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Limited Liability Company

A limited liability company is easiest to set up and being able to set up a limited liability company quickly, cheaply and easily is one of the prime reasons and incentive for most of the entrepreneurs and those contemplating starting a business venture and one of the primary reasons most of the start-ups opt for a limited company over sole proprietorship or partnership is the extra protection it offers to its directors and shareholders because the very basis of a limited company is that all of its debts are covered by the company i.e. the debts are the company’s liabilities and not the liability of its stakeholders or the directors.

In other words, a limited liability company is a legal entity in itself from its shareholders and the directors and thus allows shareholders to invest in business safely in the knowledge that if things were to go wrong, all they lose is the value of their initial investment.

HMRC Personal Liability Notice (PLN) For Directors

The sad part of owning/running a company is that it incurs debts in the course of its business; however the best part is that the company is liable for that i.e. the personal assets such as the entrepreneur’s or the director’s individual and personal property such as his home or other wealth are not put at risk and in case the business fails, the directors or the stakeholders can walk away from its debts, if there is no capital committed to the company.

United Kingdom is one of the easiest places in the world where you can set up your company without much hassle and thanks to the HMRC’s digital initiative, online registration allows you to register your company within few hours at a very nominal fees.

However, the situation is not this rosy and clear-cur always and there can be some situations or instances where the corporate shield has to be removed and the directors or the stakeholders can be held personally liable for either a proportion or entire company’s debts. Section 64 of the Social Security Administration Act 1998 empowers HMRC to issue a notice, called as Personal Liability Notice (PLN) in order to held company officers personally liable for the debts.

HMRC Personal Liability Notice (PLN)

A PLN is issued by the HMRC in case the later believes an individual has intentionally failed to pay tax and the National Insurance Contributions (NIC) and thus it is issued if an individual is suspected of fraud or dishonesty. The power or the legislation to issue PLN came into effect on April 2009 in order to address prevalent abuse of National Insurance Corporations by the limited companies.

Although HMRC is empowered to issue PLN in case a fraud or dishonesty is suspected, it has to make its enquiries into the management of the company to see if the charges are true or not and if during its enquiries of those involved in the management of the company, they cannot suffice or provide sufficient proofs in order to support their argument or HMRC finds evidence in favour of the charges, then it can issue and enforce a PLN.

Section 64 of the Social Security Administration Act 1998 allows HMRC to issue and enforce a PLN for below mentioned reasons:

  • If there is a history of non-payment of tax through “phoenix” arrangements.
  • If the company management or the officers have a consistent track record of not complying with tax obligations.
  • If the tax liabilities have consistently not been paid on time.
  • If HMRC believes that the failure to pay the tax liability is either a serious neglect or fraud.
  • If there have been preferential payments to creditors, connected parties or directors rather than clearing tax liabilities.

However, it is important to understand that the purpose of PLN is not to trouble or penalize the directors that are genuinely struggling and if you are doing everything in order to pay the right amount of NIC well on time and still not able to do so, then PLN is not a penalty to be used against you. PLN is only used in case a fraud or dishonesty is suspected or in case where there is a good chance of recovering the debts because most often when you as a company director receives an HMRC Personal Liability Notice, government has quite good reason to believe that you have committed some serious and intentional failure to pay the debts and NIC owed by your company.

Read More: Director Loan Accounts

HMRC Personal Liability Notice (PLN) for Director

As the director of the limited company, you must have a thorough knowledge of situations which can attract PLN and it’s a good idea to be aware of those different situations to avoid what could be a nasty or unpleasant situations:

  • If you are engaged in wrongful trading during insolvency: As per the Companies Act 2006, a company must stop all its trading when and if the company becomes insolvent. An insolvency is a stage at which a company is not able to pay the debts owed by it and its directors must not engage in any of the following activities:
    • Repaying some creditors but not others.
    • Selling assets for less than their market value.
    • Trying to pay off debts using fraudulent ways such as dishonest transactions which cannot be fulfilled.
    • Trading with the intention of not repaying the creditors.
    • Continue paying shareholders dividends if the company is insolvent.

    Once the company becomes insolvent and not able to repay the debts of the creditors, then before it gets liquidated, an officer will be appointed to investigate the matter and actions of the directors that lead to the insolvency and in case found guilty or involved in any of the above mentioned examples of wrongful trading then he, in the capacity of liquidator officer can ask court to make the director personally liable. However, it is not that you do not have a way out and in order to come out of the situation, you as a director of the questioned company can seek professional advice from a liquidator or insolvency practitioner on war footing.

  • If you have signed a personal guarantee: At times to get a loan for your company, banks or financial institutions might ask for personal guarantee from its directors, which means that if the company cannot afford to repay the loan in the decided time period, then it is the directors responsibility to repay loan personally and in cases like these, directors personal properties are at stake if the repayment of loan is not done timely.
  • If you have overdrawn directors’ loan accounts: If everything is going as planned, then industry experts recommend directors to draw a small salary and to withdraw dividends from the profits of the company. Directors also have the option to withdraw from the company’s account in a form other than a dividend or a salary. However, one should be careful enough to not to withdraw more than the certain limit and if a director takes out more money out of the company account than he puts in then it us referred to as overdrawn loan account.

    An overdrawn account is still okay as long as it has been recorded and is settled within 9 months of the financial year-end, however it is not a desired situation if the company is already struggling with its finances because then the directors are asked to repay the loan from their personal finances, failing to do so will attract a Personal Liability Notice from the court. Also an overdrawn director’s loan account can lead the company towards insolvency and when a company becomes insolvent, it becomes the duty of the appointed liquidator to release as much value as possible from the benefit of the company’s creditors.

  • Partly paid shares: As per the Companies Act, a limited liability company protects its directors and caps the personal liability of company directors to the amount they have agreed to pay for their initial shareholding. However if a director hold shares which are not fully paid then they are liable to pay the outstanding amount either from the company’s account or from their personal account in order to avoid getting a PLN.

Once a PLN notice is issued to you, you can challenge the same if you feel that you have been charged wrongly. However, challenging a PLN is a complex procedure because it is normally last resort which an investigating officer will opt for and if he does, then he will normally have strong supporting evidence and proof in support of PLN and before issuing the same, he will look into the following aspects:

  • Company’s books and records.
  • Investigation with the company officials regarding why there has been a failure to pay.
  • Understand and determine the facts and circumstances surrounding the failure to pay.
  • Consider and weigh the circumstances and see if the failure to pay is because of negligence or a valid reason.
  • Look into the representations made by the company officials, if any.

Once PLN is issued, the decision can only be appealed before the Tax Tribunal so it is advisable to make your representations and negotiations with the liquidating or investigating officer.

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