When can a director be sued by HMRC for unpaid tax?

It is hard to be a director of a UK company if you don’t know all of the rules – and there are many of them. 

One of the common misconceptions is that the limited liability status protects directors personally against being sued by anyone who believes that they have suffered loss because of something the company has done or should have done. Those people include shareholders, employees, clients, suppliers and regulators. 

Limited liability can offer some protection when the company goes into liquidation as the directors usually wouldn’t be held liable for the company’s debts such as unpaid tax. This means that HMRC won’t be able to recover unpaid tax from the directors personally as these debts are incurred by the company and not the individual. 

However, HMRC has the power to make directors personally liable where evidence shows that failure to make payment was deliberate or resulted from the neglect or fraud. For example, where a director continues to pay their salary whilst deliberately not paying HMRC, despite suspecting that the company is officially insolvent. 

In other words, any director who has wilfully failed to deduct PAYE tax, can be made personally liable for the business’s missed payments. This power is limited to PAYE debts associated with payments to the directors themselves or connected parties such as family members. This power is usually applied to small owner-managed businesses where the director controls the company’s finances. 

This law targets directors who repeatedly fail to meet tax liabilities through repeated insolvency, known as Phoenixing. Phoenixing is where a company is liquidated, and then the same business re-appears as a new company, this way avoiding its debts including those to HMRC. This shouldn’t be too big of a problem if done once as a way of preserving the business. However, if hapenned more than once as a pattern, then this might indicate an intention to get out of paying tax rather than a necessity to keep the business alive.

Furthermore, HMRC is also able to recover all outstanding NICs from a director where the failure to pay is (again) the result of fraud/neglect, but unlike PAYE, the liability for NIC covers all outstanding NIC debts. HMRC does this by issuing a Personal Liability Notice (PLN). 

In November 2021, Michael Eames found himself the subject of a PNI for just this situation (case: Eames v HMRC 2022). HMRC didn’t allege that there had been any fraud; the question for this tribunal was whether the failure by the company to pay outstanding NICs debt following the liquidation of the company was due to neglect on the part of Eames. 

The Tribunal found that Eames made the positive choice to meet his own companies’ costs (including paying himself) out of funds which he knew were owed to HMRC. This confirmed that there is a statutory duty to make payment to HMRC of PAYE and NICs amounts withheld from employees. The Tribunal stressed that companies can’t use those amounts for their own purposes.

For more information regarding this topic, please visit the official HMRC website.