The Corporate Veil in Tax Dispute Resolution

The concept of the corporate veil traditionally protects company directors and shareholders from being personally liable for the company’s debts and obligations.

However, in recent times, tax authorities have increasingly sought to pierce this veil as well, particularly in cases involving deliberate misstatements of VAT returns and unpaid taxes. This article delves into the circumstances under which the corporate veil can be lifted, focusing on the implications for directors and the importance of timely professional advice.

Understanding Personal Liability Penalties

When a company fails to pay its VAT due to insolvency, HMRC often seeks to recover penalties originally levied against the company from the directors personally. These penalties can amount to as much as 100% of the tax owed, posing a significant financial burden on the individuals involved.

A recent case involving a logistics company exemplifies this scenario. The company faced difficulties during COVID-19 and failed to cooperate with an HMRC inquiry, leading to a substantial VAT assessment and penalties imposed on the directors following the company declaring insolvency. This situation highlights the critical importance of cooperation and timely response to HMRC inquiries to mitigate potential penalties.

The Role of Pay-As-You-Earn (PAYE)

Another common instance where the corporate veil is pierced: the misuse of PAYE. In cases where, for example, directors attempt to evade tax liabilities by engaging in phoenixism—closing one company to start another with the same business operations—HMRC can impose personal liability on the directors for the unpaid taxes and penalties of the previous company. The same is true in other instances, such as umbrella companies which have been used as employment entities but have no assets with which to meet PAYE debts.

Other Instances of Veil Lifting

Beyond VAT and PAYE, there are several other scenarios where the corporate veil may be lifted. Insolvency is again a common instance. For example, the continued payment of dividends when a company cannot meet its corporation tax debts may well attract the attention of HM Revenue & Customs who may seek for enforce all or part of the debts against the directors personally. While these cases are less frequent, they underscore the breadth of HMRC’s reach in holding directors accountable for corporate tax obligations.

Real-World Examples and Tribunal Decisions

Recent tribunal decisions provide concrete examples of how HMRC enforces personal liability:

• Paul Judd v HMRC: A 96% penalty against the company resulted in a PLN making Mr. Judd personally liable for over £5.5 million. Despite attempts to overturn the liability, the Tribunal upheld HMRC’s decision.

• Johngir & Anor v HMRC: In this case, discrepancies in till data led to a VAT assessment and subsequent penalties for two directors after the company was liquidated.

• Caton v HMRC: Mr. Caton faced a PLN for over £730,000 due to delayed appeals and non-cooperation with HMRC, highlighting the importance of timely legal action.

• Powar v HMRC: This case involved MTIC fraud, with a director personally liable for penalties due to fraudulent transactions within the supply chain.

These cases collectively illustrate HMRC’s stringent approach and the severe financial impact on directors, further underscoring the necessity for early professional intervention.

The Imperative of Early Action

The consistent theme across these cases is the critical need for directors to seek professional advice at the earliest indication of a tax dispute. Early cooperation with HMRC can significantly reduce the penalties imposed and, in some cases, prevent them altogether. Proactive engagement and timely response to inquiries are essential in mitigating the risk of personal liability.