The Finance Bill 2020 received Royal Assent on 22 July 2020 and became the Finance Act 2020.  Within it, among other things, are two key pieces of legislation that are of particular interest.  Firstly, as has been previously reported, and something that we commented on back in October 2019 is the confirmation that HMRC will have secondary preferential status in insolvencies from December this year.  Secondly, and something which was not foreseen, was the introduction of provisions that can make a wide range of stakeholders – and not just directors – jointly and severally liable for the tax debts of an insolvent company.


The Finance Act amends the Insolvency Act 1986 such that for insolvencies commencing on or after 1st December 2020, HMRC will have secondary preferential creditor status for certain taxes due from an insolvent business.  These include VAT, PAYE (including student loan repayments), Employee NICs and CIS deductions.  HMRC will remain an unsecured creditor for direct taxes such as Corporation Tax and Employer NICs.  The intention is that more of the taxes paid in good faith by a company’s employees and customers will go to fund public services, rather than be distributed to other creditors.

This will place HMRC, in respect of the relevant taxes, in front of ordinary unsecured creditors (which is where such claims would normally sit) but still after primary preferential creditors such as some employee claims.  Crucially, in corporate insolvencies, this will place HMRC in front of floating charge holders and the prescribed part (the ring-fenced amount set aside for unsecured creditors).

As highlighted in our article last year, because HMRC will rank ahead of the holders of floating charges, a common form of security for all banks (including the growing number of alternative lenders), those funders will find themselves in a less-secure position in the event of an insolvency – this could have some serious implications:

The consequences of this for British businesses could also be severe, especially at a time when SMEs are dealing with the massive disruption caused by Coronavirus:

While there would be a greater return to HMRC from an insolvency process, the trade-off is that unsecured creditors and pension funds will receive less.  This could also have a number of implications:

There are some serious risks for lenders if the value of their available security is diluted and, whilst banks need to lend money in order to make money, it is perfectly understandable that it could become harder for business owners to access that capital.  If new funding is harder to come by, then that cannot be welcome news for the owners of UK businesses at a time when many are in a precarious position.


The Finance Act 2020 provides for a person to be jointly and severally liable for amounts payable to HMRC by companies and LLPs in certain circumstances involving insolvency or potential insolvency.  This includes directors and shadow directors, managers and shareholders.  Furthermore, based on the way the legislation is written, it also extends to lenders.

From 22nd July 2020, HMRC can issue a joint liability notice to make an individual personally liable with the company for outstanding tax liabilities.  Such a notice can generally be issued in the following three scenarios:

And where:

The legislation also sets out certain conditions that all need to apply in repeated insolvency and non-payment cases for a notice to be issued. They are that:

For those engaged in the facilitation of tax avoidance or evasion, the conditions are that:

Because HMRC will decide whether the criteria for a joint liability notice have been met, there is a risk of inconsistency in approach – there is also only limited scope for an individual to appeal if they receive such a notice.

It has previously been reported that HMRC were only looking to target taxpayers who had tried to artificially reduce their tax bill via an insolvency process however, because the legislation is wide-ranging, there is a risk that it could also apply to people who were not directly involved with the running of the company and had no knowledge of any wrongdoing, particularly in the case of groups of companies.  It is therefore vital to consider this in any potential restructuring or company rescue.

In summary, this new legislation is likely to have serious consequences for companies and their directors, as well as directors in an individual capacity and so, should any of your clients have any issues resulting from this then don’t hesitate to speak to your local Leonard Curtis contact or via this link https://www.lcbsg.co.uk/locations/.

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