Why are Directors facing greater personal financial risk?
In recent years, both HMRC and Companies House have been granted enhanced powers to pursue directors personally for company-related liabilities. These powers are no longer theoretical. They are being actively used, and directors – especially those of struggling or insolvent companies – are increasingly finding themselves exposed to fines, penalties and personal liability.
The days of assuming that limited company status offers blanket protection are gone. Directors now need to understand the risks, act early and seek professional advice before those risks become personal financial consequences. In this article we look at some of the key powers of HMRC and Companies House and how they are increasing the personal financial risk for directors.
What is HMRC doing differently?
HMRC has significantly expanded its toolkit for recovering unpaid tax, particularly in insolvency scenarios. These powers go beyond the standard creditor process and are designed to pierce the corporate veil (or limited liability) that directors of Limited Companies once enjoyed where HMRC suspects avoidance, phoenixism or deliberate non-payment by using AI methodology which is becoming increasingly sophisticated.
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Joint and Several Liability Notices (JSLNs)
Introduced under the Finance Act 2020, JSLNs allow HMRC to hold directors personally liable for company tax debts in specific circumstances. These include repeated insolvencies, tax liabilities exceeding £10,000 and patterns of non-payment. If HMRC believes a director has used insolvency to avoid tax, it can issue a notice making that individual jointly and severally liable.
This is not a theoretical risk. JSLNs are being issued, and directors are having to defend themselves – often at significant personal cost.
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Crown Preference
Since December 2020, HMRC has regained its status as a secondary preferential creditor. This means that certain taxes, such as PAYE, VAT, NICs and CIS deductions, are paid ahead of floating charge holders in an insolvency. These are taxes collected on behalf of others, and HMRC treats them as a priority.
While this does not directly create personal liability, it does reduce the funds available to other creditors and can complicate the financial position of directors who have given personal guarantees or are trying to manage a controlled wind-down.
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Security for Tax
In cases where a business has a history of non-payment or is deemed high-risk, HMRC can demand a security bond or deposit for future tax liabilities. If this is not paid, continuing to trade becomes a criminal offence. This power is most commonly used in relation to VAT and PAYE, and it can be a serious issue for directors trying to keep a struggling business afloat.
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Penalties Assessed on Directors
Under Schedule 24 of the Finance Act 2007, HMRC can assess penalties for deliberate inaccuracies in tax returns directly on company officers. These penalties can be as much as the tax owed again. If the company is insolvent and the director is found to have gained personally or influenced the behaviour, those penalties can follow the individual – even after the company has ceased to exist.
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Transfer of Going Concern (TOGC) Anti-Avoidance
If HMRC suspects that a business has been sold as a going concern to avoid VAT registration or liability, it can block TOGC relief and pursue the buyer for VAT debts. This is particularly relevant in cases of phoenixism or asset stripping, and directors involved in such arrangements may find themselves under investigation.
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Criminal Enforcement Powers
In extreme cases involving fraud or deliberate evasion, HMRC can prosecute under the Fraud Act, the Criminal Finances Act or other legislation. It can also freeze assets using Proceeds of Crime Act powers. While rare, these cases demonstrate the seriousness with which HMRC now approaches tax recovery.
What about Companies House – isn’t it just a registry?
Historically, Companies House has been seen as a passive body, responsible for maintaining company records and filings. That perception is changing. When a company is insolvent and has ceased trading, directors often ask, “If I do nothing, will that be OK?”
The answer is increasingly no.
Companies House is now more active in pursuing directors who fail to meet their obligations, especially where a company is left to dissolve without proper closure. Fines and penalties can be issued, and directors may find themselves personally liable for failing to act.
What happens if a director does nothing?
Doing nothing is rarely a safe option. If a company is insolvent and has no assets to fund a formal liquidation, some directors assume that allowing it to be struck off is a cost-free solution. This can lead to personal financial consequences.
Failing to properly close a company can result in:
- Fines from Companies House for late or missing filings
- Personal liability for unpaid taxes, especially if HMRC suspects deliberate avoidance
- Investigations into wrongful trading or misfeasance
- Damage to personal credit and reputation
Directors have a duty to act responsibly when a company is insolvent. Ignoring that duty can be costly.
How can Insolvency Practitioners help?
This is where professional advice becomes essential. At Antony Batty & Company, our Insolvency Practitioners work with directors to assess their position, so that we understand their risks and take appropriate action. We don’t just handle formal insolvency procedures – we help directors navigate the increasingly complex landscape of potential personal liability.
Early Advice
The earlier a director seeks advice, the more options are available. We can help assess whether a company is truly insolvent (in which case, liquidation is the only option), explore restructuring or rescue options (such as Administration or a Company Voluntary Arrangement), and advise on how to minimise personal exposure. Take a look at some of our testimonials and case studies.
Formal Closure
If liquidation is necessary, we ensure it is done properly. This protects directors from future claims and demonstrates that they have acted responsibly, which is an important factor when dealing with HMRC. We also liaise with HMRC and Companies House to ensure compliance and reduce the risk of penalties.
Defence Against Personal Claims
Where HMRC has issued a JSLN or is pursuing penalties, we can help directors respond. We have a wealth of experience of interacting with HMRC and understand the criteria that HMRC uses and can build a case to challenge or mitigate liability. We also work with legal advisers where necessary to protect the directors.
The personal financial risk for Directors. What should directors do now?
If your company is struggling, or if you are concerned about personal liability, the most important step is to seek advice early. The powers of HMRC and Companies House are expanding, and the consequences of inaction are growing.
At Antony Batty & Company, we specialise in helping directors understand their position and take control. Whether it’s a formal insolvency, a restructuring plan or a defence against personal claims, we’re here to help. Contact us for a free initial chat.
