The Court of Appeal (CoA) confirmed a High Court decision which might result in HMRC being liable for damage to a business which it shut down with an accrued debt of nearly £7.4 million.
Background:
In November 2023, HMRC presented a petition for the winding up of a company on the basis that it was indebted to HMRC in the sum of £7,390,282.54 in respect of national insurance contributions (NICs) for the years 2017-2018 to 2023-2024 and was unable to pay its debts. HMRC applied without notice for the appointment of provisional liquidators.
The High Court agreed with the appointment of provisional liquidators subject to HMRC giving a cross-undertaking in relation to damages. HMRC appealed this decision.
Decision:
The CoA dismissed the appeal and upheld that HMRC was required to give cross-undertaking with respect to damages. The Court started by restating the applicable law and that HMRC has recently received powers to present a winding-up petition for public interest reasons. However, such powers are limited to the circumstances specified in Section 85 of the Finance Act 2022.
The Judge noted first the importance of protecting parties affected by the interim order. Such protection justified the requirement of a cross-undertaking. Newey LJ ruled that “The mere fact, however, that HMRC has been given responsibility for collecting tax and NICs cannot, of themselves, absolve them from giving cross-undertakings in damages”.
The fact that HMRC acts in the interests of public benefit is insufficient to lift a court order that requires safeguards. As the Judge argued, the fact that HMRC pursues a public interest does not mean that “all legal proceedings they initiate represent ‘law enforcement action’ in respect of which no cross-undertaking in damages is needed”.
While the winding-up petition was aimed at stopping potential fraudulent abuse of the tax system, HMRC brought the proceedings in their capacity of creditors to preserve assets and not to avert any potential fraud. HMRC was not acting as a ‘law enforcement agency’ but to recover their losses.
Moreover, legal precedents, such as Hoffmann-La Roche, Sinaloa or Re Highfield Commodities Ltd have been very clear that public authorities are not immune from providing cross-undertakings in damages.
Adding to the conclusion of Newey LJ, Lewison LJ noted that “Departure from the well-established practice of requiring a cross-undertaking in damages on the appointment of a provisional liquidator where the applicant is HMRC seeking to recover unpaid tax would … confer on HMRC an entirely unwarranted public interest immunity for the consequences of unjustified initiation of such proceedings; and would encourage indiscriminate initiation of proceedings at the unjustifiable expense of an individual”.
Implications:
This judgement makes it clear that the tax authority cannot lift a court order that requires it to repay payroll business damages for losses suffered after it was put into provisional liquidation. The decision reinforces the existing position that public entities, acting in the public interest, must still comply with procedural safeguards, especially those protecting the rights of affected parties.
This ruling means that if you are experiencing a similar situation, you now know your rights are potentially protected.