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  • Writer's pictureSteve Thomas

HMRC takes dangerous stance against taxpayer in bankruptcy filings

Updated: Mar 21

The pursuit of rugby star Lawrence Dallaglio by HMRC over unpaid taxes has thrown back into the spotlight the controversial methods deployed by the state when seeking to recover monies owed, warns Steve Thomas, partner at Excello Law

Steve Thomas, Lawyer, Excello Law

Lawrence Dallaglio, whose tax debt is estimated to be around £700,000, was given extra time to raise the funds at an Insolvency and Companies Court hearing last month, following HMRC’s lodging of a bankruptcy petition against him.

The use of bankruptcy petitions in situations where HMRC is aware that their targets are already attempting to secure the money to pay their tax bill remains a contentious subject.

Rather than acting punitively by seeking to bankrupt such individuals, HMRC could, and should, act with more clemency in cases where they can see concrete steps are being taken to raise funds and repay their debt.

Generally, there are two tests to decide if someone is vulnerable to bankruptcy. One is a cashflow basis and the other is a balance sheet basis. The former is where you owe someone money and you do not have the cash to pay them within 21 days and the latter is where you add up the value of all your assets - home, car, shares, etc, and take away what you owe. If you are left with a positive number then you are solvent on a balance sheet basis, if it’s a negative then you are technically insolvent.

However, you can be insolvent on one basis and solvent on another basis, which is a bizarre conclusion.

Therefore, while HMRC are acting within the law as it stands, the law needs to be changed. However, in the interim HMRC and the courts do need to take a different approach which we say will mean that HMRC will get paid in full.

In Dallaglio’s case, HMRC accepted that he was attempting to sell a property in order to meet his tax liability, yet still thought it appropriate to petition for his bankruptcy through the courts.

Justice Sebastian Prentis, who heard the case, took a different view, allowing Dallaglio three months more to get his affairs in order before rehearing the case.

That the judge in Dallaglio’s case opposed HMRC’s aggressive tactics should prompt pause for thought by tax officials and legislators; the court clearly believed there are alternatives to forcing bankruptcy on individuals, rather than it being the only option available to the state when chasing payment for tax debts.

In those cases where individuals are deemed to owe tax after using previously-legal tax schemes which are later deemed to be illegal under tax law, HMRC ought to be even more reticent to forcefully pursue bankruptcy petitions.

The issue of retrospective tax liabilities in such cases has been a matter of fierce debate ever since the 2008 rule change by the government which allowed HMRC to claim back-taxes after overturning the legality of particular tax schemes.

While there is little that defendants can do once HMRC has declared a scheme illegal, HMRC should have the decency and understanding to recognise that the individuals concerned should not be tarred with the same brush as tax evaders who had acted with intent.

Parties must always be given time to pay their assets in full in such cases, and no interest should be paid on the sums owed, as their intentions were not to break the law, and thus further punitive measures should not be implemented.

Parties should not have to defend themselves for utilising such schemes – instead it should be the promoters of the schemes who become the focus of HMRC’s legal action.

Clients who acted in good faith based on their tax advisers’ guidance cannot reasonably be expected to have known that the steps they were taking would in future be deemed illegal, meaning that HMRC must take a much softer approach in such cases when seeking to recover funds.

HMRC’s present stance towards recouping unpaid taxes is both unnecessarily harsh and dangerously opaque. Instead, the principle needs to be enshrined in law that HMRC cannot be able to make a party bankrupt due to the use of a tax scheme which has retrospectively been determined as unlawful.

The current lack of such legislation means there is a dangerous precedent that the government may decide at will whether to accept its original ruling for a scheme or change its mind at any given time, resulting in an ever-present lack of clarity for both taxpayers and their advisers, and ongoing fear that what is deemed acceptable today may suddenly be classed as illegal tomorrow.

Until such a change in the law is made, those targeted by HMRC’s petitioning for their bankruptcy should challenge such action through the courts. While the rules of the tax charter can be applied where there is no realistic prospect of avoiding bankruptcy, in those cases where debtors do have assets of which they are able to dispose to raise funds, courts should see sense and allow more time for them to arrange their affairs.

HMRC must critically and sensibly examine its current practices to ensure that there are clearer regulations for the taxpayer to abide by, preventing further cases arising from similar disputes. It is acknowledged that HMRC have to collect taxes but making someone bankrupt does not achieve that goal especially when the taxpayer wants time to pay in full.

Fortunately, as shown by cases such as Dallaglio’s, judges can act as a buffer to prevent some of the excessive actions meted out by HMRC. However, it should not fall on the courts to steer HMRC in the right direction; rather, wholesale change must be enacted at the legislative level so that focus is on prevention of overly punitive measures rather than on the cure.

About the author

Steve Thomas is a partner and insolvency mediator and corporate recovery specialist at Excello Law

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