HMRC and Powers to Pursue Directors personally to recover revenue

Increasingly in our experience the HMRC are more regularly seeking to use  Schedule 41 of the Finance Act 2008 to recover tax from Directors personally. The Act gives them the ability to pursue the director personally in certain circumstances. It is generally used to recover funds where a person fails to comply with an obligation.

These obligations could be in relation to income tax and capital gains tax. Under section 7 of TMA 1970 a person must give notice of liability to income and capital gains tax.

Similarly under paragraph 2 of Schedule 18 to FA 1998 a person is obliged to give notice of chargeability to Corporation Tax and of course VAT.

Failure to comply with these statuary obligations can then lead to a financial penalty. The amount of this penalty is determined by the circumstances which have led to the failure to meet these obligations and are categorised as follows:

  • ‘Deliberate & concealed’ if the failure is deliberate and then the person then conceals the information.
  • ‘Deliberate but not concealed’ the failure is deliberate but the person does not make arrangements to conceal the situation giving rise to the obligation.

Depending on whether the failure to meet the obligations is deliberate and or concealed determines the amount of penalty payable.

For example for a deliberate and concealed act or failure, 100% of the potential lost revenue is recovered from the Director/s personally. For a deliberate but not concealed act or failure HMRC will recover 70% of the potential lost revenue.  For other reasons the penalty may be as little as 30% of the potential lost revenue.

You have to notify HMRC within six months of the end of the first accounting period on your obligations i.e. submit your notifications with regard to income, capital gains, VAT or corporation tax to avoid a ‘failure’  which could then trigger HMRC to attempt to recover lost revenue through issuing a penalty personally to a Director.

With income tax there is an annual obligation so the penalty will apply for each and every year, which could become costly.

If the failure is not deliberate, there is no penalty if the taxpayer (or actually the non-taxpayer) has a reasonable excuse, what makes a reasonable excuse will be decided by HMRC and what is a reasonable excuse at the time may well cease to be a reasonable excuse if the failure continues.

The kind of reductions that HMRC can decide on will also take into account:

If a person discloses a relevant act or failure by telling HMRC about it, and gives HMRC reasonable help in quantifying the tax unpaid by reason of it, and allowing HMRC access to records for the purpose of checking how much tax is so unpaid.

Taking the above into consideration there is the possibility of a penalty loading being as low as 20%.

We believe that the instances of the HMRC going after directors personally to recovery revenue is likely to increase now that Companies House are introducing accelerated striking off. The Striking off process has been reduced giving HMRC a shorter period of time in which to launch an objection when a notice to strike off a company has been published. If HMRC fail to raise an objection before the company has been struck off and therefore losing the opportunity to recover revenue directly from the business they can pursue recovery from the Directors personally.