Imposition of Personal Liability and financial responsibility on Directors for debts of insolvent (and trading) companies
HMRC is increasingly serving PLN’s against company Directors (and others) to recover unpaid Tax debts from both liquidated and trading entities – serious financial consequences can follow for the Director. This article explores how PLN powers work, when they apply and what Directors can do to challenge them.
NDP has seen 5 separate new instructions in the last 2 months, where HMRC has served PLN’s on Directors, making each Director responsible for:
- The unpaid Tax debts of liquidated companies; and (in some circumstances)…
- The existing and future Tax debts of ongoing trading entitles in which the Director is or has been involved (for so long as the PLN continues in force).
What are the consequences of a PLN for company Directors in the UK?
They can be financially ruinous. We look at what PLN’s are and what the Director can do, below.
When can HMRC issue a PLN to company Directors?
- HMRC has had powers since at least the Finance Act 2020 to make company officers (and possibly others) jointly and severally liable for company Tax debts that are unpaid.
- PLN’s are issued where a company is in an insolvency procedure, or there is a serious possibility of it becoming insolvent.
Schedule 13 of the Finance Act 2020 – when can HMRC issue a PLN for company Directors in the UK?”
- A PLN can be issued in 3 different scenarios:
- Tax avoidance and evasion (not covered in this article).
- Facilitating avoidance or evasion (not covered in this article).
- Repeated insolvency and non-payment. This article focuses on this head of claim.
Repeated insolvency and non-payment
- An individual can be sent a PLN if conditions A. to D. below are met:
- At least 2 ‘Old’ companies and an individual has a relevant connection within the last 5 years, which both went into an insolvency procedure owing Tax, or had failed to submit returns.
B. There is a ‘New’ company carrying on the same or similar trade (our emphasis added) as each of the 2 ‘Old’ companies, or any 2 if there were more than 2.
C. The individual had a * relevant connection (see below) with the New company within the last 5 years.
Note
* Relevant connection – ‘Old’ company – Director, Shadow Director or participator. ‘New’ company – Director, Shadow Director, participator, or concerned in management (potentially very widely defined) of the company.
D. When the PLN is given, at least one of the ‘Old’ companies had a Tax liability of over £10,000, and the Tax liability amounted to more than 50% of the unsecured creditors.
If conditions A. to D. are met, then pursuant to the PLN:
- The individual is jointly and severally liable with the ‘New’ company for any Tax liability the ‘New’ company has at the date of the PLN, and for the next 5 years while the PLN continues to have effect.
- If an ‘Old’ company has a Tax liability on the date of the PLN, the individual is also jointly and severally liable for that debt.
How can a Director challenge a PLN in the UK?
- There is a right of Review to HMRC and/or a right to Appeal to the First Tier Tribunal (‘FTT’). Time limits for both are strict.
Miscellaneous
- Any related personal penalty already imposed on the individual will reduce the PLN accordingly.
- The individual can be a party to any Appeal that the company has in relation to the ‘core’ Tax liability in question and can continue that Appeal even if the company does not (for example, where the Liquidator does not wish to pursue an Appeal).
- The provisions also apply to LLP’s – Director/Shadow Director = Member/Shadow Member.
So, what can the well-advised Director subject to a PLN do?
The Director can seek a Review of HMRC’s decision to issue PLN’s, from an independent HMRC Officer and/or if that Review application fails;
The Director can seek to oppose the PLN by Appeal to the FTT.
HMRC’S own guidance – ‘Protecting the Revenue’
‘The aim of the legislation is to deter individuals from using insolvency as a way of getting out of paying their tax liability.’
Comment
Is that really happening on the facts of your case?
Possible arguments for the Director
- Challenge whether one or more of conditions A to D actually apply to your case.
- The Director should, in particular, carefully consider the amounts owed to old company creditors (i.e. has HMRC satisfied condition D above?).
- It is open to the Director to argue that the company did not/does not carry on a trade or activity that is:
‘the same as or similar to a trade or activity carried on by (the Old company).’
All the circumstances of the case
Whilst not of itself an integral ground of successful challenge, ‘all the circumstances of the case’ must be relevant (especially given the legislative intention is to ‘protect the revenue’). That will require a detailed consideration of the circumstances of the Old company failure(s).
For example
In one of our instructed cases:
- Old company 1 failed because of a supply chain issue that could not reasonably have been foreseen, because of the Ukraine conflict. Company 1 had traded for 5 years.
- Old company 2 failed because a major customer went into insolvent liquidation before repaying Old company 2 a debt of c.£600,000 odd. Company 2 had traded for 15 years.
Question
Is that really a case that requires the issue of a PLN?
Are there other PLN claims HMRC can make against Directors?
Yes. We discuss below the imposition of liability on Directors under Section 121C of the Social Security Administration Act 1992 (‘Section 121 C Claims’).
Such claims can be (and are!) made by HMRC against Directors of liquidated companies where:
‘• The (company) has failed to pay the (NIC and/or PAYE) contributions of or within time prescribed to do so;
and
- The failure appears to HMRC to be attributable to fraud or neglect (our emphasis added) on the part of one or more individuals who at the time of the fraud or neglect were officers of (the company).’
Section 121 notices
HMRC when deciding whether or not to issue a Section 121C Notice, must look at all the facts of the case, in determining whether or not the payment failure is attributable to fraud or neglect.
It is therefore vitally important to explain the circumstances fully, completely and adequately to HMRC – that is where we come in.
We are currently engaged in 2 such Section 121 Claims on behalf of clients.
Key takeaways
- Interrogate carefully all PLN and Section 121 Claims with experienced Solicitors.
- Engage early with HMRC and consider utilising the HMRC Review and FTT Appeals processes as appropriate on the particular facts of the case.
- Utilise the services of experienced Solicitors and Counsel – we work closely with experienced Tax Barristers – that can make all the difference to a case.
- Before liquidating, the well-advised Director should look carefully at the HMRC debt position in the liquidating company and seek advice on the position.
- Where there have been 2 or more liquidations with Tax debt, avoid falling into Tax arrears with the current trading entity – that may be a trigger for HMRC action. This is precisely the kind of pattern that can lead to a PLN for company Directors.
Frequently Asked Questions
What is a PLN for company Directors UK?
A PLN is a formal notice issued by HMRC that makes a company Director jointly and severally liable for certain unpaid Tax debts. It applies in cases involving repeated insolvency, Tax avoidance, or non-payment.
When can HMRC issue a PLN?
HMRC may issue a PLN when specific conditions are met – including where a Director has been involved with 2 or more insolvent companies with Tax debts, and is now connected to a new company carrying on a similar trade.
What are the consequences of receiving a PLN?
The Director may become personally liable for the Tax debts of both the new and old companies. This can include existing liabilities and future debts for up to five years and may result in serious financial exposure.
Can a Director challenge a PLN?
Yes. There is a right to request a Review by HMRC and a separate entitlement to Appeal to the FTT. Time limits apply, and early legal advice is strongly recommended.
Do these rules apply to LLPs as well?
Yes. The same provisions apply to LLPs, where a Member or Shadow Member may be treated similarly to a Director or Shadow Director.
