Two growing trends have led us into choosing this month's technical topic:

1) The number of companies, large and small, that are folding with unpaid PAYE and NI debts, some of which rise again the next day as Newco with no responsibility for Oldco's tax debts

2) The number of cases where HMRC is pursuing the directors for the unpaid tax and NI in such cases, and the ongoing success HMRC is having around this

 

Cause and effect

It is a recession and times are hard for many businesses. Time and again cashflow is cited as one of the biggest problems for businesses - customers are taking longer to pay (if at all) and revenues are down in general for a lot of businesses. This puts pressure on the business in meeting its own financial commitments and many businesses resort to "dipping in" to the HMRC account (which isn't really the company's money) to ease the cashflow from month to month. This can go undetected for quite some time at the moment due to the retrospective way in which payroll payments are reported to HMRC (this is changing though with RTI next year !!).

Many businesses experiencing cashflow problems are ultimately going out of business but the vast majority of these are limited companies. Limited liability status means that the debts (usually) die with the company, which is why so many businesses are set up in this way in the UK. We should clarify that we're not just talking about small, owner managed businesses here, some of the largest and "richest" employers in the UK are limited companies (e.g. Rangers Football Club).

But, it is a common misconception that directors of failed limited companies can just walk away unscathed and just start again with a clean slate. It doesn't work that way, at least for PAYE and NI, as we are increasingly seeing.

National Insurance - Personal Liability Notices

Legislation has been in place for about 13 years allowing HMRC to recover unpaid NI (employer and employee) directly from a director in certain situations although until the last couple of years it was rare to see this legislation being used in practice.

However, more and more we are seeing HMRC go down this route and some cases have gone all the way to Tribunal providing HMRC with success and, more importantly, precedent to use against other directors in the future. The latest such case was reported a few weeks ago and, as yet, we are not aware of HMRC having lost any Personal Liability Notice (PLN) case that has gone to Tribunal.

A PLN can be issued by HMRC where they believe NI has not been paid by a company due to either fraud or neglect by an Officer of the company. Now, it is purely subjective what falls within the definition of fraud or neglect but a few examples of where this may be the case include:

  • Improper use of Director's Loan Accounts to pay directors when the company is failing to meet its obligations elsewhere due to a lack of funds
  • Deliberate and regular non payment of PAYE and NI on salaries when it was known these payments were due
  • Lack of communication with HMRC to address the problem

It is a specialist team within HMRC that considers whether to pursue such cases and it is fair to say that this team are very clued up on what they do and only tend to pursue cases where they have a very good chance of success. As a result, it is usually the case that where the team decide a PLN is to be issued to one or more of the directors, it is extremely unlikely for the director(s) to avoid having to pay a significant amount to HMRC from their personal money.

PAYE debts

A PLN only covers National Insurance but there are regulations in place to allow HMRC to recover PAYE debts from a director as well, albeit in a slightly different way.

The way in which this works is that HMRC has the power to transfer PAYE debts of a company to a particular director (or employee) where the company is unable to pay and:

  • It is clear that an employee or director has received payments knowing that the employer had deliberately failed to deduct the correct amount of PAYE from their earnings AND
  • The prospects of recovery from the employee or director are good

The regulations usually apply to directors who have an element of control over the finances of the company but they can apply to ANY employee who has some influence in payroll or financial matters.

HMRC's pursuit of PAYE from individual directors is not as structured in practice as we see with PLNs for NI contributions, but we are also seeing some clear evidence that times are a changing in this area with HMRC taking on more cases, and winning, than in the past.

The key targets of HMRC appear to be small companies with one or two directors who have a history of "phoenix-ism", i.e. starting one company after another leaving behind a trail of debts, but some larger companies are now being pursued by HMRC because of the significant sums of money typically involved.

 

Conclusion

The Tax Avoidance (legal but maybe immoral a la Jimmy Carr ?) v Tax Evasion (illegal) debate is never far from the headlines these days and there will always be arguments for either side in most cases. However, there is certainly a push within HMRC and the wider Government, and also a switch in what Joe Public thinks about people avoiding paying their dues, and so we will no doubt continue to see an increase in directors being taken to task, and hit in the pocket, where their companies have tried to get the better of HMRC through inappropriate use of the limited liability status of their company.

We wouldn't be surprised to see new legislation around this in the next year or so but, even if this doesn't happen, it is clear that directors who are getting involved in arrangements where they are using the company's PAYE and NI "pot" to pay other debts, or worse, themselves, should be sleeping less easy at night than they might have before.

Our last point is just to say that it is never too late ! If your company is in a situation at the moment where unpaid PAYE and NI is building up, or PLN or PAYE determinations have been issued to you or fellow directors - get in touch, there may still be some hope in resolving things with HMRC.

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