When can a Director be held personally liable for company tax?

Personal Liability Notices

One of the benefits of a company or other incorporated entity is that it shields individuals from being held liable should there be any lawsuits or other debts incurred by the company (and outstanding when the company becomes insolvent). Where a company is investigated and found to have underpaid certain taxes, HMRC may, providing specific conditions are met, transfer the liability for paying the outstanding taxes (and penalties) to “liable officers” of the company.

The legislation we discuss in this article effectively pierces the corporate veil and allows HMRC to hold Directors of a company personally liable for corporate debts. A general rules is that cases, HMRC must demonstrate that the Director(s) deliberately did not pay the relevant taxes to HMRC. In some cases however (VAT fraud by a third party), no such proof is required. There are a range of there transfer of debt provisions and we address some of them here.

Advisers should be aware of when HMRC are required to evidence behaviour, the behaviour threshold (if any) and how the notices can be appealed. Recent legislation has widened the powers in relation to the use of tax avoidance arrangements and insolvency and tax advisers may find themselves working with insolvency practitioners in this regard. For these situations, understanding the client’s and HMRC’s position before entering into insolvency is key.

In this article, reference to a “Director” includes any company officer or anyone managing a company’s affairs (to avoid confusion with HMRC officers).

National Insurance Contributions (s121C, Social Security Administration Act 1992)

Where the company has failed to pay NICs within the deadlines set, and the failure is a result of “fraud or neglect” by a Director, HMRC can issue a PLN requiring the relevant Director to pay the NICs due (or if more than one Director, the relevant proportion). The amount payable will be reduced by amounts paid by the company.

In the legislation, “contributions” means any NICs together with any associated interest or penalties.

The relevant Director (the individual) can appeal to HMRC only on the grounds that:
“(a)the whole or part of the amount specified… does not represent contributions…;
(b)the failure to pay that amount was not attributable to any fraud or neglect…;
(c)the individual was not an officer of the body corporate at the time of the alleged fraud or neglect; or
(d)the opinion formed by [HMRC]… was unreasonable.”

Importantly, the burden of proof when responding to the appeal rests with HMRC. This means, HMRC must show that the PLN was validly issued (s121D(4), SSAA 1992).

Debts of Managed Service Companies

HMRC has recently opened enquiries and served determinations on some accountancy firms involved with assisting high numbers of contractors with their tax affairs. HMRC acted on the basis that these firms are managed service companies under the legislation at Ch 9, Pt2, ITEPA 2003. Here we discuss the possible repercussions should PAYE be found not to have been correctly withheld.

The “Debts of Managed Service Companies” legislation is found at Ch4, Pt4, Income Tax (Pay As You Earn) Regulations 2003. In situations (described in reg 97B) where HMRC finds that there is PAYE due (‘the relevant debt’) and it finds that the debt is likely to be irrecoverable within a reasonable period, it may transfer the debt to one of a number of parties. For these purposes, HMRC consider three months to be a reasonable amount of time (ESM3620).

Conditions for when a relevant PAYE debt may arise include (reg 97B):

• HMRC has determined that PAYE is due, has issued a Regulation 80 notice accordingly and the tax due under the notice has not been paid within 14 days.
• If 17 or more days after the end of the tax period, real time returns should have been made and were not and the tax that would have been due has not all been paid then HMRC may issue a notice requiring the tax to be paid. If within a further 14 days, the tax has not been paid, the amount becomes a relevant debt.
• where an employer submits an annual return and the amount on the return is less than the amount that has been paid and the amount remains outstanding 14 days after HMRC have issued a certificate requiring the tax to be paid
• If HMRC undertakes an inspection of PAYE records and on the basis of the inspection issues a demand for payment then, if within 14 days the tax is not paid, the amount demanded becomes a relevant debt.

For a relevant debt to arise, there does not need to be evidence of fraud or carelessness, simply that the PAYE has not been withheld/paid under the relevant conditions.

HMRC may then issue a joint and several liability notice (reg 97C(3)) to:
i. a director or other office-holder, an any person (individual or entity) connected with the MSC,
ii. an MSC provider,
iii. a person who (directly or indirectly) has encouraged or been actively involved in the provision by the MSC of the services of the individual, and
iv. a director or other office-holder, or an associate, of a person (other than an individual) named above.

The legislation specifically includes a carve out for those who solely provide legal or accountancy advice in a professional capacity, or
“place the individual with persons who wish to obtain the services of the individual (including by contracting with the MSC for the provision of those services)”.

