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 debts belong to the company, and directors are not normally liable for them just because they hold office.
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 121C of the Social Security Administration Act 1992, inserted by section 64 of the Social Security Act 1998, gives HMRC the power to issue a Personal Liability Notice (PLN) making an officer of a company personally liable where National Insurance contributions go unpaid and the failure to pay is attributable to that officer’s fraud or neglect. It reaches National Insurance only.
Why are Personal Liability Notices issued?
The power came into force on 6 April 1999, to deal with companies that kept trading, and kept paying other people, while National Insurance went unpaid. It is used sparingly and against a narrow target, which is worth knowing if you have been told a PLN follows automatically from arrears.
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:
- Class 1 contributions, both employer and employee
- Class 1A and Class 1B 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, or the officer’s proportion of them. The notice specifies that amount, plus interest on it from the date the notice is issued. The unpaid contributions in a notice can include any interest or penalty charged on the company’s contributions (Social Security Administration Act 1992, s121C(9)).
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. Being unable to pay is not, on its own, a ground for a PLN. The test is whether the failure appears to HMRC to be due to fraud or neglect by an officer, and HMRC makes that judgement, not the director.
PLNs let HMRC pursue company officers whose fraud or neglect caused the company’s failure to pay National Insurance contributions. The power arises where the company’s failure to pay appears to HMRC to be due to fraud or neglect by one or more of its officers. Neglect is enough; no offence is needed. In practice, HMRC generally issues a PLN only 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. HMRC officers carry out the investigation.
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.
Answering HMRC’s informal questions and taking part in interviews is voluntary. HMRC can, however, serve a formal information notice under Schedule 36 to the Finance Act 2008. You must comply with it unless you appeal, and you can appeal most of these notices. Ignoring one without a reasonable excuse carries a £300 penalty, plus up to £60 a day if the failure continues. If you do not engage, you may lose the chance to put your side and agree a settlement before a PLN is 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.