England’s approach to ‘phoenixism’ – joint and several liability

English law’s latest proposed reforms in relation to abuse of its tax laws through insolvency, including through ‘phoenixism’, seem to show its regime as less advanced than that of Australia. On the other hand, Australia’s large accumulated unpaid collectable tax debt of A$23.7b, plus A$7b ‘insolvency debt’, may not show our system working that well. 

Australia and England compared

Nevertheless, Australia’s legal focus, since the removal of the Australian Tax Office priority in insolvencies in 1993, has been to impose personal liability on directors, although offering them the avenue of putting their company into administration as some level of protection.  Over the years that regime has been weighted more in favour of the ATO.

In contrast, while there are some circumstances where the UK’s Revenue and Customs can transfer liability from the company to a director or other officer, its powers in this area can usually only be exercised in limited circumstances, and only in respect of certain taxes. Similarly, while there are already some circumstances where directors and other company officers are, or can be made to be, held jointly and severally liable for the company’s tax debts, again, they apply only in specific circumstances which differ across taxes.

Tax abuse and insolvency

The UK government released a paper on 11 April 2018 – Tax Abuse and Insolvency – which raises a number of concerns about the misuse of insolvency to unload tax debt, including by way of phoenixism –

“running up tax liabilities in a limited liability entity, then avoiding paying them by making the company insolvent – and setting up a new company to carry out the same practice again”.

Reactive remedies

The paper prefers to a number of problems with existing reactive insolvency laws, such as those Australia has already and which it is increasingly enacting, that

“while an insolvency practitioner (IP) does have a number of legal actions available to them to clawback assets from the director/shareholder and/or to impose personal liability on them for the company’s debts, pursuit of these proceedings is:

  • expensive;
  • reliant on the provision of information to the officeholder and/or the revenue agency;
  • subject to litigation risk; and
  • dependant on the officeholders’ appetite for such litigation.

As a result, even if proceedings are instigated, they often end up in a “commercial” or discounted settlement being reached”.

This means that

“a director/shareholder/controlling mind who chooses 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 the commercial advantage of repeated non-payment”.

Two possible approaches

Comments were invited on two potential approaches to this problem:

  1. transferring liability from corporates to directors and other officers in certain circumstances; and
  2. joint and several liability for those linked to the avoidance or evasion.

November 2018 government response

Following that April 2018 consultation, the UK released a paper summarising the responses on 7 November 2018. That paper discusses the options, and broadly comes down in favour of introducing joint and several liability for tax debts between the company and directors, company officers and other relevant related parties in defined circumstances.

This is said to be the

“best available option as it will enable [Revenue and Customs] to take targeted and proportionate action prior to insolvency proceedings, when it is clear that revenue is at risk. Making relevant persons jointly and several liable for corporate liabilities at this stage will discourage them from causing their company from becoming insolvent unnecessarily”.

This extension of joint and several liability

“will only be available in cases of tax avoidance, evasion and repeated non-payment of tax to ensure that this measure does not stifle enterprise in genuine commercial businesses”.

Australia

This approach may offer some thoughts for Australian law reform.  One difference between Australia and the UK, and New Zealand, is our lack of access to free corporate data. This may well mean that our tax laws need to be the more focussed in order to recover tax moneys lost in the opaque environment in which the government allows business to operate.

 

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