Company Directors Personally Liable for Business Tax Debts

Company directors often operate under the assumption that incorporation limits their personal liability. While this is broadly true under company law, HMRC possesses a growing arsenal of legislative tools that allow it to pierce the corporate veil. In certain situations, directors can be held personally accountable for a company’s unpaid tax liabilities, particularly where misconduct, negligence, or repeated insolvency occurs.

This guide explains the mechanisms HMRC can use to pursue directors individually for corporate tax debts, including insolvency laws, joint liability notices, and sector-specific penalty regimes.

HMRC’s Powers as a Creditor in Company Insolvency

When a company cannot pay its tax debts, HMRC can recover amounts owed through standard insolvency proceedings, just like any other creditor. However, the law allows directors to be personally liable if they engage in certain types of conduct.

Under the Insolvency Act 1986:

• Section 212 allows liquidators or HMRC to claim against directors for misfeasance, meaning any misappropriation or misuse of company money or assets.
• Section 213 targets directors who conduct the company’s business with the intent to defraud creditors. This is known as fraudulent trading and includes deliberate tax evasion.
• Section 214 allows claims for wrongful trading. This applies when a director continues to trade even when they knew or should have known that the company could not avoid insolvency.

A common scenario involves a company accumulating VAT and PAYE debts while continuing to trade. If the director failed to take appropriate steps to minimise losses to creditors once insolvency became likely, they may be held personally liable.

These provisions are particularly powerful tools in the hands of insolvency practitioners and HMRC when a company fails, and unpaid taxes remain outstanding.

Joint Liability Notices (JLNs) – Finance Act 2020

The Finance Act 2020 introduced Joint Liability Notices. This significant change enables HMRC to bypass traditional insolvency proceedings. Instead, they can issue a notice to individuals, making them jointly and severally responsible for a company’s tax debts. There are three specific circumstances under which a Joint Liability Notice can be issued:

1. Tax Avoidance or Evasion Cases

A director can receive a JLN if:

• The company engaged in tax avoidance or evasion, as defined under legislation.
• The company is subject to insolvency proceedings or is likely to become insolvent.
• There is a serious possibility that the tax will not be paid.
• The director was responsible for, facilitated, or knowingly benefited from the conduct.

The definition of “knowing benefit” includes what the director reasonably ought to have known. The result is a personal liability not only for the unpaid tax but also for any penalties associated with the scheme.

This makes it particularly important for directors to maintain transparency and seek early advice if they suspect that any tax planning arrangement may fall within these provisions.

2. Repeated Insolvency and Non-Payment

A JLN can also be issued in cases where a director has been involved in multiple insolvent companies that failed to pay taxes. The conditions include:

• The director must have been involved in two previous companies that became insolvent in the past five years, with unpaid tax debts or filing obligations.
• A new company must be operating in a similar business.
• The director must also be involved in the new company.
• The unpaid tax liabilities from the old companies must exceed £10,000 and must constitute more than half of all their unsecured debts.

If these criteria are met, HMRC can make the director personally liable for:

• Any unpaid tax debts from the old companies.
• The tax liabilities of the new company at the time of the JLN.
• Any tax debts of the new company that arise in the five years following the notice.

This provision is aimed at tackling so-called “phoenixing”, where directors wind up companies and set up new ones to avoid tax liabilities.

3. Penalties for Facilitating Avoidance or Evasion

Where a company has been penalised for helping others to avoid or evade tax and becomes insolvent, HMRC can issue a JLN to directors involved in or benefiting from that activity.

This notice applies only to the penalty and not to the entire tax liability. However, it still represents a direct financial risk to the director, particularly in advisory or consultancy sectors.

Director Liability Under Other Tax Legislation

In addition to insolvency laws and JLNs, HMRC has several other mechanisms to pursue directors for specific tax liabilities.

Customs Duty Evasion – FA 2003

Under section 28 of the Finance Act 2003, a director may be personally liable for penalties where the company has evaded customs duties due to dishonesty that can be attributed directly to them.

This is especially relevant to businesses involved in importing goods, where undervaluation or misdeclaration can lead to large unpaid duties and penalties.

Inaccurate Tax Returns and Information Failures

The Finance Acts of 2007 and 2008 include provisions allowing HMRC to impose penalties for incorrect returns or failure to provide required information. If these penalties result from deliberate action or neglect by a director, personal liability may apply.

Coronavirus Support Overpayments – FA 2020

Where a company received coronavirus support payments to which it was not entitled, and:

• The company becomes insolvent.
• There is a serious risk that the tax won’t be paid.
• The director was aware that the company was not eligible at the time of the claim.

In these cases, HMRC can issue a notice making the director jointly and severally liable for the amount due.

Why Directors Must Act Proactively

Many directors mistakenly believe that company debts, including taxes, are wiped out upon insolvency. However, HMRC has become increasingly aggressive in using its powers to hold individuals accountable, particularly where repeated or intentional non-compliance is involved.

Understanding when you may become personally liable is essential for effective risk management. Directors should:

• Review the company’s financial health regularly.
• Keep accurate and up-to-date accounting records.
• Act swiftly when insolvency appears likely.
• Avoid entering into new tax planning schemes without thorough legal and tax advice.
• Engage proactively with HMRC if you have concerns about the company’s ability to meet its tax obligations.

Directors now face real personal liability for company tax debts, as HMRC can issue Joint Liability Notices and initiate recovery actions. If your company is experiencing financial difficulties or complex tax issues, seek expert help promptly. Engaging with HMRC early can minimise personal liability for debts and protect your financial security. A proactive approach safeguards your assets and supports long-term growth in a competitive market.