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One of the merits of having a company to run your business is that idea of the corporate veil, more specifically the protection of your personal assets. There are times, however, when HMRC will make that decision to climb over that wall and to come after you, the director for any unpaid Corporation Tax.

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In this week's episode of I Hate Numbers, I'm going to go through this idea of the corporate veil when those occasions arise, when HMRC will come after you for unpaid taxes and what you need to do to make sure that situation doesn't happen.

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Now, when you set yourself up as a limited company in the United Kingdom, you are essentially building a wall. On one side of the wall is your company - its debts, its bills, and its taxes. On the other side of that wall is you - your house, your car, your personal savings. This is essentially limited liability.

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It's a legal shield designed to encourage people to take risks, start businesses without fearing that a bad month, a bad decision is going to risk losing the family home. But here's the thing, the wall that is constructed is not indestructible. HMRC has a ladder, has a cherry picker if you want, and if they think you haven't been playing by the rules, they're going to climb over that wall and they're going to do that more and more these days.

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Now, the law does protect honest directors who just happen to run into bad luck, but if there's evidence of misconduct, negligence of what HMRC likes to call deliberate behaviour, the shield dissipates, it vanishes. Let me share some instances of how that can actually happen in a real world situation. Now, the most common way that directors get into hot water is through something called preference.

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Now, imagine that horrible scenario. Your business is struggling. You've got a big Corporation Tax bill of several thousand pounds due to HMRC, but you also happen to owe that money to a family member - if that’s your brother or your sister, it makes no odds. That money you owe them is for the money they let you when you first started your business.

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You check out your bank balance. You've got a few grand left in the account, and you'll think, hmm, I've got a dilemma here. Do I pay my brother back first, who’s family? Or do I pay that big bureaucracy HMRC first? Well, they can afford it. They can wait. Now straight away, that is a preference. You are choosing a friendly creditor over a legal one.

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Now, if the company eventually fails, a liquidator will look at those bank statements, see you paid off your brother instead of the tax man, and they can, and reserve the right to sue you personally to get that money back. You've essentially taken that company's money, your company's money to settle a personal loyalty and HMRC aren't particularly too favoured and enamoured with that.

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Then we've got the difference between fraudulent and wrongful trading. Fraud is the big one. That's when you intentionally try to cheat people. Maybe you're taking deposits from customers for a product you know you'll never ship, hiding cash under the mystical floorboards to keep it away from HMRC’s eyes. Now, if a court can prove fraud, they can issue a personal financial order.

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That means your personal assets, which you thought might be protected, are now on the table to pay off the company's debts. Now, wrongful trading is probably a more common occurrence. That's where you don't necessarily mean to be a villain. You end up being a bit like an ostrich head in the sand, hide under the duvet.

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This happens when you keep trading even though you know or should have known the company was going bust. You failed to do something about it. If the tax debt grows during that period of hopeless trading, you can be held personally liable for the extra debt. Ignorance isn't a defence here. The law expects you to know your numbers.

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Now, let's introduce the idea of dividends into this conversation as well. Now, most directors of small UK companies will take a small salary, and the rest is normally taken out as dividends. It's considered in general tax efficient. It's considered perfectly legal until it isn't. Under the Companies Act, you could only pay yourself a dividend

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if there are what are called distributable profits. Think of it like a pie. You can only eat the pie that's left over after you pay for the ingredients. Now your company makes a profit, let's say a hundred thousand. You might think, great, that's the pie. That's for me, but it isn't. You've got to put aside a proportion of that to pay for your Corporation Tax.

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If you spend that tax money as a dividend, then the dividend becomes unlawful. If the company unfortunately goes into liquidation, the liquidator will demand you pay every penny of those unlawful dividends back, and if you are the person who authorised the payment, you are also in your breach of your duties as a director is a double whammy.

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Now, there's also a rule called the six-month rule regarding asset sales. Let's say your company owns a small office or a van. You sell it. You get the cash, you give yourself a bonus. If the tax on that sale, the chargeable gain is not paid to HMRC within six months, then HMRC don't even need to go for a court order.

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They come straight after you. They can send the tax bill directly to your home address. They've got two years, by the way, to start this process. So you can be sitting at home 18 months later thinking that everything's okay, the dust is settling, and then a bill for a big chunk of cash drops through the letter box.

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Or what does it really matter? What are the ultimate consequences? Beyond losing money, you can be issued with a personal liability notice or even worse. You can be disqualified from being a director. Now, at worst case, you can talk about a ban that can last up to 15 years. If you're an entrepreneur, that could be a big damaging sentence on your entrepreneurial career.

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So how do we stay safe, folks? It requires discipline. And here's a brief checklist for you to go through. Number one, make sure you review your management accounts every single month. Don't wait until the end of the year to find out you're in the red. And as a footnote, if you don't know what management accounts are, you don't have those in place,

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give us a shout and we can talk you through that and help you set one up. Number two, the tax money is not yours to spend, so open up a separate bank account, move a chunk of your income into that account the moment it arrives. A working number from 10 to 25% will do. If it's out the loop, if it's not staying in your current account, if you can't see it, you won't spend it.

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Number three, if the company is struggling, halt the dividends immediately. Switch to a basic salary until things stabilise. There's no illegality by paying yourself a salary. Number four, always get professional advice before selling a major company asset. And number five, treat HMRC like your most important supplier.

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They're the only supplier, by the way, who's got the power to take your house unless you're given a personal guarantee. HMRC in my experience, are getting a little bit more assertive these days. There's a hole to fill for uncollected taxes, and they’re on the ball more now and focusing on these non-payments even more.

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Now, managing your risk earlier in the process is the only way to keep the corporate veil intact. HMRC and liquidators will and do look at everything - bank statements, emails, your paper chase receipts. They're going to find those unlawful dividends and the friendly payments to a member of the family. If you act proactively, keep clear records,

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respect the legal wall between you and your business, your personal wealth stays exactly where it should be - safe and secure. If you are worried that your paperwork isn't quite up to speed, don't panic. If you're worried that your manager accounts aren't fit for purpose, don't panic. Give us a shout at I Hate Numbers, and we're happy to help you to take care of the heavy lifting from company formation to making sure records are tip top.

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That's what we're here to do. Folks, thanks for listening to this episode of I Hate Numbers. Share it with somebody that you feel would benefit from that. Until next time, keep those records straight and I'll see you on the other side.