Director tax liability guide

HMRC personal liability notices: when directors pay company tax debts

A limited company’s tax debts are normally the company’s alone, but UK law gives HMRC several ways to make a director pay personally. This guide covers the main routes — National Insurance personal liability notices, Finance Act 2020 joint liability notices, officer penalty notices and PAYE directions — with what HMRC must show, who can receive a notice and the deadlines for challenging one.

Part of: Founder insurance at Apex

The routes HMRC can use

None of these routes makes a director liable simply because the company owes tax.

Route	What triggers it	Who can receive it	What you can be made to pay
NIC personal liability notice (section 121C, Social Security Administration Act 1992)	Unpaid National Insurance attributable to an officer’s fraud or neglect	Directors, managers, secretaries and anyone acting as one	Unpaid NICs with related interest and penalties, shared by culpability
Joint liability notice: avoidance or evasion (Finance Act 2020, Schedule 13, paragraph 2)	Specified avoidance or deliberate evasion, plus actual or likely insolvency	Directors, shadow directors and participators responsible for it or knowingly benefiting; anyone in management who took part	The tax linked to the avoidance or evasion
Joint liability notice: repeated insolvency (paragraph 3)	Two or more insolvent companies in five years owing, between them, tax over £10,000 and over 50% of their unsecured debts, plus a new company in a similar trade	Directors, shadow directors and participators linked to the old and new companies	The old companies’ unpaid tax, and the new company’s tax now and for the next five years
Joint liability notice: facilitation penalties (paragraph 5)	Penalties for promoting or enabling avoidance or evasion, plus actual or likely insolvency	Directors, shadow directors and participators at the time	The penalty
Officer penalty notice (Finance Act 2007, Schedule 24, para 19; Finance Act 2008, Schedule 41, para 22)	A company penalty for deliberate behaviour attributable to the officer	Directors (including shadow directors), managers and secretaries	Up to 100% of the penalty
PAYE direction (regulation 72, Income Tax (PAYE) Regulations 2003)	You were paid knowing the company wilfully failed to deduct tax	The employee, in practice mainly directors	The tax on your own pay, plus interest

National Insurance PLNs: what HMRC must show

Under section 121C, HMRC can serve a personal liability notice where a company has not paid National Insurance contributions on time and the failure appears attributable to fraud or neglect by people who were officers when it happened — “culpable officers”, which HMRC says can include shadow and de facto directors. The debt can include Class 1, 1A and 1B contributions with interest and penalties, for all employees, not only the directors.

• Proof. HMRC must prove its case on the balance of probabilities, and carries the burden on appeal.
• Neglect. Following the Upper Tribunal in HMRC v O’Rorke, neglect is an objective test of whether the officer fell below the standard of a reasonable person. HMRC’s manual says it issues PLNs in practice only for fraud or serious neglect.
• Red flags HMRC lists. Prolonged non-payment; paying officers, connected people or other creditors while HMRC goes unpaid; using PAYE and NICs to fund cash flow; phoenix activity or links to other non-compliant employers; and clearing an overdrawn director’s loan account through a salary just before liquidation.
• Sharing the debt. With several culpable officers, HMRC apportions the amount by the gravity and consequences of each person’s conduct, not by who can afford to pay.

Interest runs from the notice date. The company stays liable, and anything it or its liquidator pays reduces each officer’s share. A PLN does not need the company to be liquidated, and before issuing one a specialist HMRC team investigates and invites representations.

Joint liability notices under Finance Act 2020

Schedule 13 to the Finance Act 2020 lets an authorised HMRC officer make an individual jointly and severally liable with a company for amounts it owes HMRC. Depending on the route, VAT, PAYE, Corporation Tax, penalties and interest can all be caught. Liabilities for periods ending before 22 July 2020 are outside the rules.

