Thompson Construction & Training Ltd managing director Robert Thompson was disqualified for 3 years and 6 months. The limited company was based in Blaydon on Tyne and Mr Thompson was the sole director when he undertook to not pay his PAYE/VAT. The company provided consultancy and training services, but did not provide adequate bookkeeping to ensure VAT was properly documented so not available for audit. To make matters worse, six months prior to the liquidation Mr Thompson took all the trading revenue which were substantial amounts of money; some of which should have destined for HMRC. These amounts were taken then entered on his P35 one month prior to the liquidation and subsequently creating a substantial PAYE deficit. Mr Thompson knew the PAYE debt could not be paid by the limited company, yet still paid himself the income just prior to the insolvent liquidation.
The company was eventually placed into an insolvent liquidation on the 12th June 2012 leaving company creditor debts of £160,965. Mr Thompson acknowledged that he had made no effort to audit, or file for VAT as was his statutory duty, and made no effort to pay HMRC. Of the £160,965 debt £160,315 was debts owing to HMRC.
The Insolvency Service’s Group Leader of Insolvent Investigations (North) Robert Clarke said of Mr Thompson: “The Insolvency Service will rigorously pursue traders who seek an unfair advantage over their competitors by not paying VAT, or PAYE to the Government.
“If you run a limited company, you have statutory protections as well as obligations. If you fail to comply with your obligations, The Insolvency Service will investigate you and you could lose the protection of limited liability.”
Director’s Learning Points
There are a number of learning points for directors stemming from Mr Thompson’s case, and not least is that directors should not expect to be able to continue to trade with an unfair business advantage of not paying taxes. Most directors will agree that whilst the economic environment is improving there should be a level playing field for all.
It appears Mr Thompson deliberately sought to use HMRC’s taxes and use them for his own ends by paying himself in the six months leading up to the insolvent liquidation. When insolvent, a director must be extremely careful about deciding which creditor to pay when considering paying any of them. Technically, all creditors must be paid equally on what is called a pari-pasu basis; meaning fairly, so any payments should be proportionate to the size of the debts. The fact that Mr Thompson paid himself ahead of HMRC is a clear preferential payment.
By paying himself and not his creditors this was also a clear preference payment and the liquidator/official receiver could ask for this ‘payment’ to be returned to the company for distribution to the creditors. It has not been made clear whether Mr Thompson will be made personally liable for the increased liability to the limited company.
It is worth remembering that the inability to pay taxes in itself can lead to a disqualification and may be used as evidence for wrongful trading. Wrongful trading is best thought of as trading irresponsibly, which in this case is clearly visible. There are a number of warning flags that indicate the director is trading irresponsibly and leaving him/herself open to accusation of wrongful trading. The relevance of the wrongful trading in this case is that the director may at some point, in addition to the disqualification, be made personally liable for some, or all of the HMRC debts.
A director can be made personally liable for limitted company debts accrued in the period when the director knew, or should reasonably have known that the company would end in an insolvent liquidation. A limited company is defined as insolvent if it can no longer pay its bills when they are due, or the company’s liabilities and contingent liabilities outweigh the assets.
Section 121C Social Security Administration Act 1992
There is also another learning point where PAYE is concerned as HMRC can make Mr Thompson personally liable by way of presenting him with a Personal Liability Notice (PLN) for the PAYE/NI liability. Within the social security legislation the directors have a statutory obligation to hand over the PAYE/NI due to HMRC and a failure to do so can be a serious breach of the act.
In very simple terms, when a director fails to pay across PAYE/NI due the limited company has failed to comply with its responsibility and the officers of the company may be made personally liable for those debts. HMRC would have to prove that the director or officer of the company was wilfully and or criminally negligent. Interestingly the director in this case did pay themselves ahead of the PAYE but it is not clear whether other employees suffered as a result which would have aggravated the situation further.
An officer of the limited company is determined as: a director, manager, secretary, shadow director (someone without a director title, but say over the company’s direction/decisions); or any person acting as such. It is also worth noting that an employee acting for a disqualified director knowing that the director was subject to a disqualification notice, or bankruptcy order can also be made personally liable.