Directors' liability — tax and insolvency

Being a director brings with it a raft of responsibilities, including a range of duties owed to the company and its stakeholders.

The circumstances where the directors can incur personal liability have increased in recent years, with new anti-corruption, data protection and environmental legislation imposing potential fines and liabilities on office-holders in certain situations as well as on the company.

For the most part, however, there is no personal liability of the directors in respect of the tax liabilities of the company. In the event of company insolvency, HMRC can do little to recover any unpaid corporation tax (and will simply stand as another unsecured creditor).

There are exceptions, however.

In relation to VAT, whilst it has no direct recovery powers, HMRC can (and more often than not will) require security for VAT in relation to any future businesses with which any of the directors of the insolvent company may become involved.

There are also circumstances whereby HMRC can seek to recover outstanding PAYE and NICs from the directors. In terms of the personal liability of directors in relation to PAYE and NICs, the position can be broadly summarised as follows:

PAYE

HMRC has the power to transfer unpaid PAYE debts of the company to a particular director or employee and seek recovery from them personally in relation to any payments they received knowing that the employer had “willfully failed” to deduct tax.

This power is therefore limited to PAYE debts associated with payments to the directors themselves (or associated persons such as family members). It requires culpability on the part of the director in knowing that the PAYE would not be paid. This means that it is more usually applied in the case of small owner-managed companies or where the director has some influence or control over the company’s finances.

NICs

HMRC also has the power to seek recovery of unpaid NICs (both primary and secondary) from an individual director or directors by way of the issue of a Personal Liability Notice (PLN). A PLN may be issued when there has been a failure to pay the NIC due and that failure is attributable to the fraud or neglect of that director (who was acting as an officer of the company at the time in question).

The key point to note here is that, unlike in relation to the transfer of PAYE debts, the potential personal liability of the director(s) for NICs is not restricted to NICs on their own remuneration but covers all outstanding NIC debts.

Although there are very few cases of fraud, the fact that the provision can apply in the case of neglect is not a particularly high bar. HMRC guidance confirms however that a PLN will only be issued in cases involving serious levels of neglect. Factors that will influence their considerations as to whether to issue a PLN include where there is a background of persistent failure to pay the NICs due and the company was making significant and/or regular payments:

• To other creditors;
• To connected persons/companies; or
• In the form of director’s salaries.

These provisions have, to date, been predominantly used by HMRC to combat “phoenix” operations where the assets and operations of an insolvent business that has run up significant tax debts (including PAYE and NICs) are transferred to another new entity owned and run by the same individuals.

There is however a suggestion that HMRC is starting to use these provisions more widely, particularly in the context of insolvencies where there is any allegation of wrongful trading.