One of the primary reasons people choose to turn their company from a sole proprietorship or partnership into a limited company (ltd) is the extra protection this type of corporate structure affords. This process, known as incorporation, effectively separates the business from the individual(s) behind it. The business becomes an entity in its own right, and the finances of the business and its owner separate. So, if the business loses money, the personal finances of the company directors are safe.
However, there are some instances when this ‘corporate veil’ can be lifted, and those behind the business can be held personally liable for a proportion of the company’s debts. Section 64 of the Social Security Administration Act 1998, gives HMRC the power to issue a Personal Liability Notice (PLN) to make company officers personally liable for company debts in cases where National Insurance contributions go unpaid.
Why are Personal Liability Notices issued?
The power to issue Personal Liability Notices came into force from 6 April 2009, and was introduced to tackle the growing problem of limited companies abusing the National Insurance system. In the last couple of years we’ve seen a rise in the number of PLNs being issued, so it’s a good idea to make you aware of this situation now.
National Insurance Contributions Payable by the Company
The legislation allowing HMRC to issue and enforce PLNs only applies to National Insurance contributions payable by the company for its employees and directors. This includes:
- Employers and employees contributions
- Class 1A and 1B contributions
- Interest added to the unpaid contributions
- Penalties added to the unpaid contributions
The PLN has the effect of making an ‘officer’ of the company (e.g. director, manager or secretary) personally liable for the unpaid contributions. The amount they must pay will be specified in the notice.
When do HMRC Issue Personal Liability Notices?
The purpose of PLNs is not to penalise the directors or officers of companies that are genuinely struggling. If you are doing everything you can to pay the proper amount of National Insurance contributions but are unable to do so, this is not a penalty that will be used against you.
PLNs were introduced to allow HMRC to target company directors it believes are intentionally failing to pay the proper contributions. This power arises where HMRC feels there has been an attempt to commit fraud or some other serious offense. For this reason, it will generally only issue a PLN in cases where a company has failed to pay its National Insurance contributions in full, but has made significant payments to:
- Connected parties
- Other creditors
- Themselves as company directors
PLNs also only tend to be used when HMRC believes there is a good chance of recovering the debt.
There have also been cases of PLNs being issued in cases where the officers of a company have a history of closing a business when it falls into debt, only to open a new business that is clearly connected. This is known as phoenixism.
How does the PLN process work?
If HMRC believes the company’s failure to pay the correct level of National Insurance contributions is the result of the neglect or fraud of an officer, it will launch an investigation. This is carried out by a team of HMRC investigators who are based in London but cover the whole of the UK.
During the investigation, an HMRC inspector will:
- Take a close look at the company’s books and records;
- Invite the company officers to explain why there has been a failure to pay;
- Determine the facts and circumstances surrounding the failure to pay;
- Consider the level of neglect shown by each of the company’s officers;
- Seek to ‘fairly’ and ‘reasonably’ apportion the debt;
- Consider and respond to the company officers’ representations.
Although there is no obligation to cooperate with the HMRC investigation team, you will lose your opportunity to make representations and potentially negotiate a settlement without a PLN being issued.
If a PLN is issued, you can choose to appeal the decision before the Tax Tribunal. However, you will have a much better chance of winning the appeal if you cooperate and try to negotiate with the HMRC investigation team.
How can we help?
Are you worried about being made personally liable for unpaid National Insurance contributions? Or perhaps you’re in financial distress and are unable to pay your liability to HMRC? For the expert advice and assistance you can rely on, please get in touch with our team.