Dishonest Tax Evasion - Directors Cannot Hide Behind the Corporate Veil

Directors who are complicit in dishonest tax evasion cannot use the corporate veil to escape the consequences of their wrongdoing. The point was powerfully made by a case in which the boss of an engineering company was ruled personally liable to pay a six-figure VAT evasion penalty.

The company's poor VAT compliance record began on the day it started trading. Following a lengthy investigation, HM Revenue and Customs (HMRC) concluded that it had failed to pay £316,354 in VAT over a period of about four years. An evasion penalty of 90 per cent of that sum – £284,718 – was raised against the company.

On the basis that the company's default was attributable, in whole or in part, to the dishonest conduct of its sole director and shareholder, HMRC exercised their powers under Section 61 of the Value Added Tax Act 1994 to issue him with a demand that he pay the whole of the penalty personally.

In dismissing his challenge to that decision, the First-tier Tribunal found that the director's conduct was beyond negligent and revealed a pattern of dishonesty. Although well aware that the company had been significantly under-assessed for VAT, he did nothing to alert HMRC to that fact. It was reasonable to hold him liable in person for 90 per cent of the company's default, the amount of which had not been overstated.