A lot of contractors decide that the best way to operate their business is to avoid umbrella companies and start their own limited company by incorporating a company of which they as contractor would be a director. However, for various reasons some contractors operating this manner are unable, unwilling or simply just don’t pay the required National Insurance fees that they owe.
Unfortunately, the HMRC take a very dim view of individuals doing this and it is one of the rare occasions that a debt incurred by the company can be transferred to the director (in this case the contractor).
Transfer of Debt
The official stance of HMRC is that this is only the case where the individual has failed to keep up with the required contributions due to fraudulent activities or neglect, meaning that financial hardship would not lead to the same response. For example, if a company is struggling and unable to pay its bills to the point the company is being dissolved, HMRC won’t take any action to prevent this. However, if the contractor is continuing to operate under the company and simply fails to pay the National Insurance contributions, the HMRC will transfer this debt over to the individual with a Personal Liability Notice.
If HMRC are able to provide proof of fraudulence or neglecting of the debt, they will immediately issue the director (the contractor) with this Personal Liability Notice – swapping that debt from the company as a separate entity over to the individual. This was originally instigated about 12 years ago when the HMRC saw an increasing number of individuals trying to avoid paying their National Insurance debt by closing the company then just starting a new one. This also applied to income tax, however the Personal Liability Notice only has the power to transfer National Insurance debts to the contractor NOT income tax.
Tax Tribunal
There is one quite simple way of getting out of a Personal Liability Notice when issued with one, which is simply to settle the debt that you owe.
If you do not have the money to pay this debt or believe that HMRC are mistaken in thinking that you fraudulently withheld or neglected to pay the required amount, you can take the appeal to a tax tribunal. As with most aspects of law, it is HMRC’s burden to prove that you are guilty – not the other way round.