VAT & Directors Liability

The First-tier Tribunal's decision in Michael Krishnan illustrates how a VAT penalty imposed on a company can follow a director into personal insolvency - and how procedural default can close off any prospect of challenge.

MHM Construction Ltd was assessed for a VAT under-declaration covering the period ending April 2014. HMRC's analysis drew on Construction Industry Scheme records showing payments to the company against a nil VAT return for that period. A penalty was issued to the company. HMRC also issued a personal liability notice ("PLN") to Mr Krishnan as sole director and shareholder, holding him personally responsible for the full amount of that penalty on the basis that the inaccuracy in the company's VAT return was attributable to him.

The penalty regime applicable here allows HMRC to transfer a portion - up to 100% - of a company's deliberate inaccuracy penalty to a company officer where the inaccuracy is considered to be that officer's doing. With the company in liquidation, the PLN was the mechanism by which HMRC sought recovery from Mr Krishnan directly.

Mr Krishnan did not appeal within the 30-day statutory period. By the time he notified his appeal to the Tribunal, over seven years had passed. Applying the three-stage Martland framework, as confirmed by the Court of Appeal in Medpro, the Tribunal refused permission to appeal out of time. There was no credible explanation for the delay, no supporting evidence of communications with HMRC or legal advice received, and nothing before the Tribunal to suggest the underlying appeal was obviously strong.

The practical message for directors is direct. Where a company faces a VAT penalty and HMRC concludes the inaccuracy was attributable to a specific officer, a PLN can be issued making that individual personally liable. The company's insolvency does not extinguish that liability. Any challenge to a PLN must be made within 30 days. Allowing that period to pass without appeal - and without a compelling, evidenced explanation - will in most cases be fatal to any later attempt to bring the matter before the Tribunal.

Where a director receives a PLN, specialist advice should be sought without delay.