Key Takeaway (Our summary): HMRC is both a preferential creditor for certain taxes and the most common creditor in UK insolvency proceedings. Directors who allow tax arrears to accumulate without engaging with HMRC face heightened disqualification risk, potential personal liability through Personal Liability Notices, and exposure to the joint liability notice regime introduced in 2020.

How HMRC Tax Arrears Create Director Liability

When a company enters a formal insolvency procedure, the conduct of its directors is investigated by the appointed insolvency practitioner, who submits a confidential report (known as a D report) to the Insolvency Service. One of the most common findings in these reports is the persistent non-payment of Crown debts, including VAT, PAYE, and National Insurance contributions.

The Insolvency Service treats the failure to ensure timely payment of tax as a significant indicator of unfit conduct under section 6 of the Company Directors Disqualification Act 1986 (CDDA 1986). In 2024 to 2025, the Service disqualified more than 1,000 directors, with non-payment of tax consistently cited as one of the most common grounds (Insolvency Service enforcement outcomes, 2024–25; also reported by PAYadvice.UK).

 

Director liability for HMRC tax arrears can arise through several distinct routes:

  • Disqualification proceedings under section 6 of the CDDA 1986, where non-payment of tax owed to HMRC is treated as evidence of unfitness. The disqualification period ranges from 2 to 15 years.
  • Wrongful trading claims under section 214 of the Insolvency Act 1986, where continued trading with knowledge that insolvent liquidation was unavoidable has increased the company’s tax debt.
  • Personal Liability Notices (PLNs) under the Social Security Administration Act 1992 (for NICs) and the Value Added Tax Act 1994 (for VAT penalties), where HMRC holds individual officers personally responsible for tax debts arising from fraud, neglect, or dishonesty.
  • Joint liability notices (JLNs) under the Finance Act 2020, which can make directors and other connected individuals personally liable for company tax debts, tax-avoidance-linked liabilities, or facilitation penalties in defined circumstances.
  • Misfeasance proceedings under section 212 of the Insolvency Act 1986, where the director’s failure to pay tax constitutes a breach of duty.

HMRC as a Preferential Creditor

Since the Finance Act 2020 restored Crown preference for certain taxes, HMRC stands ahead of unsecured creditors and floating charge holders in insolvency distributions for VAT, PAYE, employee National Insurance, and Construction Industry Scheme deductions. This restoration has materially increased HMRC’s financial interest in director conduct and its willingness to pursue enforcement action.

The practical effect is that directors who prioritise other creditors over HMRC in the period before insolvency face particular scrutiny. Payments made to trade creditors, connected parties, or directors’ own loan accounts while tax liabilities remain outstanding may be challenged as preferences under section 239 of the Insolvency Act 1986.

The Disqualification Risk in Detail

Disqualification proceedings under section 6 of the CDDA 1986 must generally be commenced within three years of the company becoming insolvent (section 7(2)). The average disqualification length in 2024 to 2025 was approximately eight years, reflecting the seriousness with which unpaid tax is treated (Insolvency Service, 2024–25 enforcement outcomes).

The Insolvency Service examines not just whether HMRC was owed money at liquidation, but the circumstances in which the debt arose and the director’s conduct in relation to it. Key factors that commonly influence the assessment include:

  • Whether the director engaged with HMRC through a structured repayment arrangement or other phased plan.
  • Whether the director prioritised other creditors over HMRC without proper commercial justification.
  • Whether the director maintained adequate records of tax liabilities and payment decisions.
  • Whether the arrears formed part of a pattern of repeated company failure with unpaid tax.
  • Whether the director sought professional advice about the company’s tax position.

Scenario: The Director Who Used HMRC as Working Capital

A director of a hospitality business experiences falling revenue through 2025. Rather than engaging with HMRC, the director prioritises payments to key suppliers and staff, allowing three consecutive VAT returns to go unpaid. When the company enters liquidation in early 2026, it owes HMRC more than £120,000.

The Insolvency Service investigation focuses on why the director chose to pay other creditors ahead of HMRC. Without evidence of a structured plan, early HMRC engagement, or professional advice, the director faces disqualification proceedings. The average ban for this type of conduct is typically in the middle bracket of 6 to 10 years.

