The days of a director having the ability to rely upon the corporate shield of limited liability has long been weakened with some even suggesting no such shield longer exists. This is no more evident than with Personal Liability Notices (‘PLN’).

THE POWERS OF HM REVENUE & CUSTOMS

HM Revenue & Customs (‘HMRC’) penalty regime was introduced by Schedule 24 of the Finance Act 2007. This provided HMRC with additional powers to their existing arsenal of weapons to include transferring the liability to pay a penalty from a company to one or more of its officers by issue of a PLN.

WHAT IS A PERSONAL LIABILITY NOTICE?

PLN’s provide HMRC with an effective tool to pierce the corporate veil and recover financial penalties from individuals usually in relation to payment of unpaid National Insurance Contributions (‘NIC’) and late payment interest and penalties that may have accrued on the non-payment of those NIC’s. The power afforded to HMRC to raise a PLN is not unlimited, but can be raised in the following circumstances:-

  • There is suspicion that the directors are engaged in phoenixism (having had previous company failures) in order to avoid paying the company’s tax or NIC.
  • The directors continued to be paid their salary even when the company was struggling financially and or it was likely that insolvency could not be avoided.
  • Prior to insolvency payments made to creditors in preference to and before other creditors to include HMRC. Also known as ‘Preference Payments’.
  • The company has received a financial penalty for a deliberate and or negligent wrongdoing.
  • The wrongdoing or negligent action is attributable to the conduct of a director, shadow director or manager of the Company.
  • A result of the wrongdoing resulted in the individual being preferred or gaining a personal benefit from the wrongdoing.

WHO CAN BE SERVED WITH A PERSONAL LIABILITY NOTICE?

A PLN can be issued against directors, shadow directors or any other officers of a company to include managers. PLN’s are regularly (whether the individual is a director of the company or not) served on individuals who HMRC determine played a role and or permitted liabilities arising to HMRC not to be paid.

CAN YOU CHALLENGE A PLN?

Once HMRC have served a PLN the individual will have the option to accept it and enter settlement negotiations or challenge it. If the PLN is disputed a request can be made for an independent HMRC Officer to undertake a review. If the result of the review is not accepted a formal appeal can then be lodged with the Tax Tribunal. If the recipient of the PLN wishes to proceed straight to an appeal without a review they can do so.

The Tax Tribunal will then determine on how to deal with the appeal. However, it should be noted that in the event matters proceed to the Tax Tribunal any opportunity to negotiate a settlement for a lesser sum with HMRC will likely be lost.

HOW TO AVOID A PLN BEING RAISED AGAINST YOU?

HMRC will not raise a PLN until such a time you have been provided with an opportunity to respond to queries, attend a telephone or physical interview and or provide your version of events regarding how the company’s finances were conducted and or controlled. It is therefore crucial that the individual co-operates with HMRC at the very outset.

WHAT WILL HMRC DO NEXT?

HMRC will review the matter to include taking into consideration whether the failure to pay NIC was a result of a deliberate or negligent act on behalf of the individual in order to determine whether a PLN should be raised. As part of this process HMRC will also review the conduct and or good faith of the individual in relation to their actions.

WHAT SHOULD I DO IF I HMRC CONTACT ME?

PLN’s can lead to disqualification as a director, bankruptcy, reputational damage and in more serious cases being sent to prison if there are grounds to support a claim for fraud or other criminality. If and when HMRC contact you all efforts should be made to discourage the issue of a PLN. In these circumstances, it is useful to remember the following:-

  • Acknowledge correspondence in a timely manner.
  • Do not respond in substantive terms and or make any admissions without first obtaining independent financial or legal advice.
  • Co-operate and respond to any queries once you have received the benefit of professional advice.
  • Engage in the process as far as is possible which will demonstrate your willingness to cooperate.
  • Do no ignore or fail to engage as this will likely lead to HMRC issuing a PLN against you.

Early engagement saves time, cost and can lead to HMRC being convinced there are no grounds for a PLN to be raised.

Gulshan Kumar – Consultant Solicitor