If you are a Director of a company who has received an HMRC Personal Liability Notice, Oliver Elliot can help you address your concerns so do not delay contacting us to obtain our expert advice.
HMRC Tax Debts
HMRC Personal Liability Notices were introduced to deal with the Directors who did not pay over to HRMC National Insurance contributions.
What Is An HRMC Personal Liability Notice?
The law in relation to PAYE and National Insurance legislation means that every employer must ensure that HMRC receives the PAYE and National Insurance contributions (NICs) due on the earnings of its staff on the company payroll. A company must pay PAYE and Class 1 (NICs) to HMRC within 22 days of the end of the month for all employment income paid to staff on a monthly payroll. However, Section 121C of the Social Security Administration Act 1992 enables HMRC to recover from the ‘officers’ of the company any unpaid contributions plus interest and penalties.
This law enables HMRC to tackle unpaid National Insurance contributions when they are inappropriately not handed over by company directors to HRMC.
When Can HMRC Issue A Personal Liability Notice?
HMRC can issue a Personal Liability Notice due to being empowered under Section 121C of the Social Security Administration Act 1992 which said that if a company failed to pay over NIC contributions as a result of fraud or neglect, its director(s) could be personally liable in respect of the unpaid tax.
Who Can Be Issued With A Personal Liability Notice?
A Personal Liability Notice can be issued to anyone acting as an officer of a company when the failure to pay the National Insurance contributions arose. However, mere failure to pay over the contributions will not necessarily trigger a Personal Liability Notice. HMRC will need to be of the view that the reason for the failure to pay was down to either fraud or neglect by a company officer such as a director or controlling individual.
Typically, HMRC will issue a PLN to a formally appointed director or company secretary but when a relevant company officer has not been registered as a Director at Companies House or recorded in the company’s statutory books as a Director or company secretary, a Personal Liability Notice can be issued if it is deemed that the individual was:
- substantially managing the affairs of the company; or
- someone in accordance with whose direction or instructions the directors were accustomed to act; or
- a shadow director of the company
Contents Of A Personal Liability Notice
The content of a Personal Liability Notice is as follows:
- specify the amount of the contributions unpaid, plus any interest and penalties chargeable on these contributions
- require the individual to pay that amount, plus statutory interest at the prescribed rate and which runs from the date the notice is issued
- where there is one person responsible for the neglect or fraud that led to HMRC issuing the Personal Liability Notice, that individual will be required to pay the full amount of the company National Insurance Contributions liability
- where there is more than one culpable officer, the Personal Liability Notice will specify the proportion of the total amount that is due from each individual officer, taking into account the role and responsibility of each officer of the company for the failure.
What Will HMRC Consider Before Issuing A Personal Liability Notice?
HMRC is not in the business of issuing Personal Liability Notices without giving the matter proper thought simply because it has the power to do so. HMRC recognises that it has a duty to safeguard Directors of businesses that are insolvent and have had to close down because they have gone into Creditors Voluntary Liquidation, Compulsory Liquidation or Administration in circumstances where the Director(s) have not either deliberately caused the situation or done so due to neglect.
Directors who have taken proper and reasonable steps to prevent or minimise the company Income Tax PAYE and National Insurance contribution (NICs) liabilities are not likely to be issued with Personal Liability Notices.
Personal Liability Notice Investigation
HMRC will carry out an investigation before issuing a Personal Liability notice to determine the reasons for the failure of the company to hand over the National Insurance Contributions.
Such a Personal Liability Notice enquiry will:
- review the books and records of the company
- quantify the contributions the company was due to pay and thereby establish the level of the debt
- find out why the contributions were not paid over
- identify individuals acting as officers of the company when the failure arose with consideration for their role in the company
- write to officers of the company to seek their position on the failure HMRC have identified
- in certain cases HMRC may contact other parties such as former accountants, payroll agents or former employees for relevant information
- look at what steps, if any, were taken by the company to address the failure
- if blame can be apportioned across more than one company officer HMRC may consider doing this when issuing the Personal Liability Notices
- examine the transactions of the company when the failure sprouted
- consider and deal with to any Director representations or information handed over by the directors of the company
- consider if the conduct complained about was down to matters of neglect or fraud by officers of the company.