Procedurally, HMRC can only recover the amount specified in the liability notice after it has served on the relevant persons a “transfer notice” (reg 97C(4). If the HMRC officer considers it reasonable, the notice issued to a person may be for less than the total amount due. The amounts recoverable from other persons however can be for a lesser or greater amount as determined by HMRC (reg 97C(5)).

HMRC may only issue a notice to a person who (directly or indirectly) has encouraged or been actively involved in the provision by the MSC of the services of the individual or their associate if an HMRC officer certifies that in their opinion, it is “impracticable” to recover the PAYE from the Director or MSC provider (reg 97C(7)). This could make things interesting in relation to tax avoidance cases where the MSC provider and the Director(s) might be based overseas. Potentially, if contractors were encouraged to introduce other contractors to the MSC, then they could fall under iii) above and be liable for MSC debts.

It is possible to appeal against a transfer notice on the basis that any of the above criteria have not been met and the full list of possible gournds is provided at reg 97G. Should the appeal to HMRC fail, there is recourse to Tribunal (reg 97H).

This legislation also applies to apprenticeship levies.

Certain Debts of Agencies – (Pt4, Ch3A, Income Tax (Pay As You Earn) Regulations 2003)

Where an individual provides services to a compant through an agency, the agency if required to dedcut PAYE. Where the company (or related person) provides the agency with a fraudulent document to persuade the agency that it should not apply PAYE, the company becomes liable to deduct the tax (s44, ITEPA 2003).
The same end result applies when an agency is inserted into an arrangment with one of the main purposes being tax avoidance (s46A, ITEPA 2003).

If one of the above situations applies, and the company does not deduct the requisite PAYE, HMRC can transfer the debt (PAYE income tax, interest and penalties) onto any person who was a Director of the company when the relevant PAYE should have been deducted or the date on which the the fruadulent document was provided of the date on which the avoidance arrangements were entered into (reg97ZA).

Where HMRC issues notices to more than one Director, then each director is jointly and severally liable. This is different again to the Social Security Regulations (described above) where each Director is issued with a notice which specifies the NICs due up to the proportion attributable to them. For example if four directors colluded to evade PAYE and NIC, they could each receive PLNs for National insurance of 25% of the full amount and PLNs for PAYE of the full amount.

If too much tax is paid to HMRC (e.g. more than one director pays the full amount of PAYE), HMRC must repay the surplus, divided on a “just and equitable” basis (reg 97ZF).

The PAYE PLN can only be appealed on the basis that the amount due per the PLN is incorrect (unless the company has already appealed on this basis) or that the person was not a director on the date the PAYE should have been deducted (reg 97ZC).

The amount in the PLN is treated as an assessment for the purposes of HMRC’s collection and recovery powers as detailed in Part 6, TMA 1970, meaning that the liability belongs to the Director and their personal assets can be appropriated in lieu of the debt should they be unable to pay.

VAT (s77A, VATA 1994)

VAT is part of almost every transaction and where there are a number of entities in a chain before a product gets to the end buyer, there are obviously a number of transactions. In some cases, a seller may not pay the requisite VAT to HMRC.

In this case, HMRC may make any person (sole trader or company) in that chain jointly and severally liable for the unpaid VAT if the person “knew or had reasonable grounds to suspect” that some or all the VAT had not been paid or would not be paid. The idea here is for individuals to review their supply chains and ensure that they are not inadvertently facilitating VAT fraud. The legislation neatly shift the responsibility for policing the supply chain from HMRC to the Directors of various entities on pain of having to pay for another person’s VAT. Whilst this is not necessarily a Personal Liability Notice, it demonstrates the range of HMRC’s power to transfer debts.

VAT evasion: conduct involving dishonesty (s61, VATA 1994)

Simply put, these sections allow HMRC to transfer a VAT debt to a Director where the debt arose as a result of a Director’s dishonest conduct in order to evade VAT. HMRC collect the VAT due by way of a penalty equal to 100% of the VAT and then transfer the penalty to the Director.

These provisions only apply where the penalty does not relate to a failure to notify HMRC of an under-assessment by HMRC or an inaccuracy in a document under Sch 24, FA 2007.

The company may appeal against the decision that a penalty applies and against the amount of the penalty. The Director may only appeal against HMRC’s decision that the dishonest conduct is attributable to them or the amount of the debt transferred (s61(5)).

Tax avoidance and insolvency (Sch 13, Finance Act 2020)

Previously, HMRC’s power to issue PLNs was restricted to situations where the tax at stake was that simply held on behalf of a HMRC by a company – PAYE income tax, National Insurance and VAT.

