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HMRC & Insolvency

Author: Glyn Mummery
25 March 2011

HM Revenue & Customs' (HMRC) time to pay agreements are not as readily available as they were 18 months ago. That is not to say that an agreement is not possible but we cannot expect the leniency we have been used to. In addition, HMRC referred to the following directors' liabilities in a recent update, which are certainly worthy of note.

Under the Social Security Administration Act 1992, HMRC has the power to issue a personal liability notice (PLN) if failure to pay over PAYE/NIC deductions arises because of a director's negligence, making the director personally liable.

In these circumstances, HMRC considers the following factors:

• Persistent failure to pay PAYE/NIC when other payments are being made on time
• Directors' remuneration continues to be paid during the period
• Whether the directors have been involved with other companies which have failed to pay over taxes

HMRC's use of these powers has, to date, been quite rare; however, there has to be a raised concern that HMRC could consider using this power more extensively.

Furthermore, under the VAT Act 1994, where directors are involved in a new business following an earlier business failure with substantial tax debts, HMRC is increasingly requiring that the new business pays a deposit to cover any tax that may fall due. This can be up to six months' worth of expected tax for the new business.

On receipt of a VAT security notice, a company has three options:

1. Pay the deposit required
2. Cease trading, or
3. Appeal against the decision within 30 days of the Security Notice

The deposit is repaid at the end of the year, providing the company has submitted all VAT returns and paid, in full, in that year. A 'quid quo pro' if you like, but this obviously adds to the funding requirements of a new business. Failure to pay can lead to the instigation of criminal proceedings against the company directors personally.

You should be aware that the actual deposit asked for from the directors of a phoenix company can vary. The amount of VAT requested as a deposit is usually based on the average VAT returns submitted by the previous company, over a six month period. This is based on the company submitting quarterly returns and the time it would take HMRC to wind the company up on first discovering that a VAT return had not been paid. Therefore, the six months equates to the amount of VAT at risk, should the company continue to trade.

HMRC does, however, offer an alternative reduced deposit equating to four months VAT, on the condition that the directors agree to switch to monthly VAT returns.

Put simply, any company can be hit with a VAT security if they fail to submit a return over three consecutive quarters, even if they have paid the assessments raised by HMRC in the absence of these returns.

In these difficult and challenging times, FRP Advisory is here to support you, your business and your clients. If you'd like to discuss any concerns or business issues with us, then please get in touch using the online form below.