One of the primary reasons many business owners choose to incorporate their businesses and become a limited company rather than a sole trader is to benefit from the limited liability it brings.
Limited liability provides the protection that, if the business were to fail, the directors would not be held personally liable for the company’s debts.
However, in the case of limited company tax liabilities such as VAT, PAYE, National Insurance contributions and corporation tax, company directors can be made personally liable in certain instances if payments are not made.
When can Company Directors be made Personally Liable for Unpaid tax?
It is not unusual for companies that are in financial distress to accumulate VAT, PAYE and National Insurance contributions arrears. It’s often the case that struggling companies do not make a profit, which makes corporation tax arrears less common.
Ordinarily, if the company were to become insolvent, HM Revenue & Customs (HMRC) would not be able to recover the unpaid tax from the company directors personally. However, HMRC does have the power to make limited company directors personally liable for unpaid taxes where evidence shows the failure to make payments was deliberate or the result of neglect or fraud.
For example, if a company director continues to pay themselves dividends while failing to make tax payments, they could be made personally liable for the business’s debts. Similarly, if the business continues to make payments to connected creditors such as family or friends but does not pay the money it owes to HMRC, the directors could have to pay HMRC from their personal funds.
Directors Liability for HMRC Debts
Company directors can only be made personally liable for the repayment of VAT tax debts if the failure to pay VAT is deemed to be deliberate and the company is insolvent or will be insolvent soon. Another power HMRC has in relation to VAT liabilities is to demand VAT security for any future businesses the director of the insolvent company is involved in. That VAT security can represent a significant sum of money, which can make it difficult to start a new business.
Any company director who ‘wilfully failed’ to deduct PAYE tax can be made personally liable for the business’s missed payments to HMRC. This power is limited to PAYE debts associated with payments to the directors themselves or connected parties such as family members. For that reason, this power is usually applied in small owner-managed businesses where the director has control over the company’s finances.
National Insurance Contributions (NICs)
HMRC also has the power to recover unpaid NICs from a company director where the failure to pay is the result of the fraud of neglect of the director. Unlike PAYE, a director’s personal liability for National Insurance contributions is not restricted to their own pay but covers all outstanding NIC debts.
A personal liability notice (PLN) is the document issued by HMRC to make a director aware that the debt has been transferred to them personally. It will specify the amount of NICs the director is personally liable for; the penalties and interest that apply, and any statutory interest payable on the debt.
If a business is struggling financially then, generally speaking, it will not be making a profit and no corporation tax will have to be paid. However, there are cases where struggling business do build up corporation tax debts. HMRC will try to recover these debts through enforcement action. However, in certain situations, such as where payments have been made to the company directors at the expense of corporation tax liabilities, HMRC can seek to make the directors in question personally liable for all or a proportion of the debt.
If your limited company is struggling financially and you have unpaid tax debts the business cannot pay, we’d advise you to contact our team immediately. Any initial consultation is completely free and we can help you consider all the options available to you. To find out more, contact AABRS today.