HMRC unsuccessful in piercing Shere Khan’s corporate veil

A Personal Liability Notice (PLN) may be issued by HMRC in the event of a failure by a company or LLP to pay tax debts or penalties to HMRC. The Notice transfers corporate debts to officers of the company. This is a particularly helpful power for HMRC, as normally company directors are protected by the corporate veil, meaning that any company debts cannot be assessed on an individual connected to the company. 

There are only specific circumstances where HMRC can issue a PLN. In the majority of instances, this is when the company is liable to a penalty for deliberate wrongdoing, this wrongdoing is by an officer (or officers) of the company, and the officer gained or attempted to gain personally because of the wrongdoing. It is also typical for a PLN to be issued when a company is insolvent (or is likely to become insolvent) with tax and/or penalty debts that were brought about due to the fraud or serious neglect of an officer of the company. 

The burden of proof rests upon HMRC to establish that the wrongdoing was brought about intentionally or knowingly by the particular officer of the company. 

It is possible to appeal a PLN which is issued to an officer of the company, but the appeal must be in relation to the quantum of the PLN or the fact that the PLN should not be issued to the officer. An appeal cannot be made against the underlying company assessment or penalty, as that should be made by the company. 

However, where a case is ultimately appealed to the tribunal, the tribunal has jurisdiction to consider the points underlying the issue of the penalty and the assessment even where the company has not appealed the amounts.

In the case of B J Shere Khan Star City Limited and Mr Babar Saddiq v HMRC PLNs were issued to Mr Saddiq as an officer of the corporate entity for VAT penalties of £735,274.22 and Corporation Tax penalties of £741,730.50. The notices made Mr Saddiq liable for 100% of the penalties.

From a corporation tax penalty perspective, the tribunal ruled that HMRC had not evidenced that the corporate’s profits had been supressed, so there could be no penalty applied, let alone a PLN issued to Mr Saddiq.

From a VAT perspective, the tribunal found that penalties could apply to errors in respect of zero-rated sales and input tax, but it was then necessary to consider whether deliberate behaviour was in play. 

HMRC then had the burden of proof to evidence that these errors were brought about due to deliberate behaviour. The tribunal slated the record keeping of the company, citing it as chaotic, but considered that the errors were attributable to carelessness rather than deliberate behaviour. On this basis the PLNs could not continue to be assessed upon Mr Saddiq.

The tribunal case was lengthy and considered various technical areas but ultimately found in the favour of the taxpayer. Whilst the taxpayer had clearly made errors and could have done better in terms of record keeping, it was clear that HMRC had not met the required burden of proof to move the penalty liability from the corporate to the individual.

With more companies struggling to meet rising costs and potentially more becoming insolvent, it is likely that HMRC will issue more PLNs with the aim of collecting corporate liabilities from individuals. Receiving a PLN can be quite daunting and a shock for the individual, but this case is a reminder about the steep hurdles HMRC must meet in order to validly issue these notices, as well as the level of evidence required for HMRC to prove that a taxpayer has taken deliberate action. Taxpayers who receive such a notice should seek advice to ensure they are aware of their options.