In Finance Act 2020, legislation was enacted to allow HMRC to shift outstanding tax debts for an insolvent (or likely to be insolvent) company onto the directors providing the following conditions are met:

• the company has committed tax evasion or entered into tax-avoidance arrangements from which a tax liability has arisen or is likely to arise;
• the company is insolvent or there is a serious possibility of the company becoming insolvent;
• some or all the tax may not be paid;
  and
• the individual(s) receiving the notice were responsible for the company entering into the relevant transactions, or knowingly received a benefit from the arrangements when they were director(s); or
• the individual(s) took part in, assisted with or facilitated the tax-avoidance arrangements or the tax-evasive conduct when the individual was managing the company.

The Director(s) receiving the notice is jointly and severally liable with the company for the relevant tax liability.

On issuing a notice, the officer must justify why they believe the conditions were met. Thus if a taxpayer receives the notice but was unaware that the company had committed tax evasion or was part of any tax avoidance arrangements then on asking for a review, you can put HMRC to proof of this point. If the taxpayer still disagrees with HMRC’s conclusion (or even if no review was requested), they can also appeal to Tribunal. Ensure any appeal to Tribunal or request for a review from HMRC is made within the relevant time limits.

When requesting a review of the notice from HMRC, the taxpayer cannot “challenge the existence or amount of any tax liability of a company to which the joint liability notice…relates” (para12(5) and para14(2)) unless the company is going insolvent and therefore has not appealed.

HMRC have 45 days to issue the result of their review with reasons for the conclusion. If HMRC do not respond, the notice is treated as upheld (para12(9)) and HMRC must notify the individual (but there are no time limits within which HMRC must do so).

It is worrying that HMRC are not required to respond to requests for a review, especially when the taxes at stake could be life-changing sums. We recommend advisers send the letter by recorded delivery and continue to chase until they are sure it is being reviewed.

There are also additional powers for HMRC to issue a Joint and Several liability notice where an individual who has been director of more than one company that has become insolvent within the previous five years with outstanding debts to HMRC, is director of a new company, which is carrying on broadly the same business as two (or more) previous companies.

The legislation does not require consideration of whether there has been any misfeasance, it is enough for the Director(s) to be responsible for the company entering into the arrangements. In Hunt v Balfour-Lynn and Ors, the high court found that the Directors had not been guilty of misfeasance despite having known HMRC’s views on the tax avoidance arrangements since 2005 and continuing to pay themselves a dividend based on the after tax profits taking into account the avoidance arrangements. We understand that the decision is being appealed.

Thus, even if courts find in insolvency cases that the implementation of tax avoidance schemes was not mismanagement, HMRC can still pursue Directors personally.

Furlough Fraud (Sch 16, Finance Act 2020)

Legislation for repayment of incorrectly claimed Coronavirus Support payments applies the same rules for transferring the liability to Director(s) as for the Tax Avoidance Joint and Several liability notices (para 15).

• If the company:
  • is or is likely to become insolvent;
  • is liable to repay any of the coronavirus support payment claimed;
• and the individual was responsible for the management of the company at the time the income tax first became chargeable and knew that the company was not entitled to the coronavirus support payment repayable;
• and there is a serious possibility that some or all of the tax liability will not be paid,

then HMRC can issue a joint and several liability notice to Director(s) of the relevant company.

There is a right to request a review from HMRC of the decision to issue the notice (para11, Sch13, FA2020) and a right of appeal to Tribunal (para13, Sch 13, FA2020) against it. As the legislation references show, the terms of appeal are the same as for a notice issued under the Tax Avoidance and Insolvency legislation described above.

Transfer of penalties

It is not just the tax liability that can be transferred to the individual. In some cases, the penalty can be transferred instead/as well.

Where an offence covered by paragraphs 1, 2, 3(1) or 4, Sch 41, Finance Act 2008 (Failure to notify) occurs and results in a penalty under that Schedule, HMRC may transfer the liability for up to 100% of the penalty to a Director if the penalty is due to a deliberate act or failure by that Director (Sch 41 (19)). The usual penalty provisions apply, as if the penalty had been assessed on the individual rather than the company.

Similarly, under para19, Sch 24, FA 2007 (Penalties for errors), HMRC can transfer liability for up to 100% of the penalty where a deliberate inaccuracy is attributable to the actions of a Director of the company.

