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Piercing the corporate veil Part 1 – can HMRC recover company liabilities from individual directors?

Piercing the corporate veil Part 1 – can HMRC recover company liabilities from individual directors?

We are seeing increasing incidents of HMRC looking to settle company liabilities with former company directors on the basis that income tax can be recovered from individuals despite it being assessed on the company under the PAYE regulations. We are also seeing HMRC press liquidators to recover assets and funds from former directors in order to fund company liabilities. This has led to difficult tripartite negotiations with former directors, liquidators and HMRC. Understanding what liabilities are recoverable from whom and when is critical in these situations.

HMRC’s war on PAYE avoidance

Much has been written about HMRC’s recent campaign to combat aggressive tax avoidance planning both through new legislation and litigation through the courts. PAYE planning has been at the centre of HMRC’s efforts and readers will no doubt be familiar with the introduction of counter measures such as the disguised remuneration legislation, the GAAR provisions and the 2019 loan charge. At the same time, HMRC also litigated test cases, most notably Glasgow Rangers, which culminated in success at the Supreme Court in 2017.

Payments versus Notional Payments

It is safe to say that PAYE avoidance planning has largely been defeated. The recognition of the redirected earnings concept in the Glasgow Rangers case makes PAYE avoidance planning very likely to fail. But success in the Glasgow Rangers is a double-edged sword for HMRC when it comes to recovering any PAYE due, especially where the debt will make an employer company insolvent or it is already in liquidation.

The Supreme Court decided in Glasgow Rangers that the EBT arrangement used by the football club involved the payment of employment income. The Court decided that it was the football club’s intention to provide employment income when it paid into the schemes. It didn’t matter what steps were inserted between the employer making the payment and the employee receiving it; the EBT arrangement was essentially ignored. This meant that the employment income was paid by the employer, not a third party.

This is significant because employment income paid by a third party is deemed to be a “notional payment”. The PAYE regulations allow HMRC to transfer an income tax liability to an employee in cases where an employer fails to pay PAYE assessed under a Regulation 80 determination if;

  • The employee has received income knowing that the employer has wilfully failed to deduct the correct amount of PAYE, or
  • The unpaid tax results from notional payments.

In a situation where a PAYE liability arises from a tax planning arrangement involving redirected earnings, HMRC cannot transfer the Regulation 80 income tax liability to the employee unless it can show that there was a wilful failure to operate PAYE. That is unlikely to be the case where employers acted on tax advice provided to them.

The Social Security legislation does not allow for the transfer of any NIC liability due from an employer under the PAYE regulations to an employee unless there is fraud or neglect.

Disguised remuneration and the 2019 Loan Charge

There can be situations where HMRC can seek to recover an amount of PAYE from an employer as a result of both a charge under the primary PAYE regulations and from a disguised remuneration charge. The most notable of such charges is the 2019 Loan Charge. In these circumstances, HMRC can issue a second Regulation 80 determination for the later event and then transfer the income tax liability from that PAYE debt to the employees concerned because the charge relates to a notional payment.

The threat of the 2019 Loan Charge forced many individuals to fund company settlements of earlier PAYE liabilities because the Loan Charge liability, as another example of a notional payment, was or would have been transferable to them personally.

It is critical, therefore, to understand on what basis a charge arises and whether it involves a notional payment. But what happens if the planning involves the same employment income being assessed under both the normal charging provisions and the disguised remuneration rules? This happened in the recent Root2 case. The planning involved the employer company paying out against what was essentially a losing bet, whilst an employee received a payment under a separate linked winning bet. The Tribunal judge recognised that both transactions resulted in a potential tax charge but prioritised the normal PAYE employment income charge on the payment made by the company over the disguised remuneration charge arising on the payment from the third party. That decision may be significant in terms of HMRC’s ability to recover from individual employees.

However, it has not stopped HMRC writing to individual employees to encourage them to settle on the basis that it will recover from them personally despite there being a doubt over HMRC’s ability to transfer the liability to the individual until the appeal goes forward to the Upper Tier Tribunal.


Penalties charged against a company for failure to operate PAYE can in certain circumstances be transferred to an officer of a company personally. Where a penalty is charged for a deliberate inaccuracy which was attributable to an officer, the officer can be liable to pay all or a portion of the penalty.

This may not seem likely but we have seen cases where HMRC has argued that a PAYE planning arrangement does not work but also that the company officers should have realised that the planning did work. HMRC’s view is that they deliberately filed incorrect PAYE returns as a consequence. HMRC has issued Personal Liability Notices that allocate part of the company’s penalty to the officers to the extent that it is not paid by the company. We are currently disputing these notices as well as the penalty notices issued to the company.

New HMRC Powers

Finance Act 2020 introduced new legislation that can make individuals jointly and severally liable for the debts of a company in liquidation where there is a loss of tax or duties resulting from avoidance, evasion or repeated insolvencies and the individual is directly linked to those activities. We will look at this more closely in our follow up article on liquidations.


A clear understanding of how an employer’s liability to PAYE arises is essential to determining what HMRC can recover and whether that liability can be recovered from the employees. This is particularly difficult where a company is in liquidation and HMRC are simultaneously pressing a liquidator to recover from directors; we will examine this further in an upcoming article.

Contacts us at Trident Tax if you have any difficulties in this area and we will see if we can help you.