What is a Personal Liability Notice and why would HMRC issue one?
Article by Begbies Traynor Group.
A Personal Liability Notice (PLN) is a notice issued by HMRC to a company director which transfers liability for any outstanding National Insurance Contributions (NIC) from the limited company to the individual. The notice was first introduced in 2009 to deter company directors from abandoning their debts and transferring assets to a new company before striking off their ailing business, writes Keith Tully of Real Business Rescue.
If HMRC believes that there is a likelihood that the company director will move on to form a new business (phoenix company) to escape the debts overwhelming the existing company, they may issue a Personal Liability Notice to ensure debt repayment. Failure to do so could result in increasing the likelihood of bad debt for HMRC as if the company is out of cash and cannot raise funds to repay debts as it does not own any assets, the debt could be written off.
What is a Phoenix Company?
Personal Liability Notices are typically used as a tool by HMRC to tackle Phoenixism. This refers to when the company assets of a financially distressed business are sold to existing company directors who then move on to form a new company. As a result, company debts are left behind to the detriment of creditors, including HMRC. Issuing a PLN attaches debt liability to the individual, which means that the status of the debt will remain unaffected by the likes of company liquidation.
Why would HMRC issue a Personal Liability Notice?
Personal Liability Notices are often issued when HMRC suspects a director of avoiding tax. Preference payments before entering company liquidation or becoming insolvent may also indicate this. A preference payment is when a payment or transfer of property is made to a preferred creditor before the closure of a company. This could result in serious repercussions if the payment breaches the repayment order prescribed by the Insolvency Act 1986.
It was announced at Budget 2018 that special protections will be reinstated to give preference to HMRC to collect debts in the event of insolvency. HMRC is now classed as a preferential creditor when making debt repayments during an insolvency procedure, enacted in Finance Bill 2020 for insolvency procedures after 1 December 2020.
If the company director has a history of falling foul of fulfilling tax obligations by opening phoenix companies, HMRC is likely to issue a PLN. Any behaviour which demonstrates that the company director is intentionally avoiding tax obligations is likely to be met by a PLN. HMRC can also hold you liable for any interest or penalties incurred on any unpaid National Insurance Contributions.
Can I challenge a Personal Liability Notice?
If you believe that a Personal Liability Notice has been issued unreasonably, this can be challenged, and you will be allowed to share your reasoning. Anyone suspected to have been involved with a serious tax offence will be interviewed before the notice is issued. Failure to repay debts under a Personal Liability Notice could result in director disqualification and even personal bankruptcy if the sum is of substantial value.
The best form of action after receiving a PCN is to seek advice from a licensed insolvency practitioner to explore a debt solution to settle HMRC tax debts.
If you would like to discuss a Personal Liability Notice or any other Insolvency or Tax issue, please get in touch.