Can HMRC hold Directors Liable for Outstanding Tax

Can HMRC Hold Directors Liable For Outstanding Tax?

Can HMRC hold directors liable for outstanding tax?   Written by John A Waller. Director-Reviewed: July 5th, 2024.

Are directors liable for limited company HMRC tax debts?

Can HMRC hold directors liable for outstanding taxes? 

YES!

For a company director to lose the benefit of limited liability. They need to take care when letting payment of the following taxes to HMRC: =

  • Unpaid National Insurance Contributions.

  • PAYE.

  • VAT.

Non Payment of PAYE

If any company director intentionally fails to deduct PAYE tax, they can be held responsible and must pay any missed payments to HMRC. So far, this only includes PAYE debts from payments made to directors or related parties, such as family members. Therefore, this mainly applies in small companies, where the director is the primary decision-maker and the company’s finances.

HMRC knows directors and officers of companies exploit the tax system. Shelf companies often abuse 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 must know the director’s responsibilities in company liquidation.

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

HMRC can raise the veil of incorporation, exposing directors to tax liabilities. So, as a company director, you are personally responsible for some of a company’s debts. 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 Potential Liability Personally

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

    • Intentional;
    • Result of neglect;
    • Fraud.

HMRC Debt Collection Agency

HMRC’s debt collection agencies include:

  • 1st Locate (trading as LCS)
  • Advantis Credit Ltd
  • Akinika Debt Recovery Ltd
  • Apex Credit Management Ltd
  • Bluestone Credit Management Ltd
  • CCS Collect (also known as Commercial Collection Services Ltd)
  • Drydensfairfax Solicitors
  • Fidélité Credit Management
  • Fredrickson International Ltd
  • Moorcroft
  • Past Due Credit Solutions (PDCS)
  • Rossendales Ltd
  • Walker Love

What powers do Debt Collection Agencies have?

It’s important to know that debt collection agencies are not the same as bailiffs and have limited authority when collecting debt. For example, debt collection agencies are not allowed to barge onto company or personal premises and can only enter when invited in by someone. In addition, debt collection agencies are not allowed to take any of your possessions if they are already inside your home.

Non Payment of Corporation Tax

Can’t pay corporation tax

When you can’t pay corporation tax, HMRC is more relaxed about delays in receiving payments, unlike when you can’t pay VAT.

Paying corporation tax late

It’s not as serious as with PAYE, NIC, and VAT. However, HMRC penalises late payments and charges your company late payment interest commencing the day after the payment date.

What is the risk for Directors in an Insolvency owing Tax?

Company directors have minimal risk of being hounded when their company has unpaid taxes or is insolvent. However, 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 company directors under certain conditions. They may now be given to directors who repeatedly have insolvent companies and outstanding taxes. This applies particularly 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 five years, again owing tax to the same director;
  • Therefore, issuing a JLN after the Old Company failed created a tax liability of either £10,000 or more or 50% or more of the first company’s liability to the company’s unsecured creditors.

This results in the director remaining jointly liable, with the first company’s tax liability currently failing. The JLN is issued along with the second company’s tax liability owing at the time of the JLN and 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.

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Can HMRC hold directors liable for outstanding taxes? 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 members make HMRC errors by changing tax codes over the following period.

However, the team member 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 personal liability.

Where do companies deduct PAYE from employees and 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

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” affects any individual proven to have acted as a shadow or de facto director or fulfilled a function and held 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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