Are you a director of a company? If so, do you assume you are protected by the limited company status? Are you sure this is the case even when dealing with the VATman?
Under limited liability a director or investor is only liable for the money they have invested. For example, if a company is formed with £1,000 of shares capital and the company subsequently goes bankrupt, the liability of the director or investor is limited to the £1,000 invested, even if the company owes £50,000.
Are there any exceptions you may ask? Unfortunately, for a company director there are 4 main exceptions which mainly benefit the VATman as follows:
1) when a director is suspected of fraud
If one or more directors are responsible for a tax fraud within the company they will be held personally liable for some of the company debts. For example, the finance director writes out cheques for unreal purchases and so that their actions cannot be traced they fabricate purchase invoices and puts them through the business claiming back the misrepresented VAT. The VATman finds out and the company is assessed for overclaimed VAT and a penalty for fraudulent evasion is imposed. As the dishonest conduct was due to the Finance Director, the penalty may be transferred in whole or in part from the company to them. This can also be applied to managers of a company and not just the director(s)
2) where a director is an undischarged bankrupt
It is an offence for an un-discharged bankrupt to act as a director, or to directly/ indirectly take part in the formation or management of a company (unless agreed by the court) If they do they are automatically personally liable for any debts for the new company. The VATman will not have finished there, a person who is involved in the management of the company and who acts, or is willing to act, on the instructions of an undischarged bankrupt is also personally responsible for the debts of the company.
3) a director sets up a new business following the failure of a previous one
If a business goes bankrupt owing the VATman a large amount of VAT and one or more of the directors sets up a new business, the VATman can demand a “security” on the new business, designed to cover any possible debt that the new company may run up. Although the security is placed on the new business, if it trades as a sole proprietor, the individual is responsible for paying it on the debts run up by the old company
4) when directors pay themselves unauthorised dividends
A director can only take dividends from a business if they are represented by profit after debts are taken into account. If directors take dividends when the company has debts they are actually taking a loan from the company. If the company owes money to the VATman, he will treat the 2dividend2 payments as a debt to the company and pursue the debtor (the director) for repayment of the loan to clear the debt.
We are happy to advise on any of the above if you think that you may be affected.