Tax abuse and insolvency – a discussion document
In principle, we agree there is a problem with the insolvency regime being used to avoid or evade tax liabilities, including through the use of phoenixism. Indeed, the insolvency regime seems to be behind the somewhat cavalier behaviour we have seen from certain employment intermediaries such as some umbrella companies – providing them with ‘an easy way out’, if and when HMRC catch up with them.
This said, we recommend that prior to making any new, wide-reaching rules to secure funds lost through insolvency (which will only add complexity and which risk collateral damage), HMRC should make more and better use of their existing powers, such as the discrete debt transfer provisions that exist in relation to incorrectly assessed travel and subsistence relief. This should include publicising when such powers have been used in order that there is a deterrent effect, as prevention is surely better than cure.
This approach should be given a chance to work. If, after a time, the evidence suggests that new rules are still required, HMRC need to think holistically about making them. Issues around the use of the insolvency regime are not restricted to tax abuses – some employers that we are aware of use it to avoid paying awards/settlements in relation to employment tribunal matters. Unless this type of abuse is also dealt with, it is likely that we will just see the increased use of models of engagement under which there is a rich windfall to be had, based on the denial of employment law rights.
Our full response can be found here: Tax abuse and insolvency – a discussion document – LITRG response
Meredith McCammond