Scenario: The Director Who Engaged Early

By contrast, a director of a logistics company falls behind on VAT payments during a period of rapid cost inflation. The director contacts HMRC within two months, applies for a Time to Pay arrangement, and documents the cash flow position in board minutes. The arrangement is initially maintained but eventually breaks down, and the company enters liquidation.

The Insolvency Service investigates but acknowledges the director’s proactive engagement with HMRC and the documented efforts to manage the debt. The outcome is no disqualification proceedings. The early engagement and documentation were decisive.

Personal Liability Notices: Piercing Limited Liability

Beyond disqualification, HMRC can issue Personal Liability Notices (PLNs) under the Social Security Administration Act 1992 (for NICs) and the Value Added Tax Act 1994 (for VAT penalties) where an officer’s fraud, neglect, or dishonesty has caused the company’s failure to pay tax.

A PLN makes the individual personally liable for the debt, piercing the limited liability protection that directors normally enjoy. For NICs, liability is apportioned among culpable officers based on their level of blame. For VAT penalties, the focus is on the individual’s dishonest conduct.

PLNs are separate from disqualification and from joint liability notices. A director can face all three simultaneously. Directors should verify the current position on PLNs with a qualified solicitor, as enforcement practice in this area continues to develop.

Joint Liability Notices: The Three Conditions

Joint liability notices (JLNs) were introduced in 2020 under Schedule 13 of the Finance Act 2020, giving HMRC a further route to make individuals: directors, shadow directors, or certain participators, personally liable for a company’s tax position. A JLN can only be issued where HMRC establishes one of three defined sets of conditions (Finance Act 2020, Schedule 13, legislation.gov.uk):

 

  1. Tax-avoidance or tax-evasion arrangements. The company has entered into tax-avoidance arrangements or engaged in tax-evasive conduct; the company is insolvent or there is a serious possibility it will become insolvent; and the individual was responsible for, benefited from, or otherwise participated in the arrangements or conduct while a director, shadow director, or participator. Here, the individual becomes liable for the tax attributable to those arrangements.
  2. Repeated insolvency. At least two companies connected to the individual have become insolvent within a five-year period, each leaving unpaid tax liabilities, and a further company now carries on the same or a similar business, a classic “phoenix” pattern. Where this applies, the individual can be made liable for the successor company’s current and future tax liabilities (capped at five years) as well as the outstanding debts of the earlier, failed companies.
  3. Facilitation penalties. HMRC has imposed a penalty on the company for enabling tax avoidance or evasion, the company is insolvent or at serious risk of insolvency, and the individual held a relevant role: director, shadow director, or participator, at the time of the conduct. In this case, liability attaches to the penalty itself.

 

Because a JLN can attach current and future liabilities, not just historic debt, it is a materially different risk from a PLN and should be treated as a distinct exposure when assessing a director’s position.

Practical Steps Directors Frequently Take to Manage HMRC Tax Arrears

  • Engaging with HMRC as early as possible when payment difficulties arise, including exploring a Time to Pay arrangement.
  • Maintaining clear, contemporaneous records of all tax liabilities, repayment plans, and HMRC correspondence.
  • Avoiding preferential treatment of other creditors over HMRC, particularly in the period leading up to insolvency.
  • Documenting board decisions regarding cash flow management and creditor prioritisation, including the commercial reasoning.
  • Seeking professional advice from a qualified solicitor or insolvency practitioner before making payment decisions that affect HMRC.
  • Holding regular board meetings to formally review the company’s tax position and recording the discussions in minutes.
  • Understanding that HMRC’s enforcement tools now include joint liability notices, PLNs, and disqualification, all of which can run in parallel.

Taking the Next Step

If HMRC tax arrears are building, a Personal Liability Notice has landed, or you’re concerned a joint liability notice under the Finance Act 2020 could apply to you, timely, well-informed input changes outcomes: the two scenarios above show how much early, documented engagement with HMRC can matter to a disqualification investigation.

If you face a liquidator enquiry, PLN, JLN exposure, or disqualification risk connected to HMRC arrears, contact our team at Essential Counsel for a confidential discussion.

 

Disclaimer: This article provides general information only. It is not legal advice and does not create a solicitor-client relationship. Laws and interpretations change. Readers are encouraged to confirm details with current primary sources or a qualified solicitor.