What Is Meant By Neglect?
For a Personal Liability Notice to be issued there must be evidence to show that the failure to pay the contributions resulted from fraud or neglect of an individual officer of the company.
Neglect is not defined in the legislation. In the decision by the Upper Tribunal in HMRC v Charles Michael O’Rorke, FTC/39/2012 Mr Justice Hildyard considered the meaning of neglect under the legislation at section 121C of the Social Security Administration Act 1992. He suggested that this involved an objective test as to whether there had been a departure from the standard of care set out by Alderson B in Blyth v Birmingham Waterworks (1856) 11 Exch. 781 at 786, where it was said:
Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a person taking reasonable precautions would not have done.
Under the legislation any failure to pay on time could constitute neglect as a taxpayer who knows of an obligation – in this case the statutory obligation to pay National Insurance contributions (NICs) by a prescribed date – and failure to satisfy that obligation could be regarded as being to some degree negligent.
In reality, it would be a rare event for HRMC to issue a Personal Liability Notice in cases that there was not fraud or serious neglect ie. mere oversight would not typically be enough.
However, it is worth considering what HMRC regards as the signs of serious neglect:
- no payments of PAYE or NICs for a complete trading period or long time
- at the time of the failure, the company directors were receiving payments instead of HMRC or connected companies or individuals alternatively were
- monies due to HMRC were deliberately withheld
- directors who have been found out to have done this sort of thing in the past
- where a phoenix company situation has arisen
- the company continued to make payments to other creditors when the failure arose
- when payments for PAYE and NICs should have been made to HMRC company monies was deployed for other company activities and to enhance its cash flow
Which HMRC Department Issues Personal Liability Notices?
The HMRC department that issues Personal Liability Notices is the NIC Personal Liability Notice Team within Individuals Small Business Compliance (ISBC). This is a specialist team that conducts and reviews all Personal Liability Notice investigations. It is this section that considers the prospect of making individual officers personally liable for unpaid company National Insurance contributions.
It is deemed a very serious matter to in effect lift the corporate veil, making a Director or other officer of a company personally liable and enable HMRC to outflank the protection usually afforded to such individuals who are trading under the banner of Limited Liability. HMRC needs accordingly to be seen to be fair which is why a specialist division within HMRC has a unique responsibility for the investigation and oversight of this function.
HMRC says as follows:
The Personal Liability Notice Team follow clear and robust internal guidelines and procedures to ensure that the legislation is applied fairly, consistently and appropriately only to those cases where HMRC believes there is sufficient evidence to demonstrate ‘on the balance of probabilities’ that the failure to pay was attributable to fraud or more serious levels of neglect.
The Rights Of Appeal
The right to appeal a Personal Liability Notice arises from Section 11 of the Social Security (Transfer of Functions, etc) Act 1999 which relevantly provides the individual with such a right to appeal.
The appeal to HMRC must be submitted in writing. When someone is issuing an appeal against a Personal Liability Notice they have the opportunity to provide further information in support of their case. In addition, it is open to the taxpayer to request a deferral of the disputed contributions liability until the appeal has been heard and completed.
The grounds of appeal are as follows:
(a) the whole or part of the amount specified in the HMRC Personal Liability Notice does not represent contributions to which section 121C should have been applied
(b) the failure to pay the contributions specified in the HMRC Personal Liability Notice was not attributable to any fraud or neglect on the part of the individual in question
(c) the individual in question was not an officer of the company in question at the time of the alleged fraudulent or suggested neglect arose to pay the contributions due
(d) the view of HMRC, either in terms of holding an individual as the exclusive responsible officer or in apportioning the unpaid contributions between two or more such officers was unreasonable.
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