Understanding company tax liability in insolvency

In the UK, a limited company is seen as a distinct entity, legally separate from its directors and shareholders. Basically, this means the company’s funds are owned by the company, not its directors or shareholders. Similarly, any debts the business incurs are the company’s responsibility to settle, not that of individual shareholders or directors.

When the business is thriving, and there’s good cash flow, this system operates effectively. The company settles its debts, tax obligations to HMRC, and other expenses using its income. Afterwards, directors and shareholders get a share of the company’s profits through salary or dividends.

If a company starts facing financial troubles, this previously smooth process can come to a stop abruptly. This can result in unpaid debts and tax bills, as the necessary funds may not be available to cover what is owed.

If a company becomes insolvent and can’t meet its debts or fully pay owed tax, the question arises: 

What is the director’s position, and are they personally accountable for settling HMRC dues if the company can’t afford to do so?


What is limited liability? 

Directors running their business via a private limited company structure benefit from personal protection against their company’s debts in case of insolvency, thanks to a concept called ‘limited liability’.

Limited liability implies that a director’s responsibility is confined to the worth of their share in the business. Therefore, if a company becomes insolvent and undergoes a formal insolvency procedure like liquidation, any remaining debt (including tax) at the process’s conclusion will be forgiven, unless secured with a personal guarantee. 

Directors are not obliged to reimburse creditors who incur losses in such cases.

In specific cases, though, directors can be personally accountable for tax debts like Corporation Tax, VAT, PAYE, and National Insurance, even if the company has undergone a formal insolvency process.


When Are Company Directors Personally Liable for HMRC Tax Debts?

HMRC possesses various methods to collect outstanding tax debts, usually applied well before personal liability is considered. If directors consistently neglect to address their tax matters, HMRC might seek to recover owed funds from directors personally in specific situations. 

The circumstances vary depending on the type of tax debt involved:

1. National Insurance – Directors may face personal liability for unpaid National Insurance Contributions (NICs) if there are suspicions of fraud or neglect on the part of the director. Directors can be held responsible for all outstanding NIC debts of the company, not just those linked to their own remuneration. 

If a director is to be held accountable, HMRC will issue a personal liability notice (PLN). This notice informs the director that the National Insurance debt has been transferred to them and outlines any additional penalties and interest likely to be imposed on the debt.

2. VAT – Personal liability for a VAT debt may be considered if it can be proven that the failure to pay VAT is intentional, and the company is either insolvent or is anticipated to become insolvent soon.

3. Corporation Tax – When a company accumulates corporation tax debt, directors may be held accountable in various scenarios. This includes situations where directors persist in paying themselves dividends despite being aware of outstanding corporation tax liabilities. Depending on the extent of the debt, directors might be held responsible for the entire outstanding amount or a portion of it.

4. Income Tax – Directors proven to have ‘wilfully failed’ to pay the necessary income tax through PAYE to HMRC may be personally responsible for the shortfall. However, this is restricted to PAYE debts related only to themselves or associated parties (e.g. partners and family members) rather than the entire workforce.


What if I can’t pay my tax bill?

If you anticipate difficulty in settling an upcoming tax bill, or if you are already in arrears with HMRC, it is crucial to take prompt action to address the situation.

You can explore discussions with HMRC to establish a manageable repayment plan, spreading your debts over up to 12 months. This arrangement is referred to as an HMRC Time to Pay (TTP) arrangement.

While a Time to Pay (TTP) arrangement can be crucial for businesses facing temporary cash flow issues, it’s essential to present a well-founded proposal. 

Clearly outline how much you can repay monthly and persuade HMRC about your commitment to adhering to the agreed plan. Striking a careful balance is key, offering an amount substantial enough to satisfy HMRC while remaining realistic in what the company can afford.

You have the option to conduct these negotiations independently or seek assistance from a professional to handle discussions with HMRC on your behalf. At Vanguard Insolvency, our licensed insolvency practitioners can collaborate with you to formulate a strong proposal and present it to HMRC on your behalf.


Exploring Alternative solutions to HMRC debt

In numerous instances, a Time to Pay (TTP) arrangement might not be enough to improve the company’s financial situation. If your company has creditors beyond HMRC, it may be necessary to contemplate engaging in a formal insolvency process.

This could entail official discussions with multiple creditors through a Company Voluntary Arrangement (CVA), placing the company into administration to salvage profitable aspects, or ultimately liquidating the company if financial difficulties have rendered it unrecoverable.

As demonstrated earlier, in the majority of instances, closing the company via a Creditors’ Voluntary Liquidation (CVL) leads to the forgiveness of any outstanding tax debts. Directors bear no personal responsibility to settle the remaining amount owed to HMRC.

Choosing liquidation is a significant decision, as it signifies the conclusion of your company, and its name will be removed from the Companies House register. While this step is serious, in certain situations, liquidation becomes the most suitable option when a company’s financial challenges become insurmountable. 




How Vanguard Insolvency’s licensed insolvency practitioners can help

As a director of a limited company, upon realising or suspecting insolvency, additional legal duties must be adhered to. Seeking advice from a licensed insolvency practitioner at this juncture demonstrates a commitment to fulfilling these legal obligations by prioritising the interests of creditors over those of yourself and fellow directors/shareholders.

A licensed insolvency practitioner can impartially evaluate your company’s circumstances, outlining the available options. If the company is considered viable, this may include restructuring or refinancing. Alternatively, exploring options for closing the company could be deemed the most suitable course of action.

For a complimentary, no-obligation consultation with a licensed insolvency practitioner, contact the Vanguard Insolvency team at 0121 769 1915 for immediate assistance and support.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.