Personal Liability Notices: What Company Directors Need to Know

When a company director can be held personally responsible for a penalty imposed on the company through a personal liability notice (PLN), it’s crucial to understand the circumstances that could lead to this liability.

A key advantage of forming a limited company is the concept of limited liability. This means that directors or investors are only liable for the amount they’ve invested if the company goes bankrupt. For instance, if a company issues £1,000 worth of shares and then becomes insolvent, the shareholders' liability is limited to the £1,000 invested, even if the company owes much more to creditors.

Are There Any Exceptions?

While limited liability is a major benefit, there are exceptions where a company director could be held personally liable, particularly when HMRC is involved. The four main situations where personal liability can arise are:

1. If the director is suspected of fraud.
2. If the director is an undischarged bankrupt.
3. If the director starts a new business after a previous one fails.
4. If the director pays themselves unauthorized dividends.

In this post, we will focus on the issue of fraud and the potential for a director to be held personally liable for the penalties imposed on the company (under FA 2008, Sch 41, para 22).

What Is a Personal Liability Notice (PLN)?

A Personal Liability Notice (PLN) can be issued by HMRC when a company or limited liability partnership (LLP) fails to pay a VAT penalty. Typically, a PLN is used when HMRC proves that the failure to pay is due to the fraud or serious negligence of a company officer.

A PLN is more likely to be issued when a company enters liquidation with outstanding tax debts.

How Does a PLN Relate to VAT Penalties?

If a company faces a VAT penalty due to deliberate wrongdoing, a PLN can be issued if the actions that led to the penalty were the result of deliberate actions by an officer or officers of the company.

The PLN can only be issued under certain conditions:

• The officer gained, or attempted to gain, personally from the wrongdoing.
• The company is, or is likely to become, insolvent.

A director or officer issued with a PLN can appeal to the tax tribunal against either the decision to issue the PLN or the amount of the penalty. However, this appeal is separate from any appeal against the company’s penalty. Only the company can appeal the underlying penalty.

Example of Personal Liability for Fraud

Let’s say the finance director (FD) of a company commits fraud by paying themselves for fictitious purchases. To cover their tracks, they create fake invoices and submit them for VAT refunds. HMRC discovers this fraud during an audit, leading to an overclaimed VAT assessment and a penalty for fraudulent evasion. As a result, the company becomes insolvent.

In this case, because the fraud was committed by the FD, HMRC can issue a PLN to hold the FD personally liable for the penalty. The liability may be transferred from the company to the individual director or manager if their fraudulent actions caused the penalty. This rule applies not only to directors but also to other company managers.

Practical Tip

If a company officer is found to have committed deliberate VAT fraud for personal gain and the company becomes insolvent, that officer can be held personally liable for the resulting debt through the issuance of a PLN.

Being aware of these risks is essential for company directors to avoid personal liability in case of fraud or negligence.

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