HMRC's changing approach to insolvency risk
Whilst insolvency has always carried risks for those in control of a company there remained a broad assumption that any unpaid tax liabilities would generally remain with the failed business. That position has changed.
HMRC now has many more powers to pursue directors of insolvent companies who face personal scrutiny where PAYE, VAT, NIC, Corporation Tax or other liabilities remain unpaid. HMRC is often no longer content to rely solely upon the insolvency process. Instead, it can actively explore routes to transfer liability to directors and connected individuals. This reflects both a wider policy shift and the expansion of HMRC’s enforcement powers.
Historically, HMRC claims ranked alongside ordinary trade non preferential unsecured creditors in insolvency situations. However, from 1 December 2020, HMRC became a secondary preferential creditor for most taxes collected by businesses on behalf of the Crown, including:
- VAT
- PAYE income tax
- Employee National Insurance Contributions
- Construction Industry Scheme deductions
- Student loan deductions
This has significantly increased HMRC’s interest in insolvency outcomes. At the same time, HMRC has developed increasingly targeted mechanisms to pursue directors personally where it considers tax losses have arisen through misconduct, repeated insolvency behaviour, tax avoidance, tax evasion or deliberate non payment. The practical reality is clear: HMRC now examines not only whether tax remains unpaid, but why it remains unpaid and who was responsible for the decisions leading to the loss.
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HMRC powers against directors
HMRC possesses a wide range of civil enforcement powers that may expose directors of insolvent companies to personal liability where a company enters insolvency with outstanding tax liabilities. These powers can operate before, during and after a formal insolvency process
Personal Liability Notices
HMRC may issue a Personal Liability Notice (“PLN”) where unpaid National Insurance Contributions are attributable to the fraud or neglect of an officer of the company. A PLN can transfer liability for unpaid NICs, together with interest and penalties, directly to the individual. Importantly this is not limited to NIC liabilities arising on the individual’s own remuneration. HMRC may seek to transfer liability for wider unpaid employer and employee NIC liabilities across the company payroll where the non-payment is attributable to that individual’s conduct. HMRC will typically investigate:
- Who controlled payroll and financial decisions
- Whether directors were aware of the arrears
- Whether tax liabilities were deliberately deprioritised
- Whether reasonable steps were taken to remedy non-payment; and
- Whether there is evidence of neglect or dishonesty.
Importantly, HMRC is not restricted to formally appointed directors. Shadow directors on whose instructions the directors act and de facto directors who exercise practical control and hold themselves out as directors may also fall within the scope
Joint and Several Liability Notices
HMRC may also issue a Joint and Several Liability Notice (“JSLN”) in relation to unpaid PAYE/NIC/VAT and certain other tax liabilities such as Corporation Tax, Construction Industry Scheme (CIS) deductions and Student Loan deductions collected through payroll.
The legislation provides HMRC with powers to transfer liabilities from a company to directors and other connected individuals in specified circumstances. The regime is primarily aimed at tackling repeated insolvency activity, phoenix style trading, tax avoidance and evasion and other forms of serious tax non-compliance. There are several statutory gateways and HMRC only needs to satisify one of them before issuing a notice. In broad terms, the legislation is commonly engaged with:
- Repeated insolvency and non payment
- Tax avoidance and tax evasion
- Facilitation and penalty-linked provisions
A JSLN can render directors and other connected individuals jointly and severally liable for company tax liabilities where the above statutory conditions are met. Again, HMRC is not limited to pursuing formally appointed directors. Shadow directors and de facto directors may also fall within the scope.
HMRC security bonds and security notices
HMRC also possesses powers to require phoenix/successor businesses to provide security for future tax liabilities. An HMRC security bond is a financial guarantee that a business will meet its upcoming tax obligations. These security bonds are most commonly encountered in relation to VAT, PAYE and National Insurance liabilities where HMRC considers there is a serious risk of future non-payment. Any person required to give security must be served with a Notice of Requirement (NOR). Failure to provide required security can lead to serious consequences including criminal prosecution if trading continues without compliance. If you do not pay your security bond you could face a heavy fine, prosecution or even disqualification of directors. Security bond and notices frequently arise where HMRC suspects:
- Repeated insolvency patters or suspects that a new business is effectively continuing the trade of a failed company.
- Where a business has accrued large tax debts, missing filing deadline or frequently failed to pay on time.
- A director is involved in several failed ventures or tax defaults
What action might HMRC take against directors?
Where HMRC believes directors may bear responsibility for unpaid tax liabilities, action can escalate quickly. In many cases, HMRC’s approach will focus heavily on behavioural evidence. Directors are increasingly judged not simply on the fact of insolvency, but on how they responded to mounting tax arrears; whether creditors were treated fairly; whether professional advice was obtained; whether records and governance were maintained and whether there is evidence of repeated failure patterns.
Take tax arrears seriously
Repeated non payment of VAT or PAYE is often treated by HMRC as a major behavioural warning sign. Where difficulties arise, directors should engage proactively and realistically. Ignoring correspondence, failing to maintain agreements or repeatedly defaulting on payment arrangements can materially increase enforcement risk. If possible avoid informal restructuring or phoenix activity. The transfer of trade, assets, staff or contracts into connected entities without proper process or valuation is likely to attract scrutiny. Directors should ensure:
- Transactions are properly documented
- Valuations are obtained
- Creditor interests are considered and
- Professional advice is taken before implementation
Seek early advice
Once HMRC has escalated a case internally position can harden quickly. Early intervention may help directors avoid personal liability.
How McTear Williams & Wood can help
We advise directors, companies and individuals facing HMRC scrutiny arising from insolvency, tax disputes and financial distress. We understand that insolvency related HMRC investigations frequently involve overlapping regularly, civil and reputational risks. We work proactively to assess exposure, protect directors’ positions and manage engagement with HMRC at every stage.
Key point
HMRC’s approach to insolvent businesses has changed fundamentally. Directors who fail to address tax arrears, governance issues or repeated insolvency risks early may now face significant personal exposure. Where HMRC begins examining director conduct, the issue is rarely confined to unpaid tax alone. The focus will usually extend to behaviour, decision-making, governance and patterns of activity. Early advice is essential.
For further information or free initial confidential advice regarding HMRC investigations, insolvency-related tax disputes or director liability issues, contact us on 0800 331 7417 or book a free 1-2-1 initial consultation meeting.
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