There are some circumstances in the running of a limited company or a limited liability partnership when the protective veil of incorporation can be penetrated and the directors made liable for tax errors.
Instances of directors being made personally liable in cases of unfit conduct, such as continuing to trade while insolvent, are relatively uncommon, but rarely do we hear of the same action being taken for inaccurate tax declarations. However, in the last few months, there have been a number of instances where Schedule 24 of the Finance Act 2007 has been unusually used to do just that.
Under Schedule 24 of the Act, company directors and officers can be made liable for inaccurate tax declarations made by a limited company. In this instance, a company matter can soon become a personal issue, with varying degrees of culpability determining the level of penalty where dishonesty and or covering up on the part of the individual can be identified.
It is also worth noting the individual may not be a director but can be any recognised officer, manager or any individual of the company who is in a position of authority to make these decisions.
When could you be personally liable for a penalty?
You could be personally liable for a tax-related penalty in one of the three following circumstances, as long as your action results in a potential tax loss:
- When a careless error or mistake is made in a tax return or document and this leads to:
– An understatement of the tax liability;
– A false or inflated statement of a loss; or
– A false or inflated claim for the repayment of tax;
- When a third party supplies false information or deliberately withholds information in connection with your tax return or document
- When a tax assessment is raised and you fail to notify HMRC that the assessment is too low
How is the penalty determined?
A penalty is charged for each error made, and this can be for a maximum of 100 percent of the revenue HMRC have lost as a result of the error. However, it is the level of culpability, as outlined in Schedule 24, part 1 of the Act, which ultimate determines the extent of the personal liability of a director or officer. There are three levels of culpability defined in the Act. This includes:
- Carelessness – If the mistake is due to a failure to take proper care, HMRC can demand 30 percent of the potential lost revenue.
- Deliberate but not concealed – If a director or officer deliberately discloses an inaccuracy to HMRC but makes no attempt to conceal it, HMRC can demand 70 percent of the lost revenue.
- Deliberate and concealed – If the director or officer deliberately discloses an inaccuracy to HMRC and then attempts to conceal it i.e. by attempting to submit false supporting evidence, HMRC can demand 100 percent of the potential lost revenue from the director or officer as a penalty.
The taxpayer’s past behaviour will also be factored into the calculation of the penalty. Whether the error was disclosed to HMRC by the taxpayer, or the disclosure was prompted by HMRC will also play a part in determining the size of the penalty. If the taxpayer is co-operative and helps HMRC quantify and correct the error, this will also reduce the penalty.
Of course, tax declarations should always be completed and filed cautiously and carefully, and recent examples of directors being made personally liable for lost revenues, even when there is no deliberate intention to defraud the public purse, show just how careful directors need to be.
It is also worth noting HMRC do make mistakes as we have discovered recently enabling us to rescue the business much to the relief of the company directors. Be aware however this kind of action is usually coupled with the pending insolvency of the company and or a winding up petition or threat of it.
How can we help?
If you would like more information or free advice on any of the concerns you may be having about your dealings with substantial HMRC debt, please feel free to get in touch. The relief of being able to speak to someone who understands these issues is often palpable even on the end of a phone.
Call us on 0800 074 6757; send an email to email@example.com.