Successful challenge of a £350,000 Joint Liability Notice from HMRC

Our team recently defended two directors against a Joint Liability Notice (JLN), which sought to hold them personally liable for over £350,000 of company debt.

The notice was issued under the phoenixing provisions of Schedule 13 of the Finance Act 2020, designed to target situations where insolvent companies with outstanding tax liabilities are closed down and the same or a similar business is continued through a new entity.

We not only protected our clients from a significant financial burden but also demonstrated that JLNs can be successfully challenged, particularly where HMRC has not fully applied the necessary diligence or engaged with the technical complexities of the case.

The legislation for JLNs is relatively new, and many of its technical elements remain untested before the First-tier Tax Tribunal (“the Tribunal”) which created additional challenge to the case.

Background of the Joint Liability Notice

Our clients were directors of two separate companies, which had no operational link to the other, aside from both having some relation to food retailing.

HM Revenue & Customs (HMRC) asserted that this similarity was sufficient to meet the phoenixing criteria.

Both companies entered liquidation, one following a HMRC enquiry, and the directors subsequently opened a new company with a similar trade.

On identifying the successor company, HMRC calculated the outstanding taxes from all three companies to be at £800,000.

Of this, over £350,000 related to liabilities arising after 22 July 2020, the date from which HMRC could apply the JLN legislation.

HMRC alleged that the directors met the test for phoenixing.

Based on this, HMRC sought to hold the directors personally liable for the post-July 2020 debts of both liquidated companies.

Our approach to this case

Initially, HMRC failed to engage meaningfully with the technical arguments we presented, particularly around the intent of parliament and the unlinked nature of the trades for both insolvent businesses.

Given this lack of engagement, we appealed to the Tribunal and focused our challenge on the accuracy of the underlying assessments.

Working with the companies’ insolvency practitioners, we conducted a forensic review of the numbers and established that the VAT and PAYE liabilities were based on flawed estimates.

Our review revealed that most of the PAYE liabilities were dated after the companies had ceased trading, and HMRC had not applied the correct VAT rates, particularly the reduced rates introduced during the COVID-19 period.

In fact, the companies were likely entitled to a refund for the years in question.

By combining this numerical challenge with our earlier technical submissions, we submitted a robust case that undermined the foundation of HMRC’s position.

Outcome of this Joint Liability Notice case

Faced with our detailed challenge and the prospect of defending indefensible estimates before the Tribunal, HMRC withdrew the JLN.

This was a significant result, especially given the added complexity of having to challenge the underlying liabilities of the liquidated companies outside the scope of the JLN legislation.

Both we and our clients were extremely pleased with the outcome.

They were relieved to avoid the financial and personal impact of a JLN, which would have required both of them to sell their family homes.

The withdrawal eliminated the risk of personal liability for our clients, reducing their exposure from £350,000 to zero.

By working with us to take proactive steps at an early stage, the client avoided the significant costs associated with taking the matter to Tribunal, along with the uncertainty and stress that such proceedings would have entailed.

This is why it is so important to challenge HMRC’s assumptions and estimates in all disputes, but especially within the scope of a JLN, where the consequences can be severe.

As ex-HMRC inspectors, we’re very experienced in handling JLN cases and HMRC disputes more broadly.

We combine technical tax knowledge with strategic dispute insight to deliver results that protect our clients’ interests.

If you or your business are facing a JLN or any HMRC enforcement action, contact us to discuss how we can help protect your position.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email david.brindley@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.