Personal liability for directors: HMRC tightens the noose
There has been a great deal of commentary recently on the proposed reform to the procedures governing pre-pack administrations. One of the main objections to pre-packs that the proposed reform is intended to address is the perception that the directors of a failed business are able to “dump” the business’s debt and then to start the same business all over again, debt-free, under a new company.
In reality, it will not always be this simple for directors. Quite apart from any personal guarantees and other personal liabilities that they may have in relation to the failed business, directors are now receiving Personal Liability Notices from HM Revenue & Customs (HMRC) on an increasingly regular basis.
what is a Personal Liability Notice (PLN)?
A PLN, when sent to a director, makes him or her personally liable for the company’s unpaid PAYE deductions and National Insurance contributions. However, HMRC may only issue a PLN if it appears to them that the failure of the company to pay its tax liabilities is “attributable to fraud or neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers” of the company.
Directors may appeal a PLN on the basis that:
1. the sum claimed in the PLN is not covered by a relevant provision (see below)
2. the failure to pay the tax liability was not attributable to any fraud or neglect on the part of the director in question
3. the director was not an officer of the company at the time of the alleged fraud or neglect, or
4. the opinion formed by HMRC when deciding to issue the PLN was unreasonable.
The power to issue PLNs has been available to HMRC since 1992 (the power derives from Section 121C of the Social Security Administration Act 1992) but we understand that PLNs are now being used more widely than before. Accordingly, directors who are accused of acting fraudulently or negligently by a liquidator, an administrator or creditors generally should be aware of their possible liability to HMRC, as well as any liability he or she may have to the company itself (or its liquidator or administrator). This may well mean that directors may become unwilling to settle claims threatened against them by liquidators or administrators unless they can also be sure that they will not subsequently be issued with a PLN.
