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How HMRC penetrate the corporate shield and hold Company Officers personally liable

05 January 2023

With HMRC more focused than ever before on recovering taxes due, we look at the most common ways in which HMRC can transfer the liability of taxes due and/or penalties to Company Officers and making them personally liable.

The Government has promised to spend an additional £79 million over the next five years to help HMRC tackle tax fraud and address compliance risks amongst wealthy taxpayers. HMRC's efforts will be a threat to businesses affected in terms of costs and expenditure in time in dealing with HRMC. 

Certain sectors and businesses will attract particular scrutiny, including importers and exporters and employment services businesses amongst others. 

To address compliance issues, HMRC is making use of its extensive powers, which can in some circumstances, shift a tax liability of a corporate entity and hold a Company Officer liable. We take a look at some of HMRC's key powers.

National Insurance Contributions (NICs)

A Personal Liability Notice (PLN) can be issued to a culpable Company Officer where:

  1. a Company has failed to pay NICs when due; and
  2. the failure appears to be attributable to fraud or neglect by a Company Officer(s).

Value Added Tax (VAT)

HMRC can issue a notice to a Company Officer where:

  1. a Company is liable to a penalty for a transaction related to VAT fraud; and
  2. the liability is attributable to a Company Officer. 

The Company Officer is liable to pay such portion of the penalty as HMRC may specify in the notice. 

Pay as You Earn (PAYE)

A joint liability notice may be issued in tax avoidance and tax evasion cases if all the following conditions are met:

  1. The Company has entered into tax avoidance arrangements or engaged in tax evasive conduct.
  2. The Company has entered into an insolvency procedure or there is a serious risk that it will do so.
  3. The individual to whom the notice is issued was:
    1. responsible for the company entering into or engaging in the avoidance or evasion or received a benefit from it, knowing the benefit came from the avoidance or evasion. At the time they were a Company Officer; or
    2. took part in, assisted or facilitated the avoidance or evasion arrangements at a time when the individual was a Company Officer or was concerned in or taking part in the management of the company.
  4. There is or is likely to be a liability due to HMRC and there is a serious possibility that some or all of the liability will not be paid.

Schedule 24 Finance Act 2007 Penalty

If a careless or deliberate inaccuracy in a tax return is brought about by a Company Officer, both the officer and the company are jointly liable for the penalty.

Other circumstances of personal liability

In addition to the above, if a Company has gone into liquidation or administration, a Company Officer may also face proceedings under: 

  1. The Insolvency Act 1986, in particular where a director knew, or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration and failed to take every possible step to avoid further potential loss to a company’s assets and/or creditors. If the court decides that this has occurred, it can order the director to make an appropriate contribution to the company’s assets.
  2. The Company Directors Disqualification Act 1986, in particular where a company director's conduct is believed to be unfit or if they have failed to meet their legal responsibilities. If the Insolvency Service issue Directors Disqualification proceeding, and the court rule that the Director did not meet their legal responsibility and/or that their conduct was unfit, they will be disqualified at which stage an application for a Compensation Order can be made for the amount of loss.

Conclusion

In its efforts to tackle fraud, compliance issues and close the tax gap, we are seeing HMRC's increased use of these existing powers but each of these powers has its limits. Proper advice is essential if personal liabilities are to be avoided or minimised. 

We have an experienced team who can assist with these issues. If you would like to discuss how we can assist you or your business, please speak to Tajinder Barring.

Further Reading