Is a director liable for company tax after insolvency?

HMRC is typically a significant creditor in corporate insolvency cases, as companies struggle to keep up with VAT, PAYE, and National Insurance (NI) payments. The tax body is also known for chasing tax debts quickly and relentlessly, winding up companies it believes are insolvent.

The corporate structure means the company is a legal entity in its own right, with finances separate from the directors. So are there any circumstances when directors may become liable for their company’s tax debts after insolvency?

Director misconduct can lead to personal liability for company tax

If a director is found to have contributed to the downfall of their company, perhaps by paying themselves an unreasonable salary or taking unlawful dividends, they place themselves at risk of misconduct allegations by HMRC and the Insolvency Service.

They could then become liable, not only for the company’s tax debts, but also for other debts owed by the business. This is a serious situation for directors, who may be pursued through the courts for repayment, and could subsequently face personal bankruptcy.

Deliberately failing to pay HMRC

If directors are found to have deliberately failed to pay their company’s National Insurance liabilities, HMRC can transfer the debt to a director personally by use of a Personal Liability Notice, or PLN.

HMRC may also use Personal Liability Notices in other instances, including where preference payments have been made, directors have taken excessive salaries when the company was struggling, or when assets or payments have been made to directors’ families or friends.

The overriding premise for being held personally liable for company tax debts is the deliberate, fraudulent, or seriously negligent, nature of director actions. So what can happen to a director if they’re held personally liable by HMRC?

Consequences of personal liability for company tax debts

The threat to a director’s financial stability is a key cause for concern on being made personally liable by HMRC. When a company enters liquidation, the appointed insolvency practitioner is required to carry out an investigation into the conduct of its directors in order to ascertain whether the company’s problems are a result of director misconduct.

Disqualification as a director may be a repercussion if misconduct is discovered; disqualification can last for 2-15 years. In serious cases of fraud, a prison sentence could also be handed down to directors, in addition to the financial sanctions.

So is there anything directors can do to mitigate the risk of being held personally accountable for their company’s tax debts after insolvency?

Entering into voluntary liquidation

Creditors’ Voluntary Liquidation, or CVL, helps to reduce the likelihood of being accused of misconduct or wrongdoing, as it allows directors to fulfil their legal duties to creditors. Entering the procedure prioritises creditor interests by minimising their financial loss.

It can also enable the directors of the company to claim statutory redundancy pay and other entitlements, which could go towards some of the business’ debts or pay for the liquidation procedure itself.

UK Liquidators can provide more detailed advice on personal liability for company tax and closing a business with outstanding HMRC tax arrears. Please get in touch to arrange a same-day consultation free-of-charge. We work from a broad network of offices around the country.