Contractors whose limited companies have unpaid National Insurance Contributions (NICs) liabilities can become personally liable for the company’s debts if HMRC believes they have arisen through fraud or neglect on the part of the contractor.
If HMRC can prove such fraud or neglect, it will issue a Personal Liability Notice (PLN) to a company officer, likely to be the contractor/director of a one-person contractor limited company, even if that company has been struck off or liquidated.
Introduced in 1999, PLNs are designed to ensure that companies don’t evade their social obligation to pay National Insurance. The legislation allowing HMRC to issue and enforce PLNs only applies to National Insurance Contributions and late payment interest and penalties arising from them. PLN’s do not apply to income tax.
Who can be issued with a PLN?
HMRC can issue a PLN to “officers of the body corporate”, which in practical terms potentially means the directors and company secretary of a contractor limited company, but not the shareholders, such as a contractor’s spouse, unless that person has been actively involved in the management of the company.
Because the burden of proof of neglect and/or fraud lies with HMRC, company officers served with PLNs will often have a track history of evading NIC liabilities, which HMRC will use to make a case for issuing a PLN. Such directors may have started and then closed down several companies in succession to deliberately evade taxes and NICs, a phenomenon known to HMRC as “phoenixism”.
And although HMRC has historically applied PLNs in only the most extreme of cases where the sums owed are considerable, they can still apply to contractors.
Contractors may be vulnerable to PLNs because of IR35
Contractors found to be inside IR35 and facing a claim against their company for unpaid income tax, NICs, interest and penalties could have the balance of the NICs claim transferred to them personally if HMRC considers the contractor to have been negligent in determining their IR35 status.
Worryingly for contractors, the definition of neglect used by HMRC to determine whether a PLN should be issued is based on case law. And the case law definition of neglect is sufficiently broad and vague that even simple mistakes, or mistakes that arose through a lack of knowledge, could qualify as ‘neglect’.
In the case of IR35, a contractor might seek an IR35 contract review from an expert who suggests that the contract would fall foul of IR35. If the contractor chooses to disregard the advice, and is found years later to have been inside of IR35 for that contract, HMRC may have a case for proving the contractor neglectful, subject to a PLN and therefore personally liable for outstanding NICs owed by the contractor’s limited company.
A contractor completing their own IR35 due diligence could conceivably be found to have acted neglectfully with respect to their tax affairs, and be served with a PLN
Similarly, a contractor completing their own IR35 due diligence could conceivably be found to have acted neglectfully with respect to their tax affairs, and be served with a PLN if the contractor limited company has no assets to pay the NICs.
Removing Personal Liability Notices
Clearly, the most effective way of removing a PLN is to pay down the debt. Monies can be paid either by the individual company officer(s) served with the PLN, or by the company if it is still trading. Personal and company payments are cumulative, so if the company has funds to pay a small part of the unpaid NICs, any personal liability is correspondingly increased.
A contractor being issued with a PLN would also be able to appeal to the Tax Tribunal. The legislation requires the burden of proof in any appeal to fall to HMRC, so it would be HMRC’s job to prove the contractor acted neglectfully.
And because the legislation covering PLNs was not originally created to target the directors of companies in financial difficulty, contractors genuinely unable to pay their bills, and who have not been involved in “phoenixism”, are unlikely to face a PLN.