HMRC increasingly pursuing company directors to pay tax bills of insolvent businesses

HMRC is increasingly pursuing company directors (and other individuals connected with the management of companies) to pay outstanding tax bills that are left when their business becomes subject to an insolvency procedure or where there is a serious possibility of it becoming insolvent, says multinational law firm Pinsent Masons.

The amount that directors were forced to pay to help settle the tax bills of their insolvent businesses rose more than sixfold from £2.3m to £15m in the last year (year end March 31, 2024).

Sophie Warren, Senior Tax Manager at Pinsent Masons, warns company directors that HMRC is now much more likely to pursue their personal assets if they shut down businesses and leave tax bills unpaid. In some scenarios, a director of an insolvent company could lose their home to bankruptcy if forced to pay a large outstanding company tax bill.

“HMRC is making clear that company directors whose businesses leave large unpaid tax bills behind after they close where there is evidence of deliberate behaviour will not walk away without paying up,” says Warren.

“It is clear now that they are willing to go after whichever of the directors and other individuals connected with the management of the company who has sufficient personal assets to pay.”

HMRC can issue ‘Joint and Several Liability Notices’ to make directors personally responsible for the unpaid tax debts of their companies if the company has entered into tax avoidance or evasion arrangements when their company has started, or is likely to start, insolvency.

The aim of the powers given to HMRC is to deter individuals from misusing the insolvency rules to shut down businesses partly to avoid paying those tax bills. HMRC must be satisfied that all five conditions set out in the legislation have been met however, before an authorised officer may give a joint and several liability notice to an individual.

The 52 directors who were pursued by HMRC for their companies’ tax debts in 2023/24 is more than three times the 16 that were pursued in the previous year. These directors received a demand for £290,000 on average in the past year, up from £142,000 a year earlier.

Given the significant rise in company insolvencies over the past two years, it is likely that there could be a further increase in the number of directors pursued for their companies’ tax debts. In 2023, there were 25,158 company insolvencies in the UK, the highest since 1993**.

“Any director of a struggling business should be taking legal advice if there’s a possibility that their company will go insolvent with substantial tax debts. There is a risk that directors of businesses in genuine financial stress could get caught up with those seeking to defraud HMRC if HMRC has good reason to believe there will be a tax liability relating to tax avoidance or evasion arrangements,” says Warren.

Joint and Several Liability Notices were introduced in 2020 as part of a wider HMRC crackdown on insolvent businesses leaving significant tax bills unpaid. In the same year, it also gained the power to claim certain specified  tax debts from an insolvent company’s assets ahead of banks and suppliers.