Clause 97 and schedule 12 introduce a new power to allow HMRC to tackle the behaviour of tax avoiders and evaders who seek to reduce their tax bill unfairly through the misuse of company insolvency. This measure tackles the small minority of people who use insolvency intentionally to sidestep tax liabilities. It does so by allowing HMRC to issue notices that make directors and other persons connected to the company jointly and severally liable for the company’s avoidance, evasion or phoenixism debts, as they are described, if insolvency is threatened. It is not linked to clauses 95 and 96, which make HMRC a secondary preferential creditor for certain tax debts.

The Government announced our intention to consult on tax abuse and insolvency at Budget 2017. The consultation ran from April to June in 2018, and the Government published a response document in November 2018. The Government also published draft finance Bill legislation for technical consultation in July 2019.

As I made clear when I discussed earlier clauses, it is the Government’s aim to support companies and help them to avoid insolvency, particularly at this very difficult and challenging time, and the measures recently announced to restructure the UK’s insolvency framework support this aim. This legislation will not impede those restructuring plans, and the measure focuses firmly on those who misuse insolvency in connection with tax avoidance or evasion, or who run up repeated liabilities that they then step away from.

In ordinary times, insolvency is a highly unfortunate but necessary part of commercial life. However, a small minority of people misuse insolvency for their own ends. They hide behind a company to engage in tax avoidance or evasion, or repeatedly build up tax debts, and then strip out the assets, liquidate the company and leave nothing to meet outstanding tax liabilities. Not only does this deprive the Exchequer of funds for important public services, but it undermines the insolvency process and adversely affects creditors and other businesses, and it casts the whole reputation of insolvency into disrepute. It is only right that we should act to discourage such misuse, and that is what this measure is designed to do.

Clause 97 introduces schedule 12, which contains details of the new regime and sets out conditions that must be met before the legislation will apply. First, paragraph 2 sets out the conditions that must apply before HMRC can issue a notice to an individual connected to a company that has engaged in tax avoidance or evasion. The conditions are: that the company has begun an insolvency procedure, or there is a serious risk that it will; and that the person was responsible for, facilitated or knowingly benefited from the avoidance or evasion.

Paragraph 3 sets out the conditions that must apply before HMRC can issue a notice to an individual who is connected to companies that repeatedly go insolvent with significant outstanding debts. Such companies are often referred to as phoenix companies, and it is widely agreed across the House that they are a blight on commercial life. The conditions are: that the person must have had a connection in the previous five years to at least two companies that began insolvency; that the person has a connection to a new company that carries out the same trade as the old ones; and that the amounts due to HMRC from the old companies total at least £10,000 and at least 50% of the amount due to unsecured creditors overall. That is an important safeguard to ensure that the measure focuses on catching those who play fast and loose with their tax. Paragraph 4 allows the amounts to be varied by a statutory instrument.

Turnaround specialists try to rescue companies that are in financial difficulty. Obviously, they cannot always be successful, so HMRC will not issue notices to those whose connection to a company is part of a genuine attempt to save the business. The third area that the legislation tackles is set out in paragraph 5, which deals with cases where companies have been issued with penalties for facilitating tax avoidance or evasion, and it sets out the conditions that must apply. Paragraph 9 ensures that a person is not exposed to a double liability for penalties transferred from a company, and paragraph 10 ensures that a notice must be withdrawn if it is no longer needed: for example, because the threat of insolvency has passed.

Paragraphs 11 to 16 deal with rights of appeal against notices and the right to join or take over a company’s appeal. Those are powerful safeguards intended to ensure that all taxpayers continue to be treated fairly by the tax system, and the new powers apply only in strictly narrow circumstances. Paragraphs 6, 7, 8 and 19 provide some definitions. Paragraph 17 ensures the measure continues to work where companies have ceased to exist, and paragraph 18 brings in limited liability partnerships.

The insolvency process is an important part of our commercial life and an important part of the process of encouraging investment in British business. A small but persistent minority take advantage of the rules to sidestep their tax responsibilities, seeking to keep the benefits of their avoidance or evasion while denying funds needed for public services. That is bad for the Exchequer, bad for business, bad for consumers and bad for other creditors. It is bad for society. Limited liability is an important part of our legal system, but that protection, intended to benefit honest businesses, should not extend to those who misuse the system to avoid their tax obligations. The Government are clear that everyone must pay the tax that is legally due, no matter who they are. It is therefore only right that we tackle such misuse. For that reason, I commend the clause and schedule to the Committee.