When directors seek advice on their position in an insolvency, the main issues that advisors will normally talk about are those risks which arise specifically from the insolvency legislation, such as wrongful or fraudulent trading, and what the impact on them might be in a formal insolvency. However it is not often recognised that directors can be held personally liable for arrears of Crown payments due to HMR&C; while the taxman can also impose conditions on any new business they are involved with which can lead to severe funding issues.

The three key risks directors run if tax liabilities begin to build are:

Potential Personal Liability For PAYE/NIC

Where a company fails to pay over PAYE deductions and NI contributions because of a director’s ‘negligence’, under Section 121C of the Social Security Administration Act 1992 HMR&C has the power to issue a personal liability notice or PLN.

The effect of a PLN is to make the director personally liable for the company’s unpaid taxes.

HMR&C can issue a PLN ‘whenever contributions are unpaid because of the neglect of a culpable officer.’ While failure to pay contributions can obviously constitute neglect, in practice HMR&C have only considered issuing a PLN in the most serious of cases where they will look at factors such as:

  • any persistent failure to pay over PAYE/NIC when other payments are being made on time;
  • if directors’ remuneration has continued to be paid during the period; and
  • has the individual been involved with other companies which have failed to pay over taxes?

While this power has obviously existed for many years, its use by HMR&C seems to have been quite rare. However as HMR&C has both lost its position as a preferential creditor and become owed sunstantial sums in arrears of taxes (in excess of £40 billion at the time of writing acording to some estimates), there has to be a concern that HMR&C will be looking at all its powers for collecting in sums that are due and might therefore begin to use this power more extensively.

In one case, Leslie Livingstone v HMR&C Commissioners, taxes were unpaid over a period exceeding a year while other creditors were paid, including to the sole director who was a qualified accountant as well as companies linked to him. The director argued that he had not intended to deprive HMR&C but was found to have been negligent and was made personally liable for £60,000 of unpaid taxes.

An investigation of this type by HMR&C can be a prolonged and stressful experience for a business owner, as well as being a potentially expensive one.


The extent to which Crown debts are unpaid ‘trading with Crown monies’ is one of the items that insolvency practitioners have to include in their report on a director’s conduct. As a result, ‘trading using Crown monies’ is increasingly a key issue in the Crown bringing disqualification proceedings against directors.

Deposits On New Trading

Finally, where the directors of a company which has failed owing substantial amounts of tax, PAYE/NIC or VAT, are involved in a new business, the tax authorities are also increasingly making use of their powers to demand that the new business pays a deposit to cover tax that may fall due.

The sums involved can be up to the equivalent of a full year’s worth of expected tax for the new business. While the deposit will be returned at the end of a year, it can obviously be a substantial sum to find for a new start up, but do not ever be tempted to carry on trading without paying it as this can lead to criminal proceedings.

So if advisers have a client with Crown arrears, it is important that the ensure the client receives constructive practical advice so as to manage not only the business’s exposure, but the directors’ personal positions as well.

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