As with many things in life, there is no simple answer. Ultimately it depends on the specific circumstances of your case, and you should always seek specialist advice to establish what is best for you. We have outlined some key considerations in terms of tax liabilities below.

Please note, nothing contained within this article should be construed as insolvency advice. Anyone considering insolvency should also consult with a qualified Insolvency Practitioner.

Summary

Although operating a business through a company does provide limited liability, this does not apply to all debts, especially if there has been wrongdoing (such as fraud and in some cases, tax avoidance) on the part of the director (or HMRC suspects wrongdoing on the part of the director). In such instances, directors may find themselves personally liable. Furthermore, entering liquidation whilst subject to an enquiry, or even following it, suggests to HMRC that it is unlikely to recover the amounts it is owed. Although HMRC should not make an allegation of fraud simply because the company cannot pay the tax (and HMRC will always deny it has done so), it does clearly provide an incentive for HMRC to pursue an argument that a director has acted improperly.

Directors should also be aware that, where the liquidation process has started before such an allegation has been made, the liquidators have no obligation to protect the director. They are, therefore, likely to find themselves in the unenviable position of having to negotiate with the liquidators regarding any appeal of the assessed tax, and any responses which are going to be sent to HMRC.We have addressed some specific considerations with regard to tax assessments and tax debts below.

Is the tax assessment correct?

This may seem obvious, but it is worth noting assessments can be appealed, and if evidence can be provided which demonstrates the assessment is incorrect, it may then be reduced or even cancelled completely. As is usually the case when dealing with HMRC, especially when considering such drastic action as liquidation, seeking specialist advice is vital.

Once liquidators have been appointed, you will no longer have the right to make decisions for the company, and the liquidators may decide it is not worthwhile challenging the assessments as the company couldn’t afford to pay lesser amounts either. This is particularly problematic for directors in cases where HMRC seek to transfer the liability to the decision maker (discussed below).

Can the company settle the liability over time?

Before entering liquidation, it is worthwhile exploring the potential for a time to pay arrangement, as HMRC will usually allow a company reasonable time to meet its liabilities. Again, this will depend on the company’s circumstances, but generally HMRC will require regular monthly payments as part of any agreement. In order to agree the time to pay, it may be necessary to demonstrate the company will have the necessary income/cashflow to make the payments agreed and still meet the company’s ongoing liabilities.

Can I be made personally liable for the debt?

Potentially. This will depend on the circumstances. Ordinarily, directors would not be liable for the debts of a limited liability company. However, this is not the case where the directors are found guilty of wrongful conduct, such as continuing to trade while insolvent.

From a tax perspective, the extent to which a director can be made personally liable for corporate tax liabilities will also depend on the conduct of that director. For example, if the directors have engaged in the deliberate or fraudulent under declaration of tax, there are mechanisms by which HMRC can pursue them for undeclared or unpaid liabilities.

Personal Liability Notice - VAT

Broadly speaking, if a director has knowingly filed incorrect VAT returns, or deliberately not filed VAT returns, with the intention of under declaring the liabilities of the company, that director can then become subject to a Personal Liability Notice. Such a notice will impose a penalty of up to 100% on a director responsible for deliberately under declaring VAT (effectively allowing HMRC to recover the VAT).

That notice can be appealed, but the only defence for the director (or another decision maker) is to demonstrate they did not act deliberately.

It may also be possible to argue the original assessment is invalid, or excessive, but if the company has entered liquidation, such an argument must be made by the liquidator and so the director may be left unable to challenge it.

If you have already received a Personal Liability Notice, we would suggest seeking advice from a tax investigations specialist, and more information can be found here.

National Insurance Contributions (‘NIC’)

HMRC can also issue Personal Liability Notices in circumstances where a company has failed to pay NIC, and that failure was due to fraud or neglect by a director (or other senior officer). The inclusion of the word neglect in these provisions makes the threshold lower than for VAT. However, HMRC has confirmed it will only use these powers if the neglect is ‘serious’ such as where the company has used the unpaid NIC to pay other creditors or fund the company’s activities.

Once again, such notices can be appealed, but if the company has been placed into liquidation, the director will lose control of the investigation, and the scope of any such appeals the director can make may be limited (they will not be able to appeal the quantum without the liquidator’s consent and involvement).

Joint and several liability notices

HMRC also has the power to issue joint and several liability notices to directors, where a company is subject to an insolvency procedure, or there is a serious possibility of it becoming insolvent. Such notices can apply in relation to any tax period ending on or after 22 July 2020.

Notices can, however, only be issued if the company has either engaged in tax avoidance or evasion itself, incurred penalties for facilitating tax avoidance or evasion by others or if the directors have engaged in the process of ‘phoenixism’ by creating new companies to replace insolvent ones (discussed below).

PAYE

Where a company has failed to pay PAYE in relation to payments made to an employee (such as a director), that employee can be pursued for the tax due in relation to those amounts. Generally, this will only be applied where the employee knew the employer had wilfully failed to deduct the amount of tax due, but there is some scope for that to be extended where it is ‘unnecessary or not appropriate’ to continue to pursue the employer.

Can I just create a new company to operate the same business?

While it may be possible to establish a new company with the same trade, HMRC has powers under the Targeted Anti-Avoidance Rule to prevent this ‘phoenixism’. Joint and several liability notices can be issued (making the directors liable for company tax debts) where an individual has:

• A relevant connection (usually a director, but could be other senior personnel responsible for running the business) to at least two companies that were subject to an insolvency procedure within the last five years, and those companies had outstanding amounts owed to HMRC;

• At least one of the companies had unpaid tax of more than £10,000, and the unpaid tax exceeded 50% of the amount owing to creditors when the notice is issued; and

• The individual has a relevant connection to a new company in a similar trade during that five-year period.