Directors beware!

In previous blogs, we have looked at the various processes HMRC will use to recover tax and VAT such as distraint, time to pay arrangements, issuing security notices and as a last resort, insolvency.  As part of HMRC drive to improve tax collection and clamp down on companies and individuals seeking to avoid or evade paying tax, HMRC is looking to introduce legislation under which a director of a limited company can be made personally liable for payment of tax and VAT due from the company.

Whilst HMRC has had this power for some time, it is only applicable in certain circumstances and does not apply to all taxes and VAT.  Under the new legislation, a director can be made personally liable for all taxes and VAT that have not been paid by a company.

HMRC is focussing on insolvent companies where it is deemed that the insolvency process has been used deliberately to avoid paying tax particularly where there have been two or more insolvencies and where the director has carried on the business in successor companies.  Whilst HMRC is aware of the powers of an office holder in an insolvency to investigate and where appropriate, make a claim against a director, in many cases the office holder is restricted due to the lack of information provided or a lack of funding.  The new legislation will allow HMRC to investigate and pursue directors without constraint.

In addition, HMRC has introduced Direct Recovery of Debts (DRD) which allows HMRC to recover cash directly from bank and building society accounts of debtors that owe £1,000 or more.  Whilst HMRC considers DRD will be used in a very small number of cases and has specific criteria that must be met in order for DRD to be used, it will be interesting to see if HMRC seeks to implement DRD where a director has been made personally liable for a company’s tax or VAT under the new legislation.

If a company is struggling to make payments to HMRC, it is vitally important for the director to take early advice when there are plenty of options available and the outcome for stakeholders can be maximised.