There are many potential consequences for a company and its directors if they choose to avoid making tax payments to HMRC.
To avoid paying tax to HMRC is a very serious step that should be avoided at all costs as the consequences can be very severe.
For the Director
Breach of Directors’ Duties
Directors have a number of duties to the company for whom they are appointed, these duties are imposed by the Companies Act 2006. Directors’ duties are broad and wide-reaching and include a general duty to promote the success of the company. As a director of a company that is avoiding its tax payments to HMRC, you are likely to be in breach of your directors’ duties, the penalties for which can be serious.
Potential penalties include injunctions, damages or compensation.
If the company is insolvent, directors duties are modified so that they need to act in the best interest of the company’s creditors. HMRC will be one such creditor.
The penalties for breaching this duty can be serious – directors can be found culpable for wrongful trading, fraudulent trading and misfeasance among other things. These can lead to the directors being banned from acting as a director for a period of up to 15 years, being held liable for some or all of the company’s debts incurred after it was insolvent or criminal proceedings in the most serious situations.
The behaviour of the directors will be investigated during the company’s liquidation and if the liquidator or official receiver finds that the directors have been in breach of their duties, they must submit a report stating that this is the case.
Personal Liability Notice
Even if the company is not insolvent, HMRC can issue a Personal Liability Notice to a director of a company that has not fulfilled its obligation to pay its Class 1 National Insurance Contributions to HMRC.
Personal Liability Notices can be issued where a company has failed to pay its Class 1 National Insurance Contributions and that failure has stemmed from the fraudulent or negligent actions of a director or other officer of the company. HMRC will address the Personal Liability Notice to the culpable officer.
The Personal Liability Notice effectively makes the culpable officer personally liable for the amount of unpaid National Insurance Contributions stipulated in the notice, along with penalties and interest. HMRC will then be able to pursue that officer as if it was a personal tax debt.
Implications for the Company
HMRC have a debt collection process that can escalate to them taking some very serious steps against the company, including forcing it into liquidation. The decision about which course to take will depend on the circumstances surrounding the debt – HMRC will investigate the history of the debt, how long it has been outstanding and its total amount and then decide what steps to take. These steps can include the following actions.
Seizure of the Company’s Assets
If HMRC have repeatedly demanded payment of tax from a company and it has not resulted in the tax being paid, they will issue a Notice of Enforcement. This entitles them to seize certain assets of the company to sell. The proceeds from the sale of these assets will be set off against the company’s tax debt.
HMRC can take the company to court for the outstanding amounts.
Debt Collection Agency
HMRC may contract a third-party debt collection agency, which is likely to result in a significant number of communications to try and recover the debt.
This is perhaps the most serious of the steps that HMRC can take as if successful, it will lead to the closure of the company. Where the debt is for over £750, HMRC can serve a winding up petition against the company asking the courts to make a winding up order that will put the company into compulsory liquidation. The company will be wound up and its assets distributed to its creditors.
This is a very public process that is advertised in the London Gazette – so in addition to the negative consequences for the company, it can be very damaging to the reputation of the company and the directors.
As mentioned above, the liquidator or official receiver will investigate the conduct of the directors prior to the liquidation – the directors may be found guilty of a breach of their duties or offences such as wrongful or fraudulent trading.
As you can see, not paying HMRC can result in some very serious consequences. If your company is having financial difficulties and you need advice about the best course of action to take, we can help. Call us on 0800 074 6757 for a free, no obligation discussion, or use the live chat function on your screen.