What Happens To HMRC Tax Debts When A Company Goes Into Liquidation?

The answer to what happens to HMRC tax debts when a company goes into liquidation is they are debts of the company. They are in effect locked in the company that is insolvent.

HMRC tax debts are liabilities of a company just like any other debt. There is nothing that would ordinarily mean they change from being debts of the company to debts of the directors personally. You cannot write off HMRC tax debts of a company.

What Is Different About HMRC Tax Debts From Other Creditors?

HMRC tax debts are nevertheless a little different from other creditors in that they can change from being simply debts of the company to being debts of a director personally in certain instances and not all HMRC debts rank as unsecured creditors when determining the order of creditor payments in terms of who gets paid first in a liquidation.

Certain HMRC Tax Debts Are Secondary Preferential Creditors

Both VAT and PAYE/NIC are known as secondary preferential creditors in the event of insolvency which gives them higher ranking as creditors to other debts of the company other than those of the employees or fixed charge creditors.

Personal Liability Of A Director For HMRC Tax Debts

However, that position is consistent with debts that a director has caused or permitted a company to incur fraudulently through dishonesty and deception. In such instances, it is possible for a company director personally to have to shoulder the burden of the debt if they have deliberately misled a creditor into providing credit to their company.

HMRC Powers To Issue Personal Liability Notices

The difference where HMRC is concerned is that it has statutory powers to issue personal liability notices not only in cases of dishonesty but also for loss caused by a negligent director that causes loss to the taxpayer. 

HMRC is not quite the same as other creditors because the company collects tax on behalf of HMRC which it should hand over and not trade with. For example, both PAYE/NIC and VAT are taxes that the company collects for HMRC. In the case of PAYE/NIC the company is collecting in monies of other taxpayers (the PAYE/NIC of the company’s employees) that it has to hand over to HMRC. 

Generally, in order for HMRC to issue a personal liability notice it will need to have gone through a careful check to see that the notice is one that fits the conduct of a director who has been fraudulent or negligent.

HMRC says in its article NIM12207 – NICs Personal Liability Notices: who conducts PLN enquiries? 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.