How to avoid personally paying your Ltd's tax bill

Despite the efforts of HMRC to make their life difficult in a variety of ways, most IT contractors still think the protection of a limited liability company is pretty solid, unless they’ve given personal guarantees on any of its liabilities, like a bank loan or a lease, writes Liz Coleman, head of Forensics & Dispute Resolution at Opus Business Services.

But beware, because in recent months we’ve seen an increasing trend for HM Revenue & Customs to seek to recover unpaid PAYE & NIC due on directors’ salaries, or even on some payments made to close associates, from the directors themselves.  In the case of NIC, the demand can even be extended to unpaid debts on salaries paid to any employees.

How does this come about, and how can IT contractors protect themselves from this ‘flipping’ of tax debts from the corporate to the personal?  In the case of PAYE, HMRC have the power to raise determinations under Regulation 72(5) (of the PAYE rules) when they are of the opinion that the director has received relevant payments knowing that their company has wilfully failed to deduct and pay over the amount of tax due on the salary or other payment.  The crucial word here is ‘wilfully’; it will be a minefield for IT contractors to rebut given what is usually their total control over their company.

If the determination is not successfully resisted, the unpaid PAYE ceases to be the liability of the company and becomes a debt payable by the contractor personally. It’s worth noting that the company doesn’t have to be going through a formal process like liquidation; HMRC can apply this sanction even if the contractor is keeping the company battling on, looking for the funds to keep it trading.

This collection regime doesn’t only apply only to current year PAYE; HMRC’s powers of discovery can be used to recover PAYE from earlier years.  In addition, interest may be charged on any late payments and there is the possibility of penalties.

As for those contractors operating their own personal service company, if HMRC mounts a challenge under IR35, the tax authority again must show that the employer wilfully failed to deduct the tax. It is therefore essential that the contractor is able to demonstrate that, even if tax was not deducted, this was not done deliberately and that the appropriate steps had been taken to comply with IR35.   

When it comes to NIC contributions, HMRC also have the power to recover unpaid NIC contributions due by a company from its directors instead. The amount of NIC that can be recovered from the individual can extend to all the NIC owed by the company and not just those due on payments made to the directors.

And if HMRC considers that the non-payment of NIC was due to the directors’ fraud or neglect, it may issue a personal liability notice (“PLN”).  This can also include interest and penalties, which will increase the sum demanded substantially.,

Before determinations or PLNs are issued, HMRC will make enquiries of the company and those individuals involved in its management. Bear in mind; while there is no legal obligation to cooperate, not doing so could result in HMRC carrying through with issuing the determinations and PLNs, leaving the director facing a large tax bill. It is therefore essential, in our view, that appropriate specialist advice is sought at the earliest possible stage when a contractor learns that such an enquiry has been started, so that all the circumstances can be reviewed; the necessary documentation put together and a robust defence mounted.

Final thought

The risk of ending up paying your company’s tax bills is compounded by the new powers HMRC have to access an individual’s bank account to recover unpaid tax without having to get permission from a court. This makes it all the more important to ensure that any attempt to transfer corporate liabilities is vigorously resisted from the outset.