Can HMRC hold a Company Director Responsible for Unpaid Tax?
Directors generally feel secure behind the limited liability status implicit in a limited company. But there are certain scenarios where this status can be overruled, as we explore below.
When Can A Director Be Liable for Company Tax?
Company directors can be made personally for the non-payment of PAYE, National Insurance contributions (NICs) and VAT, where the evidence shows the company’s failure to pay was deliberate or the result of neglect or fraud.
HMRC is very aware that some company directors and officers intentionally abuse the tax system by hiding behind their limited liability.
Having the power to lift the ‘veil of incorporation’ to make officers personally liable for some company debts allows HMRC to increase revenues, ensure HMRC debts are paid as a preference and deter company officers from abusing their position.
Company Directors Liability for Tax Debts
There are varied rules on PAYE liability depending on the situation and the particular error. Where, for example, HMRC has simple issued the wrong code, they look to the employee to make up the payments by adjusting the code over the subsequent tax period.
However, when an employer has made the error, there will be a closer look at potential culpability and particularly around the notion of ‘reasonable care.’ If it is evident that the employer did not use reasonable care it is likely they will be held liable.
Where a company has deducted the PAYE from their employees but not paid it to HMRC, there is also the possibility of making directors responsible on a personal basis.
HMRC has the power to transfer the unpaid PAYE debts of a company to a particular director or officer and seek recovery from them personally if they ‘wilfully failed’ to deduct tax.
This requires culpability on the part of the director in knowing the PAYE would not be paid.
Where HMRC feels the unpaid tax is caused by fraudulent activity, or neglect by company officers it may issue what is called a PLN, a Personal Liability Notice, which makes those concerned personally liable.
Unpaid National Insurance Contributions
HMRC also has the power to seek the recovery of unpaid National Insurance contributions from individual directors by issuing a Personal Liability Notice for the debt.
HMRC will consider issuing a Personal Liability Notice if the failure to pay the NICs is due to the fraud or neglect of the director.
It’s important to note HMRC will not use the PLN as a punitive measure against directors who are struggling, but specifically against those who pay certain creditors before their tax, pay themselves, or connected companies.
Personal Liability for VAT
The third tax company directors can be made personally liable for is VAT. If the failure to pay VAT is deliberate or a company director takes any action to evade paying VAT, they can be made personally liable. However, this is only the case if the company the non-payment relates to is insolvent, or if it is expected the company will be insolvent soon.