from insolvency practitioners, just as it did with its direct recovery measures in 2015. It must surely be more equitable, should any money be recovered from directors, let alone shareholders, for that money to go into the pot of cash available to all creditors," she said.
Until 2002 HMRC was a preferential creditor which meant that it ranked ahead of some other creditors in an insolvency. It now ranks alongside other unsecured creditors, behind preferred creditors such as company employees with wages arrears.
In 2015, under the direct recovery of debt measures, HMRC was given the power to access tax debtors' bank accounts to recover unpaid tax debts in certain situations.