One of the main attractions of forming a limited company is that it has limited liability. Under limited liability, a director or investor in a company is only liable for the money that was invested in the event that the company goes bankrupt.
For example, a company is formed and issues £1,000 in shares. The company subsequently goes bankrupt. The shareholder’s liability is limited to the £1,000 invested. Even if the company owes £50,000, creditors will generally not come after the shareholder’s assets, and the liability is limited to the £1,000 originally invested.
Are There Any Exceptions?
Unfortunately, for a company director there are a number of exceptions to this general rule, which mainly benefit HMRC. The four main exceptions are:
- when a director is suspected of fraud;
- where a director is an undischarged bankrupt;
- when a director sets up a new business following the failure of a previous business; and
- when a director pays themself unauthorised dividends.
In this article, I will be looking at cases of fraud where a company director is responsible for the fraud and held personally liable for all or part of the penalty imposed on the company (under FA 2008, Sch 41, para 22).
A personal liability notice (PLN) may be issued by HMRC in the event of a company’s or a limited liability partnership’s (LLP’s) failure to pay a VAT penalty to HMRC.
- A PLN is generally only used in cases where HMRC can prove that the underlying payment failure is attributable to the fraud or serious neglect of an officer.
- A PLN will typically be issued when a company goes into liquidation with tax debts.
In relation to PLNs for VAT penalties:
- A PLN may apply if a company is liable to a VAT penalty for deliberate wrongdoing.
- The VAT wrongdoing is attributable to the deliberate action of an officer or officers of the company.
In addition, the PLN can only be issued if one of the following circumstances exists:
- The officer gained, or attempted to gain, personally from the wrongdoing.
- The company is, or is likely to become, insolvent.
An officer issued with a PLN can appeal to the tax tribunal against either the decision to raise a PLN against them, or the amount of the PLN. An appeal against a PLN is not an appeal against the underlying company penalty; nor does the outcome of the appeal affect the status of the company penalty. Only the company can appeal the company penalty.
For example, the finance director (FD) of a company steals money from the company by paying themself for imaginary purchases. To cover their trail, they falsify purchase invoices and put them through the business, claiming back imaginary VAT. HMRC discovers this on an inspection of the company records, and it is assessed for overclaimed VAT. Furthermore, a penalty for fraudulent evasion is imposed, making the company insolvent. As the dishonest conduct was on the part of the FD, the penalty may be transferred by the issue of a PLN (in whole or in part) from the company to a director or managing officer of that company where there is evidence to show that the conduct giving rise to the penalty is attributable to the dishonesty of the director or managing officer. In this case, the FD becomes liable to pay the penalty, not the company. This can also be applied to managers of a company, not just directors.
Practical Tip
If a company officer undertakes a deliberate VAT fraud and personally gains from it and the company becomes insolvent, they can be held personally liable for the debt by the issue of a PLN.