• Avoidance and evasion. Avoidance covers listed categories, such as arrangements counteracted under the general anti-abuse rule, covered by a follower notice or within the DOTAS disclosure rules. Evasion means a deliberately inaccurate return, claim or document, or a deliberate failure to notify liability to tax.
• Insolvency. Liquidation, administration, receivership, a company voluntary arrangement and being struck off the register, including voluntary strike-off, all count. A members’ voluntary liquidation counts only if debts are not paid in full, with interest, within 12 months. Before insolvency, HMRC says it needs clear evidence of a serious possibility of it. Avoidance, evasion and facilitation cases also require a serious possibility that the tax or penalty goes unpaid.
• Time limit. A repeated-insolvency notice must be given within two years of HMRC first having enough facts to conclude the conditions are met.

Joint and several means each notice holder can be pursued for the whole amount; HMRC’s guidance says it will pursue whichever has sufficient assets. HMRC must withdraw a notice if a condition was not met or it is no longer needed to protect the revenue. HMRC says it will not use the repeated-insolvency rules against genuine rescue attempts, or against connected people who acted in good faith without material influence.

Penalty notices and PAYE on your own pay

When a company is penalised for a deliberate inaccuracy, a deliberate failure to notify, or certain deliberate VAT and excise wrongdoing attributable to an officer, HMRC can make that officer pay up to 100% of the penalty. HMRC’s guidance limits this to cases where the officer gained or tried to gain personally, or the company is, or is likely to become, insolvent. The officer must pay within 30 days of the notice, but HMRC says it will not ask officers to pay if the company pays.

Separately, if you received salary knowing the company wilfully failed to deduct PAYE, HMRC can direct that the tax is yours to pay, with interest. HMRC’s manual says this is used mainly in director cases where recovery from the company is unlikely, and that there is no time limit for making the direction.

Appeal rights and time limits

Notice	How to challenge it	Deadline
NIC PLN	Written appeal to HMRC stating your grounds, then the tax tribunal if unresolved	30 days after the notice was issued
Joint liability notice	Accept HMRC’s offer of a review in writing, or appeal to the First-tier Tribunal	30 days from the notice, or a later date in an extension notice; after a review, 30 days from the conclusion letter
Officer penalty notice	Appeal against being pursued and the amount allocated to you	Usually 30 days; the letter gives the date
PAYE direction	Written notice of appeal to HMRC stating your grounds	30 days from the direction notice

Under section 121D, a PLN appeal can argue that the amount is not contributions the rules cover, that the failure was not due to your fraud or neglect, that you were not an officer at the time, or that HMRC’s view on sole culpability or apportionment was unreasonable. You can ask HMRC to postpone the disputed amount meanwhile.

The tribunal must cancel a joint liability notice if a condition was not met or it is no longer needed to protect the revenue, and must cancel or correct it if the amount is wrong. That appeal cannot dispute the company’s tax, but if the company is in an insolvency procedure you can join or continue its appeal, or bring one within 30 days of the notice even if the company’s deadline has passed. HMRC must complete a review within 45 days unless you agree otherwise.

Practical steps, and where D&O insurance fits

• Treat PAYE and NICs as priority payments; several HMRC red flags involve paying others first.
• If the company cannot pay, contact HMRC early about a payment plan. HMRC expects the debt to be reduced first and may ask directors to put personal funds into the business, accept lending or extend credit.
• Minute board decisions on tax payments and record who runs payroll: HMRC’s enquiries examine each officer’s knowledge and role, and any steps taken.
• Take professional advice before responding to HMRC; you have the right not to answer questions HMRC asks to decide a penalty.
• Diary deadlines the day a notice arrives, and be cautious about restarting a trade in a new company while an old one’s tax is unpaid.

Directors’ and officers’ (D&O) insurance does not pay the company’s tax or National Insurance, the amount in a notice, or fines and penalties, and it does not cover deliberate fraud or dishonesty. Subject to the policy wording, it can typically help with defence and representation costs when HMRC investigates or pursues a director personally, including challenging a notice. Policies typically require prompt notification, so tell your broker or insurer as soon as HMRC writes. Apex arranges D&O insurance: see D&O for startups, defence costs and investigations cover and what a founder is personally liable for.

Frequently asked

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not legal or tax advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.