The second article in this series covered the main risks of personal liability for their company's debts directors can face under insolvency legislation. Directors will, rightly, often seek advice on their position in an insolvency. When they do so, the main issues that their advisers will usually cover are those risks which arise specifically from the insolvency legislation, such as wrongful or fraudulent trading, and what the impact on them might be in a formal insolvency.

The fact that directors can be held personal liable for arrears of Crown payments due to HMR&C seems to be discussed much less often; while HMR&C also have the power to impose onerous conditions on any new business you are involved, which may in practice make it impossible to fund.

Director's Potential Personal Liability For PAYE/NIC

Where a company fails to pay over PAYE deductions and NI contributions because of a director's 'negligence', under Section 121C of the Social Security Administration Act 1992 HMR&C has the power to issue a personal liability notice or PLN.

The effect of a PLN is to make the director personally liable for the company's unpaid taxes.

HMR&C can issue a PLN 'whenever contributions are unpaid because of the neglect of a culpable officer.' While failure to pay contributions can obviously constitute neglect, to date HMR&C seem to have only considered issuing a PLN in the most serious of cases. If considering using this power they will look at a range of factors such as:

• has there been a record of persistent failure to pay over PAYE/NIC when other payments are being made as they fall due;
• has directors' remuneration has continued to be paid during the period; and
• has the individual been involved with other companies which have failed to pay over taxes?

Despite being on the statute book, HMR&C seems to have only used this power quite rarely. However as HMR&C has both lost its position as a preferential creditor and become owed substantial sums in arrears of taxes (in excess of £40 billion at the time of writing acording to some estimates), there is some concern that HMR&C is looking at all its powers for collecting in sums that are due and may therefore begin to use this power more extensively.

In a recent case, Leslie Livingstone v HMR&C Commissioners, taxes were unpaid over a period exceeding a year while other creditors were paid, including to the sole director who was a qualified accountant as well as companies linked to him. The director argued that he had not intended to deprive HMR&C but was found to have been negligent and was made personally liable for £60,000 of unpaid taxes.

An investigation of this type by HMR&C can be a prolonged and stressful experience, as well as being a potentially expensive one.

Trading Using Crown Monies

The level of unpaid Crown monies is one of the items that insolvency practitioners have to include in their report on a director's conduct. As a result, 'trading using Crown monies' is increasingly a key issue in the Crown bringing disqualification proceedings against a director and one estimate is that approximately 40% of current disqualification proceedings are related to unpaid taxes, while law firm Wedlake Bell are reporting a 17% annual increase in disqualification proceedings being brought.

Deposits On New Trading

Finally, where the directors of a company which has failed owing substantial amounts of tax, PAYE/NIC or VAT, are involved in a new business, the tax authorities are also increasingly making use of their powers to demand that the new business pays a deposit to cover tax that may fall due.

The sums involved can be up to the equivalent of a full year's worth of expected tax for the new business. While HMR&C will return the deposit at the end of a year, it can obviously be a substantial sum to find for a new start up.

But if this is required, do not ever be tempted to carry on trading without paying it as this can lead to criminal proceedings. Of course the information contained in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and as these can have serious implications you should always seek appropriate professional advice on your own particular circumstances before taking any action.

Author Mark Blayney of Galen Partners Ltd is an accredited business rescue expert and author specialising in owner managed businesses. For more information on dealing with PAYE arrears and related issues, a free copy of his 13 Key Steps Guide to managing a crisis and a turnaround, or a free referral to a local expert, contact him at http://www.gpsuk.biz