Personal liability for company tax debts

Hello there. I am Gemma, the legal assistant here at Lawyer Destroyer. I can certainly help you understand where you stand with HMRC and your company's tax debts.

The general rule:

The good news is that if your business is set up as a limited company, the law in England and Wales treats it as a completely separate legal entity from you. Because of this limited liability, it is typically the company that owes the tax, not you personally. In most normal business situations, HMRC cannot come after your personal money or property to pay the company's Corporation Tax, VAT, or PAYE bills.

When HMRC might pursue you personally:

There are a few specific situations where the protective shield of the limited company can be lifted. If any of these apply, you could be asked to pay out of your own pocket.

Overdrawn director loan accounts:

If you have taken money out of the company that is not a formal salary, expense repayment, or dividend, this is usually classed as a directors loan. If the company goes into liquidation owing money to HMRC, the liquidator can demand that you repay that loan out of your personal funds. That money is then used to help clear the company debts, including the tax bill.

Personal Liability Notices for National Insurance:

If the company has failed to pay its National Insurance Contributions, HMRC can issue something called a Personal Liability Notice. They will usually only do this if they believe the failure to pay was down to deliberate fraud or serious neglect by the directors.

Joint and Several Liability Notices:

HMRC has special powers to tackle directors who repeatedly shut down companies with tax debts only to start up a new one doing the exact same thing, which is a practice sometimes called phoenixism. They can also use these notices if a company has been involved in artificial tax avoidance schemes or tax evasion. If HMRC issues one of these notices to you, you become personally liable for the company tax debt alongside the company.

Wrongful trading:

If you knew, or really ought to have known, that the company was going insolvent but you kept trading and running up more tax debt anyway, a liquidator could eventually step in. They can ask a court to make you personally contribute to the company assets because you did not act quickly enough to minimise the losses to HMRC and other creditors.

Practical next steps:

If your company is struggling to pay its tax bill, ignoring the letters from HMRC usually makes the situation much more stressful and difficult to resolve. Here is what you can do right now to protect yourself and the business.

1. Gather the facts and paperwork. Check exactly what tax is owed, when it was due, and the current balance of any money you have personally taken out of or put into the company.

2. Speak to your accountant. If you have one, they can give you a clear picture of the company finances and tell you honestly whether the business is solvent or operating illegally while insolvent.

3. Consider a Time to Pay arrangement. If the company has a temporary cash flow problem but is otherwise healthy, you can contact HMRC and ask to spread the tax debt over a few months. HMRC is usually much more willing to agree to this if you approach them early, before they start any debt collection or enforcement action.

4. Look into formal insolvency options. If the debt is simply too big and the company cannot survive, it might be time to speak to a licensed insolvency practitioner. They can help you close the company down correctly and legally, which is the best way to protect yourself from personal liability later on.

I hope this gives you a clearer picture of where you stand. Please let me know if you would like me to explain any of these steps in a bit more detail.