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In trouble with the tax authorities?
The recent sacking of government minister Nadhim Zahawi brought into sharp focus the damage that can be caused following a tax investigation and negative findings by HMRC. Not only can this lead to serious financial implications for a business, but reputational damage can be severe and costly. For example, in 2016 all four members of the pop band Take That were ordered to pay a total of £20 million back in taxes to HM Revenue and Customs after taking part in a 2014 tax shelter scheme.
When facing any sort of problem with HMRC, be it late returns or payments, investigations into perceived tax evasion or fraud, or when facing penalties and enforcement, it is vital that you deal with these issues head on and seek legal advice straight away. Not only can this be costly for the business, but it could also mean the end of the business and potential personal liability for the directors and even criminal penalties. Once HMRC has you in their spotlight, it can also cause problems for any company you wish to be a director of in the future.
It is not just deliberate tax evasion or avoidance that can lead to problems. When running a busy company, filing tax returns, and making payments to HMRC can sometimes be de-prioritised when other issues and creditors are more pressing.
HMRC are traditionally quite forbearing as a creditor, but when a company is in breach of tax legislation, there are numerous options open to HMRC in penalties and enforcement options.
Here we provide a brief overview of the problems that can arise, and how your solicitor can help if your company finds itself subject to an HMRC investigation or enforcement action.
Non-payment of taxes
Failure to file returns for PAYE, NIC, corporation tax, or VAT (if applicable) can start by incurring fairly minor financial penalties, but failure to pay will increase those penalties, and late-payment interest will be added which can exacerbate cashflow problems.
Certain actions by HMRC can affect you personally as a director:
- PAYE and VAT security notices - if you were previously involved as a director of an insolvent company which owed money to HMRC (which tends to be the majority of insolvent companies) HMRC can ask for a deposit from your new company as security for future VAT or PAYE to mitigate the risk of arrears arising again.
- Personal Liability Notices for NIC - this little-known enforcement may be served on a director personally when their company owes unpaid NIC and HMRC believe the non-payment is deliberate.
Tax evasion versus tax avoidance
The difference between these two terms is often misunderstood, but there is a vital difference between them. Tax avoidance refers to an action which is not illegal, but used in order to reduce the full tax liability that would otherwise be due. For example, setting up an offshore company in a tax haven. Tax evasion is the illegal deliberate policy of not paying tax that is lawfully due. For example, under reporting income or claiming expenses that are not legitimate business expenses.
If your company files either an erroneous tax return, or a deliberately misleading tax return and fails to account for tax properly due, the options open to HMRC are very wide and can be very serious. Schemes that are considered to be tax evasion are subject to particularly severe sanctions.
The Government is increasingly on the ball when it comes to spotting tax avoidance loopholes which they believe are disguised remuneration schemes. Loopholes are usually closed with new legislation as soon as they are spotted, so something which was previously considered a legitimate way of reducing a tax bill can quickly become a criminal liability, moving from avoidance to evasion.
For example, HMRC have been examining R&D Tax Credit claims recently and taking action for fraudulent claims.
If you receive notice from HMRC of suspected involvement in a disguised remuneration scheme, then you could be faced with an accelerated payment notice as well as penalties and potential criminal prosecution.
How a solicitor can help
When dealing with HMRC, opening an avenue of communication is key and your solicitor will be able to negotiate a better outcome on your behalf, depending on the circumstances. For example:
- Time to pay agreements - it is possible to reach a ‘time to pay’ agreement with HMRC to avoid ongoing increases in penalties and interest and get a difficult situation back under control.
- Security notices - if you receive any security notices, your solicitor can negotiate with HMRC on your behalf to avoid or reduce the sum required from you as a security deposit, where possible.
- Supporting an investigation - if you receive notice of an investigation by HMRC speak to your solicitor as soon as possible so that they can help you negotiate with HMRC and, if necessary, through the voluntary disclosure scheme help you to resolve the investigation, or head it off altogether.
- Correcting a tax return - if you fear investigation and want to correct your returns to avoid problems arising then your solicitor can help to arrange this.
- Appealing an incorrect tax assessment, fine or penalty - it is quite possible that on occasion HMRC will make a mistake and incorrectly assess your tax, or impose fines or penalties that are not justified. We can appeal mistakes on your behalf where these have occurred.
It is a sobering fact that the majority of company insolvencies will have HMRC as a major creditor because, although they have wide powers of enforcement at their disposal, they are usually more forbearing than other creditors.
However, if HMRC remains unpaid, they will not shy away from pushing your company into a formal insolvency process for non-payment of arrears if that is their best option for recovery. If you receive notice of enforcement action by HMRC it is vital that you do not ignore it and seek legal advice as soon as possible.
Your solicitor can act on your behalf in negotiations with HMRC, and the earlier this happens, the higher the chance of reaching an agreement on your behalf and avoiding a company insolvency.
Sometimes insolvency might seem a preferable option if your company faces overwhelming debts, but as a director involved in a liquidation or administration of a company owing money to HMRC you could face disqualification proceedings personally if the court finds a pattern of non-payment of tax or failure to file tax returns. You can also face personal liability claims for NIC and security deposits in the next venture, all of which can seriously hamper a director trying to build another company in the future.
In the event of legal action
Contact us as soon as you are aware of a potential problem. The sooner we are aware of the issues, the sooner we can help.
For further information and assistance, please contact a specialist legal advisor in our dispute resolution team at York on 01904 624185.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.