Are directors liable for limited company HMRC tax debts?

Understanding company tax liability in insolvency

In the UK, an incorporated limited company is treated as its own individual entity, legally separate from its directors and shareholders. In simple terms, this means that any company money belongs to the company rather than its shareholders/directors; likewise any debts the business accrues are the responsibility of the company to repay not the individual shareholders/directors.

When business is good and cash flow is healthy, this process works well; the company pays its debts, HMRC tax liabilities, and other outgoings out of income, with directors and shareholders then receiving a portion of the company’s profits by way of salary or dividends. When a company begins to experience financial difficulties, however, this once smooth process may quickly grind to a halt leaving debts and tax bills outstanding without the money available to pay what is owed.

When a company becomes insolvent and is unable to service its debts or fully pay the tax it owes, where does this leave the director, and are they personally responsible for paying HMRC if the company cannot afford to do so?

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Understanding limited liability

Company directors operating their business through a private limited company structure are afforded a level of personal protection from the debts of their company in the event of insolvency through something known as ‘limited liability’. Limited liability means a director’s liability is limited to the value of their share in the business. This means that if a company finds itself insolvent and subsequently enters a formal insolvency procedure, such as liquidation, any debt (including tax) which remains outstanding at the end of the process will be written off (except if secured with a personal guarantee) and director’s will not be expected to repay those creditors left out of pocket.

In certain instances, however, company directors can be held personally liable for tax debts including Corporation Tax, VAT, PAYE, and National Insurance even if the company has undergone a formal insolvency process.

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When can company directors be made personally liable for HMRC tax debts?

HMRC has a number of collection methods at its disposal when it comes to recovering unpaid tax debts, and these are likely to be implemented long before personal liability is considered an option. However, if company directors repeatedly fail to bring their tax affairs up to date, it is possible that HMRC will look to recover the owed funds from directors personally under certain situations; these vary according to the type of tax debt which is involved:

• Income Tax – Company directors who can be shown to have ‘wilfully failed’ to pay the required amount of income tax via PAYE to HMRC can be made personally liable for the shortfall, however, this is limited to PAYE debts associated only with themselves or connected parties (e.g. partners and family members) rather than their entire workforce.
• VAT – Personal liability for VAT debt may be deemed an option if the failure to pay VAT can be proven to be deliberate and the company is either insolvent or is likely to soon become insolvent. 
• National Insurance - Directors can be held personally liable for unpaid National Insurance Contributions (NICs) should fraud of neglect be suspected of the director. Directors can be held liable for all outstanding NIC debts of the company, not just those related to their own pay. If a director is to be held liable, HMRC will issue a personal liability notice (PLN) which explains to the director that the National Insurance debt has been transferred to them, as well as detailing any additional penalties and interest which are likely to be added to the debt.   
• Corporation Tax – If a company has built up corporation tax debt, this amount can be recovered from directors in a number of situations, including where directors have continued to pay themselves dividends knowing they had outstanding corporation tax liabilities. Depending on the level of debt involved, directors may be held responsible for the entire outstanding amount, or just a portion of it.

What should I do if I cannot pay my tax bill?

If you have reason to believe you may struggle to pay an upcoming tax bill – or if you have already fallen into tax arrears with HMRC – it is vital you take swift action to rectify the situation.

It may be possible to enter into negotiations with HMRC to put an affordable repayment plan in place to spread your debts over a period of up to 12 months; this is known as a HMRC Time to Pay (TTP) arrangement. While a TTP can be a lifeline to companies experiencing short-term cash flow problems, you must be able to submit a sound proposal detailing how much you can repay on a monthly basis and convince HMRC of your ability to stick to any agreed plan. A careful balance must be struck between offering an amount which is large enough to satisfy HMRC, while also being realistic in the amount the company can afford.

You can either choose to handle these negotiations yourself, or enlist the help of a professional to deal with HMRC for you. At Real Business Rescue, our licensed insolvency practitioners can work with you to draw up a robust proposal and present this to HMRC on your behalf.

Alternative solutions to HMRC debt

In many cases, however, a TTP arrangement will not be sufficient to turn around the company’s financial affairs and you may need to consider entering into a formal insolvency process, particularly if your company has creditors in addition to HMRC. This may involve formal negotiations with a number of creditors through a Company Voluntary Arrangement (CVA), placing the company into administration to allow for profitable elements of the business to be saved, or even liquidating the company should its financial problems have taken it beyond the point of rescue.

As shown above, in the vast majority of cases, closing the company through a Creditors’ Voluntary Liquidation (CVL) will result in any outstanding tax debts being written off with directors facing no personal liability to repay what remains owed to HMRC. With that being said, opting for liquidation is a serious step to take as this will mark the end of your company and see its name being removed from the Companies House register. In some cases, however, liquidation is the most appropriate option when a company’s financial difficulties become insurmountable.

How Real Business Rescue’s licensed insolvency practitioners can help

As the director of a limited company, you have a number of additional legal duties you must comply with once you know (or suspect) your company to be insolvent. By seeking the advice of a licensed insolvency practitioner at this point, you are demonstrating a desire to adhere to these legal responsibilities by placing the interests of your creditors above those of yourself and your fellow directors/shareholders.

A licensed insolvency practitioner will be able to objectively assess the situation your company finds itself in, before explaining the options open to you. This may involve a process of restructuring or refinancing if the company is deemed to be viable as a trading entity; alternatively, options for closing the company may be explored as the most appropriate course of action. To arrange a free no-obligation consultation with a licensed insolvency practitioner, call the Real Business Rescue team on 0800 644 6080 for immediate help and support.