HMRC will issue PLNs in relation to penalties where they believe that the deliberate behaviour resulted in personal gain or where there is a chance that the company will become insolvent, leaving debts to HMRC unpaid. In the latter case, HMRC will look at the history of the company (e.g. whether there has been phoenixsim in the past). Since these conditions are not stated in legislation, they cannot form part of terms of appeal of the penalty. However, since the penalties are now treated as assessments on the individual, the Director can appeal against the amount of the penalty assessed on the company or attributed to the Director.

CH84635 states that “If at the time you are issuing the penalty assessment to the company you decide that there is no personal gain and that therefore the penalty is not to be apportioned to any of the company officers, you cannot later pursue any of the company officers for payment of the penalty even if the circumstances subsequently change.”

The legislation does not provide a time limit by which HMRC must issue a PLN in respect of the penalty, other than within the usual 12 months after the outstanding tax is assessed. There is an argument that if the penalty is not attributed to the Director within a short time after issuing the penalty assessment to the company, then perhaps the investigating officer had previously decided that no PLN should be issued. This can be difficult to prove however.

The burden of proof is on HMRC to demonstrate that the individual deliberately set out to create a situation where taxes were under-declared. CH84615 provides useful guidance on what HMRC would deem to be a deliberate action. For example, simply signing a document which then results in an inaccurate return being submitted “is not in itself evidence that the inaccuracy is attributable to that officer’s deliberate action.”

Transfer of penalty liability provisions also exist for the Tax Avoidance and Insolvency legislation in Sch13 (5), FA2020 where criteria similar to those for the transfer of the tax liability are met.

Partnerships

A partner can be held liable to an inaccuracy penalty levied on a partnership if the inaccuracy affects the tax due by the partner (para20, Sch 24, FA 2007). Again, the usual penalty provisions and appeal terms apply.

For failure to notify penalties, the legislation allowing Directors to be held liable for penalties specifically excludes partnerships.

Penalties for VAT fraud

Where an entity is subject to a penalty under s69C VATA 1994 as a result of Transactions Connected with VAT Fraud (where the entity was not fraudulent but the Directors ‘should have known’ that VAT fraud was occurring in the sales chain), that penalty may be transferred to a Director of the entity if the actions of the company (which result in the penalty under s69C falling due) were a result of the conduct of that Director. The Director would be liable to up to 100% of the penalty (i.e. 30% of the VAT due per s69C(7)). If this PLN is issued to more than one Director, then the Directors together cannot be liable for more than 100% of the penalty.

The notice transferring the penalty liability cannot be issued before the penalty has been assessed on the company. Also, if the Director has already been convicted of an offence in relation to the same conduct, HMRC may not penalise them further by issuing this PLN.

before issuing notice, HMRC must warn the Director and give them the opportunity to make representations against the notice being issued. There is the normal right of appeal to HMRC against the notice.

HMRC’s manuals state that “The liable officers do not have the right to appeal as individuals against the amount of the penalty assessed on the company and the outcome of any appeals against a PLN have no effect on the company penalty.” (HMRC Manuals CH98690). However, in Andrew v HMRC [2016] UKFTT 0295 (TC), the FTT confirmed that the recipient of the PLN may challenge the penalty issued to the company if the company did not.

What to do if HMRC issue a PLN?

The actions to take in response to a PLN depend greatly on the relevant tax and what the client wishes to do. In some cases, where deliberate behaviour has been agreed, the client may wish to simply pay the tax/penalty and move one with their lives. Often, we see cases where individuals see a company bank account as their own and therefore a PLN would make little difference.

In the first place, the ideal situation would be to avoid having a deliberate penalty issued to the company. Common grounds of appeal are behaviour or for VAT fraud, that the Director could not have been aware that there was fraud taking place in the chain. Of course, the basis of any appeal needs to be substantiated, including perhaps reference to actions the Directos did take to ensure the supply chain was ‘clean’.

There have been recent cases relating to ignorance, reliance on advisers and reasonable care – including JT Quinns Limited & Queen-Rose Green v HMRC [2021] TC08338 (the Director relied completely on the accountant and was right to do so) and La Luz Residential Home Ltd & Ors v HMRC [2022] UKFTT 100 (TC) (the Directors had a fiduciary duty and should have made themselves aware of the situation) – with differing levels of success. Any appeal needs to be supported by evidence and reviewed from all angles.

In practice, it is difficult to appeal a PLN. Focus should therefore remain on limiting the likelihood of it being issued in the first place bearing in mind HMRC’s guidance to their officers on when PLNs should be issued.

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