Accepting a role for a legal entity or arrangement (e.g., as a company director or a settlement trustee) comes with great responsibility, and certain risks.
Duties and sanctions
The legal duties and ramifications are beyond the scope of this article, but a company director’s duties under company law include the following (CA 2006, Pt 10A, Ch 2):
- To follow the company’s constitution, particularly its articles of association.
- To act in the company’s best interests to promote the company’s success.
- To exercise independent judgment.
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare their interest in any proposed transaction or arrangement.
Breaches of such duties are generally civil law matters. However, directors can be subject to criminal sanctions in certain circumstances. For example, the offence of fraudulent trading (i.e., knowingly carrying on the company’s business with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose) carries on conviction a prison sentence and/or a fine (CA 2006, s 993(3)).
Aside from offences under CA 2006, directors may potentially be subject to offences under the Insolvency Act 1986, Fraud Act 2006, or Theft Act 1968 (e.g., false representation, or false accounting).
Government guidance (‘Being a company director’) is available on the Gov.uk website.
Tax law and criminal sanctions
In addition to company law, insolvency law and criminal law, certain tax law offences carry criminal sanctions. For example, a person commits an offence if he is knowingly concerned in the ‘fraudulent evasion of income tax', by that or any other person. This offence does not concern the evasion of taxes other than income tax and capital gains tax (TMA 1970, ss 106A, s 118). A separate (but similar) offence applies for VAT purposes (VATA 1994, s 72(1); CEMA 1979, 170(2)).
For PAYE purposes, HMRC can generally require a person (e.g., a director) to give security for payment of liabilities of which an employer is or may be accountable, by giving a ‘notice of requirement’ for security (SI 2003, 2682, regs 97N, 97Q). There is a similar security requirement for NICs purposes (SI 2001/1004, Sch 4, pt 3B). Failure to comply with these security requirements is an offence, which is subject to criminal sanctions (ITEPA 2003, s 684(4A)). The Upper Tribunal case Horder v Revenue and Customs [2023] UKUT 106 (TCC) concerned a late appeal against a security notice in respect of a company’s unpaid PAYE and NICs liabilities, although proceedings before the Magistrates Court were proceeding against CH in parallel with the late appeal application before the tax tribunals.
In Horder, the appellant (‘CH’), a qualified accountant, was asked by a businessman (‘Y’) to set up a company (‘Q’) to carry on Y’s business. CH arranged for himself and his sister (JH) to become directors and shareholders of Q (although JH played little or no active role). CH opened and operated the company’s bank account; paid the staff their salaries and expenses; paid rent on Q’s premises, and (at the start) paid some tax to HMRC. Q accumulated liabilities to HMRC but did not pay them (Y was a ‘shadow director, and CH acted on his instructions; Y had allegedly assured CH frequently that Q would shortly have funds to pay the tax). HMRC issued a notice of requirement for PAYE/NICs to Q and CH to pay £78,593 by 8 April 2018. HMRC pointed out that non-payment would result in Q committing a criminal offence. HMRC also stated that if CH failed to give security for the PAYE and NICs he would be committing an offence. In November 2018, the Crown Prosecution Service issued a requisition to CH and Q containing charges (pursuant to ITEPA 2003, s 684(4A)). CH’s appeal was more than 14 months late. The First-tier Tribunal (FTT) refused an application by CH and Q for permission to make a late appeal. CH appealed.
His grounds of appeal included that the FTT acted unlawfully in breach of European Court of Human Rights law (Article 6). It was also claimed the FTT erred in failing to recognise it had less latitude over the exercise of its discretion to extend time in a case with criminal consequences. However, the Upper Tribunal concluded that the FTT’s decision disclosed no error. CH’s appeal was dismissed.
Wider implications
Professional advisers and agents generally try to be as helpful as possible to their clients. This might include accepting responsibility for running the financial functions of a client’s company. However, care needs to be taken if crossing the line from undertaking the activities normally associated with an agent (e.g., payroll, VAT, accounts preparation) to acting as a director of the client’s company.
Trusting a client’s motives and intentions is laudable, but within limits; risking criminal sanctions and censure from a member’s professional body is surely a step too far.
Conclusion
Prior to accepting an appointment as a director, consideration should be given to obtaining legal advice on the potential implications of doing so. Forearmed is forewarned.
About the author
Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a co-author of Inheritance Tax Annual and Ray and McLaughlin’s Practical Inheritance Tax Planning.
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