Plans to make directors of failed companies personally liable for their business’s tax debts could penalise genuine entrepreneurs, a North West insolvency expert has warned.
The proposals from HMRC – which would apply to directors linked to two or more insolvent businesses – are designed to combat tax abuse. However Paul Barber, the North West chair of insolvency and restructuring trade body R3, says they could deter start-ups and job creation, and even catch out professionals working with struggling companies.
He is urging the new government to rethink these and some other proposed measures. Paul, who is also a partner at Begbies Traynor, said: “This policy breaches the fundamental principle of ‘limited liability’ which lies at the heart of the UK corporate law and is designed to protect entrepreneurs who take risks to generate wealth for themselves and the community.
“While we understand the issue that the plans aim to address, without amendments and strict guidance on their use, they could be applied much more widely than intended. The proposals could not only be used against unfortunate but genuine business directors, but could also discourage them from taking on staff to minimise their tax liabilities.”
R3 also wants to the new government to:
Drop plans to give HMRC priority for payment in insolvency cases – when a business becomes insolvent, there are rules to dictate which creditors get paid first. Currently HMRC is close to the end of the queue but it is proposed that, for certain types of tax debts, it would ‘jump the queue’ and get paid ahead of employees, business suppliers and pension funds.
Paul Barber adds: “This would mean employees and suppliers which are owed money would get less – if any – of it back. Not only could this put other small businesses at risk, it would also mean that banks and finance firms will be less willing to lend in future, thus restricting the overall supply of business finance.”
Ensure identity checks for directors listed on Companies House – currently it is easy for fraudsters to disguise their tracks by using different versions of their name or date of birth.
Tackle the late payment culture – R3’s statistics show that nearly one in five businesses are owed payment on invoices more than 30 days overdue. “Late payment is endemic in sectors such as construction and food supply,” says Paul Barber. “The biggest offenders are often large companies maximising their own position at the expense of smaller suppliers.”
Extend the proposed ‘Breathing Space’ to VAT-registered traders – the Breathing Space plan will give people with debt problems a 60-day period to seek advice, free from pressure from creditors. R3 wants to ensure that sole traders with business debts above the £85,000 VAT threshold can also benefit from the policy.
Paul Barber adds: “The Brexit debate has dominated the political agenda since 2016, but this has meant that some key policies have been pushed into the background, while other flawed proposals haven’t had the scrutiny they need.
“We hope the new Government takes heed of our recommendations and gives insolvency and restructuring issues the time and attention they deserve, so that our profession can rescue more businesses, save more jobs and help more people to get their lives back on track.”