Beware of the Phoenix – Notices of Requirement for VAT and PAYE Securities

Recently, HMRC has increased the use of ‘notices of requirement’ – these can cause serious problems for businesses. We give a brief overview of what they are, what they mean and what can be done below.

What is a notice of requirement for security?
HMRC can issue a ‘notice of requirement’ to provide a security for VAT, PAYE and NICs, and environmental taxes. We concentrate here on VAT and PAYE.

This is a demand for tax to be paid ‘up front’ where HMRC perceives that there is a risk of tax being lost. Historically, they were typically used in cases where a director, or management team of a company had a history of liquidating and leaving behind HMRC debts, this is known as ‘phoenixism’. Where a company became insolvent, owing HMRC money, and then the same people started up a similar company shortly thereafter, HMRC sometimes issued a notice to demand that an amount of tax is paid ‘up front’. HMRC should issue notices in ‘high risk’ cases. Sometimes these are ‘phoenix’ cases, but more recently they are also used where businesses without any history of phoenixism have simply run up debts because of cash flow issues.

Are HMRC issuing more notices of requirement?
We issued a freedom of information request to HMRC to obtain data on how often they were being issued for PAYE/NICs and VAT, since it appeared we were being instructed more often to assist with this issue.

In short, yes, HMRC are issuing more. Possibly, it is ramping back up to pre-pandemic levels, but the headlines are as follows:

• For PAYE/NICs in 2020/21 428 were issued, in 2021/22 there were 731 issued and in 2022/23 1,291 were issued.
• A similar picture emerges for VAT. In 2020/21, 479 were issued, 792 in 2021/22 and up to December 2022 a further 848 were issued.
• In 2022/23 it looks likely that the number issued for VAT will be close to the 1,291 issued for PAYE/NICs, once the final data to March 2023 is released.

A threefold increase in three years indicates a significant hardening of HMRC’s stance, certainly compared to the start of the pandemic, where HMRC took a much more ‘hands off’ approach in relation to debt.

What are the consequences of being issued with a notice of requirement?
Comparing VAT and PAYE notices, the consequences are slightly different, but both are very serious. For PAYE, non-payment within the time allowed is a criminal offence. Not an imprisonable offence, but one that can result in fines being issued. For VAT, payment is required immediately. If payment is not made, every time a VATable supply is made, this is a criminal offence, again subject to a fine. Being issued with a notice, especially a VAT notice, can be a business killer.

Who can be issued with a notice of requirement?
The company or business is issued with the notice. However, with respect to a PAYE notice, directors can also be jointly and severally issued with a notice, making them personally responsible, both for payment and possibly for a criminal sanction and fine.

What can be done if a notice of requirement is received?
The first and most obvious option is to pay, if funds are available. The sum is required for a set amount of time, and ‘good’ behaviour should result in the security being returned at the end of that period.

In terms of appealing, the procedures differ slightly between PAYE and VAT notices, but they can be appealed. In the case of a notice issued because a debt has built up, if a time to pay can be agreed with debt management and banking (DMB) soon after issue of the notice, the securities team may withdraw the notice.

Appeals are difficult since the legislation is widely drafted. However, when HMRC’s own guidance and case law is considered, if HMRC has acted inappropriately in the circumstances, an appeal can be successful. If directors have been joined in a PAYE notice, all of the directors, as well as the company, must appeal, if that is the chosen response.

If a warning letter is issued stating that a notice may be sent, it is important to immediately contact HMRC to try to de-escalate the situation, as well as engage with DMB in terms of trying to get any arrears back on track. Sometimes a notice can be stopped before it is issued. Ignoring the matter won’t make it do away. Similarly, ignoring chasers from DMB if there are any tax arrears will only make the situation worse. Active engagement with HMRC and trying to reach an agreement that both sides can live with is always advised.

In summary, the number of these notices being issued has been steadily increasing and they can have serious consequences. They can be appealed, and we have successfully defended a number of these notices for our clients. Actively engaging with HMRC is always recommended.

If you need assistance with this or a similar issue, please get in touch with the inTAX team on 0203 675 8122 or email jeremy.johnson@intaxltd.com.

In some cases, tax arrears or the consequences of the notice of requirement are completely unmanageable and may lead to a company insolvency. If that is the case, our colleagues at our sister company Quantuma can assist and advise.

Quantuma is a business advisory firm offering a broad range of restructuring and insolvency services to help deal with financial difficulty. We would suggest seeking advice as early as possible to achieve the best available outcome. Rapid action can often prevent administration, liquidation or other adverse consequences. If you wish to speak with our colleagues at Quantuma, further details can be found here: https://www.quantuma.com/services/restructuring-insolvency