How HMRC Recovers Corporate Tax Debt through Personal Liability Notices
In this article we discuss how HMRC can ‘pierce the corporate veil’ in certain circumstances using Personal Liability Notices which allow Directors and other senior officers of a company to be pursued in their personal capacity.
Directors and other senior officers of private limited companies have, for well over a century, enjoyed a considerable level of protection from personal liability for debts incurred by companies they administer. Since the Limited Liability Partnerships Act 2000, this protection has been extended to members of Limited Liability Partnerships (LLPs).
Such protection from liability does not extend to personal guarantees or charges over any assets, which may have been given to secure company borrowing or similar activity.
This protection, generally known as ‘the corporate veil,’ arises from a landmark decision of the House of Lords in Salomon v A Salomon [1896], where the court confirmed that even if a company is owned and controlled by a single individual, it still exists as a separate legal entity.
However, the courts have become increasingly aware that there must be limits to the extent of this protection to ensure that directors do not take advantage of it by, for example, deliberately causing a company to incur debts that cannot be recovered, or engaging in illegal activity for which the company is left to take the blame.
Nonetheless, whilst the legal principle of the corporate veil remains strong, in the case of Prest v Petrodel Resources Ltd [2013] UKSC 34, the Supreme Court held that ‘veil piercing’ may take place where:
- a person has an existing legal obligation or liability,
- that person deliberately evades the obligation,
- a company controlled by them is used to frustrate enforcement of that obligation.
HMRC enjoys authority to pierce the corporate veil in specific tax-related circumstances by the issue of a Personal Liability Notice (PLN) which allows it to pursue individuals personally.
John Veale of KANGS explains the nature of a Personal Liability Notice.
Potential Consequences
The consequences of receiving a PLN can be significant, as it is a formal Notice which transfers responsibility for payment of specific tax debts from the company to an individual, who is likely to be a director but could be a manager, company secretary or anyone involved in administering company finances.
The issue of a PLN is not a routine debt collection notice which can be ignored. It is a method of enforcement issued where HMRC suspects misconduct or where there has been a history of avoidance of obligations.
Failure to properly address the receipt of a PLN could ultimately result in:
- Personal bankruptcy,
- Legal action,
- Director or member disqualification,
- Reputational damage.
In addition to the underlying tax liability, HMRC may seek to recover interest as well as imposing a substantial financial penalty which could amount to 100% of the tax due.
Appealing a Personal Liability Notice
A PLN can initially be challenged through HMRC's internal review process. If the matter remains unresolved, an appeal may be made to the First-tier Tribunal (Tax Chamber).
In tribunal proceedings, HMRC bears the burden of proving that the statutory conditions required under the relevant legislation have been satisfied. The requirements differ depending on whether the PLN relates to PAYE or VAT liabilities, with the statutory test for VAT generally being more demanding.
Alongside the formal appeal process, HMRC also offers an Alternative Dispute Resolution (ADR) procedure, which can provide a more informal means of resolving disputes without the need for a full tribunal hearing.
How Can We Help You?
If you receive a Personal Liability Notice, it is essential that you seek immediate legal advice and guidance. As mentioned above, HMRC must demonstrate that a company’s failure to pay arises from fraud or neglect.
The experienced HMRC litigation team at KANGS, are able to consider and advise upon the nature of the evidence relied upon and the most appropriate way to proceed in order to protect your best interest.
KANGS brings decades of experience in assisting individual and corporate clients involved in disputes with HMRC of every conceivable nature, including advising in voluntary interviews, initial enquiries and investigations, and defending complex civil and criminal tax proceedings.
If you need assistance dealing with a PLN or any other type of tax dispute, please do not hesitate to get in touch. We would be delighted to hear from you, contact our team using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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