It has been said that death and taxes are the only certainty in life, unless perhaps if you live in an offshore tax-free jurisdiction.  However, even there, the likelihood of escaping the international disclosure requirements has made tax avoidance more difficult for many individuals and their businesses to achieve.  Whatever issue you may face with HMRC, our specialist team at Francis Wilks & Jones is here to help. 

Introduction

For most UK companies, tax liabilities remain a priority and – if such tax returns / taxes are unpaid – then HMRC will bring swift action to prevent a company from trading.

The most common method of achieving this, when it comes to companies, is by presenting a winding up petition against a company. 

  • unlike most creditors, the tax liability a company owes to HMRC can be crystallised as a statutory debt which does not need to be formally demanded and may be presented where no tax return has been filed. 
  • otherwise, the company’s debt to HMRC is the amount stated as due on the tax return (whether that be for VAT, Corporation Tax, PAYE or NI – the most common forms of tax liability).

HMRC does additionally have a whole range of penalties, surcharges and interest to add to such sums which, after only a short period, can increase the tax liability significantly. 

Once a company is wound-up, from 1 December 2020 HMRC has a preferential status when compared to other unsecured creditors (a status previously removed under the Enterprise Act 2002 but which has now been reinstated) in respect of unpaid VAT, PAYE, NIC and CIS deductions.  This means that, for creditors of an insolvent company, the significant liabilities owed to HMRC will have to be repaid first making insolvency a more disastrous outcome for unsecured creditors generally.

Risks faced by directors

For directors of companies placed into insolvency, especially when considering the current conflicting problems of a huge national debt and a disincentive to business for taxes to be increased, there are a number of statutory options enabling HMRC to recover their losses (which are normally the biggest unsecured debt in any liquidation) using one of the following routes

1. Personal Liability Notice – NIC

HMRC may seek to enforce a Personal Liability Notice, or PLN, against a director personally where a company is placed into insolvency with NIC liabilities which were unpaid during the period of trading pre-liquidation, and where such non-payment is considered to be as a result of the fraud or neglect by a Director.

  • from experience, HMRC will seek to allege neglect (rather than fraud) as a lower threshold is required to demonstrate neglect;
  • the director may only be liable for a part of the unpaid liability, if considered less culpable, or all of the unpaid liability (which can be significant).

2. Recovery of PAYE

As with NIC above, similar provisions apply to enable HMRC to recover PAYE liabilities directly from an employee which should have been deducted by the company. 

  • for almost all scenarios, the employee is usually a director (as there is a need for HMRC to demonstrate a knowing receipt);
  • interest and charges will also be payable in addition to the PAYE that should have been deducted.

There is a statutory defence (dependant on the grounds under which HMRC make such claims) that there was either no wilful deduction or that the company did not take reasonable car.

In the absence of any such defence, the employee and / or director will bear the liability for the debt owed by the company.

3. Security – PAYE/NIC and VAT

HMRC can demand security for PAYE / NIC and VAT where a company has been placed into insolvency with a debt due to HMRC for PAYE/NIC and/or VAT – and the director sets up a new company. This is whether that be the business purchased out of administration / liquidation or a completely new business. HMRC can adopt the stance that an up-front security sum is required to be paid before the new company can continue to trade.

  • this can prove a quite serious disincentive to the company rescue and restructuring culture of UK business, especially where the security sought is based on the old company’s turnover (which, as a previously established going concern, may be a lot higher than that of the new company), and therefore may be in the many hundreds of thousands of pounds;
  • if such security requests are ignored, and the company continues to trade, then this may result in a criminal liability and potential fines up to £5,000 per invoice against the director(s) targeted (which, for a company with many smaller sales, can mean an extremely significant fine).

4. Tax avoidance

Tax avoidance is a complicated area with many options open to HMRC as a result of action taken to prohibit the use of tax avoidance schemes since 1998, and since the Finance Act 2011.

  • Advanced Payment Notices (APNs) can form statutory debts against companies where such schemes are subject to ongoing disputes between the company and HMRC. 
  • equally, as regards the recipients of “loans” as income through such schemes, from 2017 legislation was introduced to enable a liability (called a “loan charge”) to be created against the receiving individual, although policy changes from December 2019 have reduced the liabilities created.

Over the course of the last 20 years directors of SME companies have been advised to enter into such schemes but are now facing the loan charge recoveries of the taxes due which may create significant liabilities over the coming years.  This may be particularly prevalent in the next few years, where HMRC and the Treasury are seeking to maximise such recoveries to help pay the national debt.

As with all HMRC claims, there is an appeals process and at Francis Wilks & Jones we have been very successful in assisting with such appeals.

In a perfect world it is preferable for any director to plan against such eventualities but if you are at risk of any of the above, then please contact us to discuss.


At Francis Wilks & Jones we provide a quality value added service and can help you whatever HMRC claim you are having to deal with. Speak to a friendly member of our team today.

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Maria Koureas-Jones

Maria Koureas-Jones

Partner

Andy Lynch

Andy Lynch

Consultant

Stephen Downie

Stephen Downie

Partner

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