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Piercing the corporate veil Part 2 –HMRC’s efforts to recover against individuals

Piercing the corporate veil Part 2 –HMRC’s efforts to recover against individuals

In our previous article, we looked at HMRC’s efforts to recover PAYE from individuals under tax legislation where the tax was lost as a result of planning entered into by a company. In this article we consider the increasing efforts to recover company tax liabilities from individuals through the Insolvency Act. What does this mean for liquidators and former company directors?

What if the employer company is insolvent?

We see many cases involving old tax planning from up to 15 years ago that is still being pursued by HMRC. These cases often involve companies that are now in liquidation, where HMRC has made a claim to a liquidator based on PAYE assessed under a Regulation 80 determination. Typically, those determinations are old and under appeal. HMRC will argue that the claim, although under appeal, is valid because of the decision in the Glasgow Rangers case and may suggest that the company’s appeal should be withdrawn.

However, although it may be clear that the PAYE planning does not work it does not follow that the claim is valid. We see Regulation 80 determinations that are simply wrong because the year assessed, the amounts of income or the employees named are incorrect.  Many Regulation 80 determinations are made outside the normal assessing time limits and in these cases HMRC must also show that tax has been lost owing to careless or deliberate behaviour. That is unlikely to be the case where tax planning was undertaken on advice.

Assuming HMRC’s claim against a company in liquidation is valid, we have also seen HMRC press the liquidator to seek recovery from former company officers on the basis that they are guilty of misfeasance. HMRC’s argument is that the directors should have known that HMRC would look to recover PAYE on any planning transaction based on its widely publicised position and so should have set aside sufficient funds to cover any tax or NIC. This view gained judicial support in Toone v Ross  (see our newsletter article of 10 February 2020). The counter argument is that the directors should have been able to rely on tax advice provided by professional advisors and so will have acted in good faith.

A variation of HMRC’s argument is that a company should have recognised contingent liabilities relating to PAYE and, had it done so, would not have had sufficient reserves to pay out dividends in later years. The payment of the dividends is then argued to involve misfeasance. However, the timing of events is critical. We have seen HMRC argue that a contingent liability should have been recognised as early as 2010 following the publication of HMRC Spotlight 5 on disguised remuneration schemes, but the Morse report into the 2019 Loan Charge helpfully observed that taxpayers are “…entitled to rely on the law as interpreted by the courts – rather than a position taken by HMRC – as the authoritative guide to their tax obligations.” The timeline of events in a liquidation therefore becomes significant if this argument is to be rebutted.

Liquidations where HMRC may transfer liability to an individual

In some circumstances HMRC will be prepared to settle a company’s historic PAYE liabilities with an individual directly but where will that leave a liquidator responsible for the company in liquidation? We have seen this where the 2019 Loan Charge is in point and HMRC has offered an individual the option of settling their share of a company’s liability instead of being faced with settling a higher 2019 Loan Charge liability. Where does that leave the liquidator, who may have costs to recover or other creditors to represent? The liquidator may not even be aware of what is happening. What will HMRC do following settlement? What if a settlement covers only income tax and not NIC, interest, etc. or is a substandard offer? Will HMRC withdraw all or only part of its claim?

What is needed is for the liquidator to insist on a tripartite agreement where any historic company liability is settled.

Employer company not yet in Liquidation

When we are advising owner managers of companies on negotiating settlements with HMRC a key decision will be the difficult question of whether to use personal assets to help fund a company settlement. The alternative is likely to be liquidation. Any new liquidations will involve HMRC as a preferential creditor (see New HMRC Powers below). The owner will need to understand what can be recovered from them personally either by a formal transfer of liabilities under the tax legislation or by way of recovery through the Insolvency Act.

We have seen cases where HMRC has suggested that individuals sell the family home, draw down pensions in order to access tax free lump sums and sell jointly owned assets. This approach of simply listing assets in which an individual has an interest is too simplistic in our view; many of the assets would be outside the scope of any bankruptcy proceedings against an individual. An individual offering up all their personal assets to fund a company settlement could be the equivalent of betting everything on black at the casino because he or she will lose everything if the company subsequently fails.

New HMRC Powers

HMRC acquired significant new powers in FA 2020. HMRC is now a preferential creditor in liquidations that commenced after 1 December 2020 and individuals can now be made jointly and severally liable for a company debt in certain circumstances.

HMRC’s new status as a creditor is that of a secondary preferential creditor. There are other creditors that stand ahead of HMRC (e.g. an employee that is owed unpaid wages in certain circumstances), but HMRC will be ahead of any other unsecured creditor. The preferential status is restricted, however, to deductions or charges in respect of payments made by the company: VAT, PAYE, employee NIC, Construction Industry Scheme deductions and Student Loan repayments.

The ability to make an individual jointly and severally liable for a company tax debt was also introduced in FA 2020 and applies to a company in liquidation or likely to go into liquidation. However, there must be a loss of tax or penalties resulting from evasion or avoidance or from repeated liquidations.

The individual must have been responsible for the avoidance or evasion by the company or benefitted from it to be made liable. The repeated liquidations or “phoenix” test applies to a company in liquidation where two other “old” companies have gone into liquidations in the previous 5 years and those companies failed to pay their taxes or file returns.


The interaction between HMRC, a liquidator and former directors where a company has gone or is about to go into liquidation is complicated. It is particularly difficult for a liquidator, as a non-tax specialist, to deal with the nuances of some of these issues. It is important to understand whether any claim by HMRC is both valid and correct. It is also important to understand the significance of the background and timeline to know whether HMRC can force a misfeasance argument. These factors in turn will influence any decision by the owner of a company to use personal assets to fund a settlement and it is imperative that a Liquidator is involved in any such discussions.

Please contact us if you need any help with any of the issues discussed.