Originally, PLNs were predominantly used by HMRC to tackle “phoenixism”, where the assets and the operations of an insolvent business that has run up significant tax debts are transferred to a new company operated by the same management team that has a history of non-payment of tax liabilities. However, HMRC’s use of PLNs is now increasing.
HMRC now issuing PLNs more frequently
More recently, as the government desperately aims to plug the shortfall in the public finances, PLNs are appearing in increasing numbers and are being more widely used in formal insolvency procedures, such as following the compulsory liquidation or winding-up of an insolvent company by HMRC where there are accusations of wrongful trading or more serious charges of fraudulent trading.
Wrongful trading is a civil offence whilst fraudulent trading is a criminal offence, both of which can lead to penalties, a custodial sentence and/or director qualification.
Once HMRC establishes through an investigation that National Insurance Contributions (NIC) have been intentionally underpaid by a director, company secretary, a manager of the business (as a whole) or a shadow director through serious levels of fraud or neglect, whilst other creditors, connected parties, such as family members, and/or directors’ salaries were paid, it will issue a PLN.
This notice may go to one or more of the company’s directors, but office-holders who have clearly taken reasonable steps to prevent or minimise company NIC debts will not be pursued by the taxman.
Nonetheless, the effects of a PLN are extremely serious for the individual because they must act as a deterrent to company officers to avoid the future abuse of and losses to the National Insurance Fund.
The transfer of NIC debts
Unlike PAYE debts, where the taxman only collects unpaid tax associated with payments to the directors themselves and connected persons, such as family members, in the case of NIC, the potential personal liability of the director(s) is not just restricted to NIC on their own salary, but covers all the company’s outstanding NIC debts.
Therefore, when a PLN is issued, the result is drastic as liability for the entire company’s unpaid NIC in addition to late payment interest and penalties transfers from the company to a company director personally.
Cooperating with HMRC
HMRC will only ever conduct an investigation into a company’s NIC debts if it believes that it can recover a high proportion of the unpaid liabilities from one or more of the company’s officers.
The investigation normally begins with HMRC scrutinising the company’s books and records, and then interviewing directors to find out why the company was unable pay its liabilities.
Whilst directors are not legally bound to cooperate, it’s crucial that they take a positive approach throughout the investigation as this could result in the PLN being withdrawn if a satisfactory explanation can be given for underpayment of NIC.
Failure to co-operate with the taxman could lead to one office-holder being singled out and blamed by others within the company, resulting in his or her sole liability for unpaid NIC.
Office-holders who choose not to co-operate also run the risk of being disqualified as a director, especially if the NIC debt is sizeable. Therefore, co-operation is essential at all stages, and negotiations with HMRC should take place before the notice is issued as once the notice has been sent, it becomes subject to an appeal process before the Tax Tribunal.
During the investigation, directors will have an opportunity to make representations to HMRC to offer an explanation of why the company failed to pay.
The taxman will consider and respond to all representations made either individually or as a group as well as any other information provided by company directors that may be relevant to the circumstances surrounding the NIC debts.
All of which will be taken into consideration when determining the facts underlying the failure to pay and to establish grounds on which to issue the PLN.
Directors should take the opportunity to negotiate with HMRC before the notice is issued either negotiating a reasonable apportionment (share) or making representations on the basis that the officers weren’t intentionally negligent or fraudulent to avoid a PLN.
In most cases, if directors accept some or all of the responsibility and representations are made to HMRC at the right time in the process, a settlement can be negotiated on a voluntary basis without a notice being issued.
Issuing a PLN to culpable officers
At the end of the investigation, if no acceptable reasons for underpayment are given by the office-holders, HMRC will consider whether it has sufficient grounds to issue a PLN and to whom.
Whether a PLN is issued or not will depend on HMRC’s assessment of “the balance of probabilities” in other words “the standard of proof used in all civil court proceedings” that fraud or neglect has occurred.
Office-holders whom it considers “culpable” for the non-payment of NIC will receive a notice with information detailing how HMRC came to the decision and how much it expects each officer to pay.
When more than one office-holder is involved, HMRC will apportion or share the debt between these officers based on the evidence that came to light during the investigation and also in relation to the level of negligence or fraud.
Seek professional advice
Company directors or any other office-holders who are subject to a PLN enquiry should take specialist tax advice immediately and not wait until after a PLN has been issued to appeal HMRC’s decision.
By participating in the process fully, directors can ensure that they make the most of their opportunity to make representations to HMRC. Given a more accurate picture, the taxman may revise its assessment of the “balance of culpability” on an individual and re-apportion it, or even withdraw its claim to a PLN completely.
This guide has been written exclusively for ByteStart by AABRS, a firm of insolvency and company rescue practitioners based in London.
Last updated - 8th September, 2017