Business Difficulties? It's Unwise to Pay Your Other Creditors Before HMRC

When companies experience cashflow difficulties, stressed directors all too often prioritise trade and other creditors over HM Revenue and Customs (HMRC). As a tax tribunal ruling showed, however, such a course is almost never wise and is highly likely to give rise to substantial personal financial liabilities.

The case concerned the sole director of a company with about 10 employees. The company had in the past reliably met its responsibilities to pass on to HMRC Income Tax and National Insurance Contributions (NICs) deducted from its employees' pay under the PAYE system.

As soon as the director was appointed, however, the company began to default on its obligations. Over a 16-month period, it failed to account to HMRC for £63,337 in NICs. HMRC's response was to use its power under Section 121C of the Social Security Administration Act 1992 to issue a personal liability notice (PLN) for that amount against the director.

Challenging the PLN, the director pointed to his serious health problems and stress arising from, amongst other things, divorce and the death of his father. Despite the importance of his role, he said that he lacked commercial acumen and the training and experience required to run a company. He put the default down to the usual unpredictability of commercial life.

Rejecting his appeal, however, the First-tier Tribunal found that the company's default arose from his neglect. As the company's sole officer, it was his statutory duty to pay over NICs that were due to HMRC each month. He was aware of that obligation and, despite cashflow issues, he could have paid at least some of the NICs. He had instead chosen to pay others.

He knew that his role as a director carried great responsibilities and his health and personal problems pre-dated his appointment. A reasonable and prudent person either would not have taken on a burden he could not manage or swiftly sought help once he realised he could not cope alone. Although he claimed to lack funds to satisfy the PLN, that was no basis for allowing his appeal.