What happens to businesses and directors when they cannot make the delayed VAT payments to HMRC?  Whilst the usual position is that the directors of a company are not held liable for the debts of the company, there are occasions where directors can be held personally liable for the company debts – especially in the case of fraud.

One of the options provided to businesses by the government to assist with the disruption to cash flow caused by Covid-19, includes the option to delay VAT payments. Businesses may also be permitted to request time to pay arrangements (TTP) in relation to other taxes due, such as corporation tax and PAYE sums, which can be arranged directly with HMRC. Whilst these options are being offered to businesses, the sums deferred are still required to be paid back at some point in the future.

These are unusual times and the government have taken various steps to attempt to assist both businesses and individuals through this period of uncertainty. However, when payments of sums are delayed there are various considerations that businesses still need to take into account to ensure that they act correctly moving forward.

Directors of a limited company are required to act in good faith for the success of the company and its shareholders. If there are any concerns that the business is not able to pay the debts as they fall due however, then the responsibilities of the directors start to shift from the company and the shareholders, over to those of the company’s creditors.

The ability to delay VAT payments until a later date, has been a vital lifeline to many businesses due to sudden changes to cashflow as a result of Covid 19 and the subsequent lockdown. However, directors should be aware that HMRC will scrutinising businesses that go under in the foreseeable future with sums outstanding to the Revenue. The Government are going to want to show that the funds provided or used by the businesses provided value to the tax payer, especially if these payments have been voluntarily delayed by the company or may have come from the Covid Business Interruption Loan Scheme. The Government has already confirmed they intend to investigate furlough fraud and other misuses of government provided covid support programs and will consider criminal prosecutions for Directors, if fraud or wider abuse is suspected.

The responsible question that every Director should always be asking themselves whenever a company is going through difficult times, let alone now is:

“Can we pay our debts at least within a reasonable time after they fall due?”

This answer is crucial as it defines whether the company is a going concern (still fit to trade) or if it is in significant financial difficulties and cannot pay its debts.  The requirement is that a business is able to pay their debts as they fall due, or within the foreseeable future. If you can show that by delaying certain payments, this allowed the business to restructure matters for future trading in order to succeed, this is an argument that will certainly go in your favour. It is also accepted that not all plans succeed, for example a particular project aimed at revenue generation did not progress as anticipated, or clients pulled out at the last minute. It is important to make a note of the reason for your decisions however, as this will very much assist should you find yourself and/or the business subject to an investigation some months or even years down the line.

So what are the risks?

There are many wide ranging powers which HMRC have available to them, as well as other public bodies who may also intervene and/or investigate if deemed necessary:

  1. HMRC have powers to investigate both companies and directors, as well as the power to issue assessments and wrongdoing penalties – which in certain circumstances can pass over to directors personally.
  2. Where a company has already been closed down, HMRC could take steps to reinstate a company to allow them to take direct steps against the company and/or any previous directors.The business and those running it could face fraud investigations, which could result in fines and or criminal prison sentences.
  3. Whilst the usual position is that the directors of a company are not held liable for the debts of the company, there are occasions where directors can be held personally liable for the company debts – especially in the case of fraud.
  4. Steps could be taken to disqualify you as a director for a period between 2 – 15 years. This could have incredibly serious repercussions for you and any future plans you may have.

The future is unknown, and with many businesses trying to do what they can to keep going in these incredibly difficult circumstances it is accepted that there are some tough decisions to be made. It is however important to be aware of any responsibilities you have, and make sure that you can show why you took the decisions that you did at a later stage if required.

As a director, you cannot always hide behind the ‘limited’ status of your company. You can be held personally responsible for the company’s unpaid taxes, including VAT. If this is a cause for concern, please contact us at Altion Law for a confidential discussion.

It might be that your company cannot pay its debts. If so, we can explain the options available to you, ensuring that your personal position is protected. Alternatively, the Insolvency Service may be pursuing legal action against you. In these cases, we can represent you throughout proceedings, working to show that you met your duties as a director.

To speak to a Tax solicitor or to have an initial confidential discussion with a member of our team, please make an Online Enquiry, and we will call you back at a time that is suitable for you. Alternatively, you can contact us directly on 01908 414990.