One of the main advantages of running a limited company is limited liability. In most cases, this means the company is responsible for its own debts, including corporation tax.
Because a company is a separate legal entity, directors are normally not personally liable for unpaid corporation tax.
However, there are situations where HMRC or a liquidator may pursue directors personally. Understanding when this might happen can help directors avoid unnecessary risks.
When Might HMRC Pursue Directors Personally?
Although limited liability usually protects directors, that protection may weaken if HMRC believes the company’s tax debt arose due to deliberate behaviour, negligence, or misconduct.
For example, HMRC may look more closely if:
- Directors pay themselves instead of paying corporation tax
- The company pays connected parties (such as family or friends) ahead of HMRC
- Tax debts build up over time without action being taken
The risk of personal liability can increase if the company enters liquidation, particularly because HMRC is now a preferential creditor in insolvency situations.
Fraudulent Trading and Wrongful Trading
Under insolvency law, directors may be held personally liable if they engage in fraudulent trading or wrongful trading.
Fraudulent Trading
This occurs where a business continues trading with the intent to defraud creditors or for another fraudulent purpose.
If proven, the court can require directors to personally contribute to the company’s assets.
Wrongful Trading
Wrongful trading has a lower threshold.
It can apply where directors continued to trade when they knew, or should reasonably have known, that the company could not avoid insolvent liquidation.
If the company’s corporation tax debt increased during this period, a liquidator may ask the court to order directors to personally contribute to those losses.
What About Unlawful Dividends?
Another risk arises when companies pay dividends that shouldn’t have been paid.
Under the Companies Act 2006, dividends can only be paid from distributable profits. This means:
- Accumulated realised profits
- Less accumulated realised losses
A company may still pay a dividend in a loss-making year if there are sufficient retained profits from earlier years.
However, if there are insufficient reserves, the dividend may be considered unlawful.
If directors authorised the payment and knew (or should have known) that it was unlawful, they may be required to repay the dividend.
In owner-managed businesses, where directors and shareholders are often the same people, this can create significant exposure.
Capital Distributions After Selling Assets
Directors can also face risks when companies make capital distributions after selling assets.
For example, if a company sells assets and makes a chargeable gain, corporation tax may arise.
If the company then distributes funds to shareholders but fails to pay the corporation tax within six months of the due date, HMRC has powers to pursue the shareholder who received the distribution.
HMRC can issue an assessment within two years of the corporation tax due date.
Practical Steps for Directors
While most directors will never face personal claims for corporation tax, it’s still important to manage company finances carefully.
Directors should:
- Ensure corporation tax is prioritised and paid on time
- Only pay dividends from distributable reserves
- Check that the company is solvent before paying dividends or making distributions
- Avoid paying connected parties ahead of tax liabilities
Taking these steps can help protect both the company and the directors personally.
Final Thoughts
Limited liability provides valuable protection for company directors, but it isn’t unlimited.
In certain situations — particularly where tax debts build up or improper payments are made — directors may face personal exposure.
Regular financial reviews and proper advice can help ensure your company stays compliant and financially stable.
Need Advice on Director Responsibilities or Corporation Tax?
If you run a limited company and want to make sure you’re managing corporation tax and dividends correctly, we’d be happy to help.
At Jon Davies Accountants, we work with business owners across the UK to help them stay compliant and make informed financial decisions.
Get in touch with Jon or the team today if you’d like guidance on your company’s tax position or director responsibilities.
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