It is amazing how many insolvent businesses end up with significant unpaid VAT and PAYE arrears by the time Administrators are finally appointed.
Now let’s not kid ourselves, we all know why this is. The fact is that there is a commonly held belief amongst directors that it is better to re-pay the bank (with whom they may have personal guarantees) than continuing to pay the VAT and PAYE liabilities as and when they fall due.
Depending on how you look at things, the banking crisis of 2008 and 2009 fully reinforced this notion with central government effectively allowing companies to run up large crown arrears whilst the big five banks set about rebuilding their balance sheets, liquidity ratios and credibility in the financial markets by ceasing to lend to industry.
Industry commentators speculate that HMRC arrears are now in excess of £40 billion and the current round of swingeing spending cuts appears to be being supported by a very different approach coming out of HMRC.
Now prepare yourself for some really bad news! Although not a well known fact, directors can be held personally liable for the payment of sums due to HMRC.
This frightening nugget of information is buried in Section 121C of the Social Security Administration Act 1992 which allows HMRC to issue a Personal Liability Notice or “PLN”.
HMRC can issue a PLN to directors when a company has failed to pay contributions due to HMRC and there is judged to have been neglect or fraud on the part of the director(s) concerned.
The PLN makes the director concerned personally liable for payment of the unpaid tax and/or National Insurance Contributions.
Neglect is not defined in the legislation and it is therefore necessary to look to case law for its generally accepted meaning. One case commonly referred to for the meaning of neglect is Blyth v Birmingham Waterworks Co, 1856, 1 Ex 781, p784:
‘Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a person taking reasonable precautions would not have done.’
In the case of Leslie Livingstone (TC00369), which related to an appeal against the issue of a Personal Liability Notice for £60,000 in its decision published on 2 March 2010, the Tax Tribunal considered ‘What is expected of a reasonable man in the context of National Insurance Contributions’ and their decision stated:
‘Every employer, and that includes a limited company, has a statutory duty to deduct PAYE and NIC where appropriate from wages of every employee and to make a remittance to HMRC no later than the 19th of each month. That duty extends to a director who may be administering a company.’
So the moral of this story has to be that deliberately deciding not to pay HMRC, whilst continuing to pay other creditors, is a seriously risky strategy for any director to adopt.
The range of restructure and recovery options available to a sick company declines with the passage of time. If you are the director of a company with cash flow and/or related difficulties, taking early professional advice on the company’s and your personal position is something that should be at the top of your “to do” list.
Peter Vinden is the Managing Director of Vinden. His company offers a range of options to help sick businesses operating in the UK construction sector. He can be contacted by email at firstname.lastname@example.org