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Don't try to hide from the tax man, insolvency expert warns
Financial expert Ryan Holdsworth is warning company directors of the heavy financial penalties they face if they attempt to evade paying their tax bill.
Ryan, a director at the Sheffield office of professional services group Leonard Curtis, says too many directors fail to understand the personal liability risks they may face under UK legislation.
“There are many powers that HM Revenue & Customs possess which could lead to personal liability and we have recently seen a working example of HMRC opening enquiries into such actions,” Ryan explained.
“Current legislation allows HMRC to issue a Personal Liability Notice to a company officer, usually directors or shadow directors, where there is evidence that a company’s failure to pay National Insurance Contributions is due to fraud or neglect on the part of that officer.
“And if HMRC are successful in obtaining a PLN, the individual becomes personally liable for the unpaid Class 1 National Insurance, plus interest and penalties.
“HMRC can also issue Joint and Several Liability Notices to directors where companies repeatedly enter insolvency with tax debts, a provision that targets directors who deliberately avoid tax by dissolving companies and starting new entities.”
He added that HMRC could also make directors personally liable for company VAT debts where the company was involved in VAT fraud or deliberate evasion.
And in cases of deliberate failure to pay PAYE and Construction Industry Scheme deductions, HMRC could pursue personal liability under specific provisions.
The case the Leonard Curtis team is currently working on has seen HMRC formally request bank statements covering the entire period during which the National Insurance debt accrued, along with a Bank mandate or confirmation of authorised signatories, as evidence of who had control over the company’s bank accounts.
They have also asked for a full itemised breakdown of any directors' loan accounts, along with inter-company loan accounts managed by the business.
Access has also been requested to all company books and records, including electronic data from any accounting software used during the relevant period.
“The important thing is that HMRC must prove a director’s behaviour directly contribute to the company’s failure to meet its NIC obligations,”: Ryan explained.
“Routine business failure is not enough - there must be demonstrable fraud or neglect.
“Professional advisors should therefore ensure directors maintain clear, timely records of tax payments and decision-making processes to mitigate personal exposure.
“Everybody has known about this legislation but the feeling appears to have been that HMRC don’t use their powers as much as they might do, though we are seeing right now that is clearly not the case at all.
“A large debt of £1 million or more, such as the one we have been dealing with, is enough to get HMRC very interested and they will look at a company’s position very closely because they want to understand who has been paid instead of them.
“This scenario should serve as a reminder for directors and their advisers of the risks associated with prolonged HMRC debts.
“It’s certainly a very timely reminder of the importance of keeping comprehensive and accurate records and seeking advice early if financial difficulties arise.
“Ensure robust financial controls are in place to manage tax liabilities and document board decisions, particularly regarding tax and cash flow.
“If there are genuine difficulties, then it is essential to engage early with HMRC where payment difficulties arise to reduce the risk of allegations of neglect.
“It is essential, at the same time, to avoid patterns of behaviour that could be seen as deliberate tax avoidance or fraud.
“Leonard Curtis, of course, have specialist teams to advise directors on HMRC liability and what steps should be taken when encountering issues.”
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