One of the advantages of running a business as a limited company is that your financial commitment to the business is limited by the value of your shareholding. So, if you’re a director and shareholder of a limited company, the most you stand to lose if the company goes bust is the value of your shares. However, there are some exceptions.

There are certain circumstances where you could find yourself personally liable for unpaid VAT. This can be the case where your company is insolvent, or it is suspected the company may soon become insolvent, and:

  • Fraud is involved; or
  • You start a new business following the failure of another

What penalty will you receive?

Where there are VAT liabilities arising from either of the above, the action taken will depend on whether the director has had previous issues paying VAT. If there is evidence that a director has left a previous without paying the VAT due, a VAT security notice can be issued by HMRC. This is essentially a deposit that must be paid by the new business.

This will be calculated based on the perceived risk and the estimated VAT liability of the new business for 6 months of trading based on quarterly returns, or 4 months of trading for monthly returns. The security will also include any existing arrears from the current or previous business.

In the case of an underpayment of VAT due to fraud, HMRC can pursue a company director personally, not just for the underpaid VAT amount, but also any VAT non-payment penalties they receive. This can create a substantial liability. The prescribed penalty for VAT fraud is 100 percent of the amount unpaid. This can be handed down in situations where the non-payment of VAT is attributable to a deliberate error, for example, where the amount of output tax has been understated and the director has gained personally.

New penalties for VAT fraud

HMRC will introduce a new and more effective penalty for participating in VAT fraud in the Finance Bill 2017. It will be applied to businesses and company officers who knew or should have known that their transactions were connected with VAT fraud.

For confidential advice on tax debt problems or HMRC tax investigations over missed tax payments call 0800 074 6757.

Author: Mike Smith