How Directors are Liable for Company Tax Debts

Have you ever thought “limited liability” kept your personal assets safe if your company crashed? Think again! Today, we’ll reveal five startling ways directors can still end up on the hook for business debts—especially tax debts—when things go south.

The Myth of Limited Liability

In theory, a limited company stands as its own legal “person,” separate from its owners (shareholders). If the company fails, shareholder losses are typically limited to the value of their shares. This has long given directors (often also shareholders) a sense of security that they could walk away from business debts like unpaid PAYE, National Insurance Contributions (NICs), and VAT.

But what if the company collapses with serious tax arrears? With more and more businesses engaging in shady “phoenix” practices—shutting down one company and popping up as a new one (“NewCo”) without paying old debts—HMRC decided enough was enough. The result? A series of tough rules now let HMRC pierce the veil of “limited liability” under certain conditions. These ruthless measures mean you might be personally responsible, even if the company itself is a separate legal entity.

How “Phoenixism” Made HMRC Fight Back

“Phoenixism” is the practice of letting a failed company (the “OldCo”) fold—often leaving massive tax debts—only to start up a nearly identical “NewCo,” sometimes with the same directors, staff, and location. Historically, people repeated this to dodge huge PAYE, NICs, and VAT bills, creating a string of bankrupt companies behind them.

To block this loophole, the UK government introduced FA 2020, Sch 13, commonly known as the joint and several liability rules. Under these new rules, if someone was involved in multiple companies that all collapsed with significant tax debts, HMRC can make that person personally responsible—not just for the old, unpaid taxes, but also for the future tax bills of the new company. If you fail, leave a pile of taxes unpaid, and then start again with a similar setup, HMRC can chase you directly—no more hiding behind a limited company.

Joint and Several Liability: Conditions That Let HMRC Pinpoint Directors

1. At Least Two Old Company Failures: Over the past five years, you had a major role (such as a director) in at least two companies that both went bust and owed tax.
2. A New Company with the Same Trade: A fresh business is carrying on a similar trade to any two of those old companies.
3. You’re Involved in the New Company: You’re still a key player (director, manager, etc.) in the new business.
4. Serious Unpaid Taxes: The old companies must have a tax liability exceeding £10,000 and that debt must be more than half of their unsecured debts overall.

If these apply, HMRC can issue a joint and several liability notice – you’ll be on the hook for:

• The old tax debts,
• All existing tax owed by the new company as of the notice date and
• Any tax the new company racks up over the next five years.

Although intended to stop sneaky phoenixism, these notices can also affect directors who have legitimately failed businesses—for example, those wrecked by the COVID-19 pandemic—with no “phoenix” intentions at all.

Security Notices: Directors Could Face Criminal Charges

A Notice of Requirement for Security (NOR) is another way HMRC protects itself from future tax losses. Although a NOR doesn’t automatically transfer past debts to a director, it demands a security deposit for future taxes. If a new business is seen as high-risk—maybe it’s run by people who left old debts behind—HMRC can say, “Prove you’ll pay your taxes this time. Give us a chunk of money upfront.”

• Scope: NORs can be used for PAYE, NICs, and VAT.
• Who Gets It?: Both the company and its directors usually receive the NOR, making directors personally liable for the security.
• Consequences of Ignoring an NOR:
  • It’s a criminal offence not to comply.
  • If you don’t pay and keep trading, expect criminal charges. You could face a fine of up to £5,000—and a criminal conviction is far from ideal!
• Amount of Security: This usually covers four to six months of expected tax plus any unpaid amounts from the last 12 months. It can add up quickly—sometimes equal to 18 months of tax bills.

Can You Appeal an NOR?

Yes. Directors can challenge both the need for the NOR and the amount demanded. Some have successfully argued that Parliament only wanted HMRC to use NORs in blatant phoenixism cases, not just for any company with a rocky history.

The Kittel Principle: Paying for Someone Else’s VAT Fraud: Another nasty surprise is the Kittel principle, stemming from an EU court ruling (Axel Kittel & Recolta Recycling SPRL, 2006). If you “knew or should have known” that the goods or services you bought or sold were tied to a VAT fraud somewhere in the supply chain, HMRC can refuse your company’s input tax claim. Then, even if your company can’t pay, HMRC can slam you personally with a penalty—up to 30% of the unpaid VAT!

Why Is This So Dangerous?

• HMRC doesn’t have to prove which business in the chain pocketed the missing VAT. It just has to show you “should have known” about the scam.
• “Should have known” is pretty vague. If HMRC believes you didn’t do enough “due diligence” (like checking your suppliers’ credentials or verifying that their prices weren’t suspiciously low), you might be stuck with the bill.

Personal Liability for VAT Fraud

Under VATA 1994, sections 69C to 69E, if HMRC believes the company can’t pay the penalty, they can shift it to the director personally. It’s called a personal liability notice (PLN). Once again, so-called limited liability may not protect you if HMRC proves negligence or if you have turned a blind eye to suspicious deals.

Defending Yourself: Good recordkeeping and thorough checks on your suppliers can defeat Kittel-based claims. If you can show you had robust processes for spotting dodgy transactions, you might refute HMRC’s assertion that “you should have known” about fraud.

Personal Liability Notices (PLNs): A Personal Liability Notice (PLN) can be the final blow when HMRC thinks an officer of a company (like a director) personally contributed to the company’s failure to pay its taxes. The rules for PLNs are found mainly in:

• Reg 97Z of SI 2003/2682 for PAYE,
• SSAA 1992, s 121C for NICs, and
• VATA 1994, ss 69D–69E for VAT penalties.

A PLN is basically HMRC saying, “We see your company didn’t pay its PAYE/NICs/VAT. We believe that’s because of your fraud or neglect.” If you don’t agree, you can appeal, typically by arguing:

• You weren’t negligent or fraudulent.
• HMRC acted unreasonably by issuing the PLN.

Practical Tips for Directors—Don’t Get Caught!

1. Maintain Solid Records: Keep evidence of all company activities, especially tax payments, supplier checks, and official communications with HMRC. This helps you fight any claims that you “should have known” about fraud or that you were negligent.
2. Watch for Red Flags in Your Supply Chain: If a deal looks too good to be true (e.g., prices suspiciously lower than market rates), be cautious. Document why you believe the deal is legitimate—this could save you in a Kittel dispute.
3. Be Proactive with HMRC: If your company is falling behind on VAT, PAYE, or NICs, talk to HMRC early. Payment plans might be possible. Ignoring the problem can lead to more severe consequences, including NORs and PLNs.
4. Be Aware of Phoenix Indicators: If you’re shutting down one company and immediately restarting a nearly identical one, HMRC might automatically suspect phoenixism. Keep thorough records proving any genuine reasons for the closure and new launch.
5. Seek Expert Advice: If you suspect you’re at risk of a personal liability notice or NOR, consult an accountant or tax lawyer ASAP. A single slip-up could cost you personally, even if the company fails.

Is Limited Liability Really That “Limited”?

The astonishing truth is that “limited liability” is not the invincible shield many company directors assume it to be—especially concerning tax debts. While the limited company concept protects shareholders to an extent, a range of HMRC powers now let the tax authority reach directly into directors’ pockets when they smell dodgy dealings, unpaid taxes, or a Phoenix scheme.

Don’t Become a Statistic: If you’re involved in multiple companies, keep your affairs squeaky clean. Proactively address tax issues, stay away from questionable trading partners, and never assume you can walk away from unpaid taxes by closing down. HMRC has the tools—and the will—to hold you personally responsible. Call our specialist tax advisors for details.