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The directors of limited companies are not usually liable for the debts their businesses cannot pay. The limited liability of limited companies means that if your business owes money to third parties (your creditors), they will not be able to pursue you personally to repay the debt, even if the company fails. However, HMRC is not a typical creditor.
In certain circumstances, it has the legal power to make company directors personally liable to pay their business’s tax debts. And, if you cannot clear the arrears, your assets, including your home, could be at risk, and you could even face bankruptcy.
HMRC has a range of powers to collect outstanding tax arrears from limited companies. It will usually implement those powers long before it considers the prospect of making you personally liable.
If your company cannot afford to pay a tax bill on time and you do not contact HMRC to arrange a payment plan, it will usually apply penalties and interest to the debt. If you continue not to pay, the next step may be enforcement action, often involving a visit from a bailiff. They will seek to seize assets they can sell to cover the arrears.
If the enforcement action is unsuccessful, HMRC can issue a formal demand for payment, known as a Statutory Demand. That gives you 21 days to clear the outstanding sum. If you still do not pay, it can then issue a Winding Up Petition to force the closure of your company via liquidation. And it’s during the liquidation process that personal liability issues are most prevalent.
When a company is insolvent and subsequently enters liquidation, the liquidator will sell its assets and use the proceeds to repay its creditors, including HMRC, as far as possible, before closing the company. Ordinarily, if there are any tax debts the liquidator cannot pay in full or at all, they will be written off.
However, as part of every insolvent liquidation, the liquidator investigates the reasons for the company’s failure and the conduct of its directors. If that investigation finds that failure to make tax payments was deliberate or the result of neglect or fraud, HMRC can make the directors liable for some or a proportion of the company’s tax debts.
For example, if a director makes payments to connected creditors, such as family and friends, but does not pay HMRC, they risk becoming personally liable. Similarly, if they continue to pay dividends while failing to settle tax debts, liability issues could arise.
While company liquidation often triggers director liability for HMRC debts, HMRC also has the power to hold directors personally liable for unpaid taxes even before or without liquidation. That’s particularly the case where there’s suspected tax evasion, fraud or abuse of the insolvency process. And it’s not just liability for the outstanding tax that can switch to the director. In some cases, they can transfer penalties as well.
Where the director fails to deduct PAYE from payments to themselves or connected parties, such as family members. This commonly applies to small businesses where the director has control over payroll.
Directors can become personally liable if they fail to deduct or pay over NICs from the wages of any employee, where the failure to pay is the result of fraud or neglect. They will also be liable for any penalties or interest incurred.
Company directors can become personally liable for VAT if the arrears arise as a result of dishonest conduct, or if the company is insolvent or close to insolvency and a director deliberately fails to pay VAT.
If a company is liquidated with unpaid VAT debts, HMRC can also request that the director pays a VAT security deposit when starting a new company. That is an upfront sum to cover HMRC against future losses.
Corporation Tax is only payable when a company makes a profit, so it’s less common for Corporation Tax bills to go unpaid. However, a director can still become personally liable if HMRC is unable to recover the outstanding amount from the company and the director has acted negligently or fraudulently.
Personal liability for company tax debts is a consequence you will understandably want to avoid, but what steps can you take to minimise the risks?
HMRC uses two notices to make directors liable for HMRC debts - Personal Liability Notices (PLNs) and Joint and Several Liability Notices (JLNs).
Personal Liability Notices are primarily issued when a business fails to pay National Insurance Contributions due to the fraud or neglect of a company director. HMRC can issue a PLN to hold the director liable for the unpaid amount and any penalties that apply.
Joint and Several Liability Notices are broader in their scope and allow HMRC to make directors personally liable for tax liabilities resulting from tax avoidance or evasion. They can also be issued to companies that are insolvent or close to becoming insolvent, or where there’s a history of previous insolvencies.
Issuing a JLN allows HMRC to pursue any director or company officer named on the notice for all of the company’s tax liabilities, including interest and penalties, regardless of who initially incurred the debt.
If your company has tax debts it cannot pay and you think it may be insolvent, contact our team immediately. Our licensed Insolvency Practitioners will assess the position of your company and advise you on how to adhere to your legal duties as a company director.
If your company is still viable, we can negotiate with HMRC on your behalf or explore ways to rescue and refinance it. On the other hand, if there’s no way back, we can guide you through the liquidation process from start to finish. Please get in touch for a free, same-day consultation or arrange a face-to-face meeting at one of our UK offices.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
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