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Can HMRC hold Directors Liable for Outstanding Tax

Written by John A Waller-Director-Reviewed: March, 8th, 2022

Is a director liable for the company’s tax debt?

Can HMRC hold directors liable for outstanding tax? 

YES!

HMRC knows directors and officers of companies exploit the tax system. Shelf companies often abuse the limited liability, protecting the directors by a ring-fence.

One of the main reasons many business owners choose to incorporate their business and become a limited company instead of trading as a sole trader is to benefit from the limited liability it brings.

Limited liability affords protection, so directors will not be personally liable for the company’s debts if the business fails.

As a director, you need to be aware of directors responsibilities in a company liquidation.

HM Revenue & Customs has the power to make directors personally liable for unpaid taxes, where evidence shows failure to pay was with intent and not a mistake.

HMRC has the power to raise the veil of incorporation, exposing directors to tax liabilities. So as a company director, you are personally responsible for some debts of a company. Then HMRC can increase tax receipts and guarantee that HMRC claims remain paid as a preference. This discourages company directors from attempting to abuse their situation with HMRC.

Company directors can then, however, remain personally liable when the company can’t pay PAYE to HMRC:

However, the evidence must then prove that the company’s deliberate intention or failure to pay was:

  • Intentional; 
  • Result of neglect;
  • Fraud.

Non Payment of Corporation Tax

Can’t pay corporation tax

When you can’t pay corporation tax – what? HMRC are more relaxed on delays with receiving payments, unlike when you can’t pay VAT.

Paying corporation tax late

Not as serious as with PAYE & NIC and VAT. HMRC so penalise for late payment. HMRC charges your company late payment interest, commencing from the day after the payment date.

The risk for Directors in an Insolvency owing Tax?

Company directors have minimal risk of being hounded when their company has unpaid tax, when insolvent. Company directors who have experienced two or more insolvencies over five years must seek advice from an independent insolvency expert before considering launching a further limited company.

The Finance Act of 2020 came into force on July 22nd 2020.

It included allowing HMRC to issue joint liability notices (JLN) to directors of companies under certain conditions. They may now be given to company directors, who repeatedly have insolvent companies and outstanding taxes. It applies in particular if a director has had two or more insolvencies in the last five years.

Further,

  • If the companies liquidated, owed tax or had not submitted returns operating to the outstanding tax;
  • The new company, created after the original co, then failed in the five years, again owing tax with the same director;
  • Therefore, the issuing of a JLN, then the Old Company failed, had a tax liability, and the tax liability was either £10,000 or more or remained 50% or more of the first company’s liability to the company’s unsecured creditors.

It results in the director remaining jointly liable, with the first company failure tax liability at the moment. The JLN is issued along with the second company tax liability owing at the time of the JLN, along with any tax liability resulting within five years of the JLN.

Company directors, who repeatedly flout company law, receive JLNs. HMRC strives to close the net on fraudulent directors, along with changes made on December 1st 2020, to HMRC status. Directors prefer HMRC payments when paid out stop. Interesting times ahead.

Can HMRC hold Directors Liable for Outstanding Tax
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Can HMRC hold directors liable for outstanding tax? If so, who is Liable for Unpaid PAYE?

Different rules apply to PAYE payment arrears to HMRC, depending on the circumstances and whether there is deliberate misconduct. If HMRC is wrong, they help the team member make HMRC errors by changing tax codes over the following tax period.

The team member, however, is responsible for the mistake. Then HMRC can challenge it through inspections to avoid potential deliberate liability, and directors act with due care and attention. Perhaps misfortune on their part. Therefore, if proven, directors face liability personally.

Where do companies deduct PAYE from employees and then fail to pay it over? Then, the chance of securing directors as personally responsible remains.

Further, HMRC may transfer unpaid PAYE to a director or officer while seeking recovery from the company directors personally, having failed to deduct tax knowingly.

So, HMRC may, however, not abuse their position using a personal liability order, but only when a director with intent withholds PAYE.

Unpaid tax by fraudulent activity or neglect by company officers then prompts the HMRC to issue a Personal Liability Notice (PLN) with justification. Consequently, securing directors engaged in such misfeasance exposes them to remain personally liable for unpaid tax. 

So, HMRC will issue an HMRC Personal Liability Notice to a formal director. Nevertheless, the addition of the statement, “or any person purporting to act as such”. It affects any individual proven to have acted as a shadow or de facto directors or fulfilling a function and holding duties expected of a director.

However, company directors should check out options for paying PAYE arrears promptly.

Are PAYE arrears pulling your company down?

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