CH282230 | Director disqualification: types of misconduct

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When investigating the types of misconduct for director disqualification, HMRC must be put into a more detrimental position because of that misconduct.

Typical misconduct might include but is not limited to:-

Trading to the Detriment of the Crown

This misconduct is not about the non-payment of HMRC liabilities, but the different treatment of the Crown compared to other creditors.

This misconduct is on the lower bracket for disqualification period and examples of it include:

• non-payment of taxes: failing to pay VAT, PAYE or other taxes owed to HMRC while continuing to pay other creditors

• preferential treatment: HMRC's debt position increases while other creditors or connected companies' debt position either remains the same or decreases

• misuse of funds: using funds collected on behalf of HMRC (for example VAT or PAYE) for personal expenses or other non-business-related activities

• repeated insolvencies: having companies go into liquidation owing significant amounts to HMRC

• contrived insolvencies: a pattern of trading by a director to avoid paying liabilities to HMRC

• trading with the knowledge of insolvency

• failure to comply with agreements: entering a Time to Pay Arrangement with HMRC and failing to adhere to it

Failure to Comply with Statutory Obligations

This misconduct is on the lower bracket for disqualification period and examples of it include:

Tax:

• failure to register or file returns

• failure to operate PAYE

• deliberate non-payment of taxes: failing to pay VAT, PAYE or other taxes owed to HMRC

• failure to submit tax returns: not filing required tax returns on time

• payments on assessments: payment amounts that are substantially less than the amount due for a prolonged period

Companies Act 2006 ("CA 06"):

• failure to file annual accounts: not submitting annual financial statements to Companies House

• failure to submit statutory returns over a 2-year period

Sales Suppression or Failure to submit accurate returns

This misconduct is on the middle bracket for disqualification period and examples of it include:

• under-reporting sales: deliberately not recording all sales transactions to reduce taxable income

• using dual till systems: operating 2 sets of books or tills to hide actual sales figures

• issuing false invoices: creating fake invoices to manipulate sales records and reduce tax liability

• cash-in-hand payments: accepting cash payments without recording them in the official accounts

• inaccurate tax returns: submitting tax returns with false or misleading information

• omitting income: failing to declare all sources of income on tax returns

• incorrect expense claims: claiming non-business-related expenses as business expenses

Failure to Maintain, Preserve or Deliver Up Accounting Records

Directors have a statutory duty to maintain books and records that contain:

"(a) entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and

(b) a record of the assets and liabilities of the company." (s.386 CA06)

Books and records need to be preserved for 3 years in a Limited company and 6 years in a Public Limited company (s.388 CA06).

For tax purposes directors must maintain and preserve books and records for at least 6 years from the end of the last company financial year they relate to. This period ensures that all necessary documentation is available for any potential tax audits or inquiries by HMRC.

Failure to maintain and preserve books and records are also criminal offences under s.387 and s.389 Companies Act 2006.

This misconduct is on the middle bracket for disqualification period and examples of it include:

• incomplete records: not keeping comprehensive and accurate financial records

• loss of records: failing to preserve important accounting documents and records

• non-delivery of records: not providing accounting records when required to liquidators and the Insolvency Service for insolvencies and HMRC for tax inquiries

• inadequate documentation: lacking sufficient documentation to explain financial transactions and company activities

• failure to update records: not regularly updating accounting records, leading to gaps in financial information. This includes weakness in accounting systems and processes that have been allowed to continue

Non-payment of National Minimum Wage ("NMW")

This occurs when an employer fails to pay their workers the legal required minimum hourly wage in adjustments for underpayments, penalties and fines for breaches of NMW legislation.

Directors failing to pay NMW are breaching their legal responsibilities.

This misconduct is on the middle bracket for disqualification period.

Transactions to the Detriment of HMRC

These relate to a specific transaction, or a series of transactions, which negatively affects HMRC.

This misconduct is on the higher bracket for disqualification period and examples of it include:

• preferential payment: favouring payment to certain creditors over HMRC, this includes prioritising payments to suppliers, lenders and other creditors instead of paying HMRC

• transactions at an undervalue: selling company assets for less than their market value, this undervaluation can be used to reduce the apparent wealth of the company, thereby minimising tax liabilities, and reduce the funds available to pay HMRC. Assets can be transferred to family members, friends, or other entities directors control at an undervalue to shield assets from HMRC. In some cases, directors may give away assets for free or at nominal value just to put them out of HMRC's reach

• unlawful dividends: distributing dividends to shareholders when the company is insolvent or has insufficient profits. The distribution often exceeds the company's distributable reserves and reduces the company's ability to pay its taxes, as funds are improperly diverted to shareholders

• misappropriation of funds: using company funds for personal expenses or non-business-related activities

• fraudulent trading: continuing to trade and incur debts when there is no reasonable prospect of repaying creditors including HMRC

• misfeasance: a misuse, neglect, or abuse of duty of care to the company and its creditors by the director. Actions can include misapplication or misuse of company assets, failing to act within the power granted by the company's constitution, or neglecting statutory duties

Abuse of HMRC coronavirus (COVID-19) Scheme

This misconduct is on the higher bracket for disqualification period and examples of it include:

• false claims: submitting claims for employees who were not actually furloughed

• inflated claims: overstating the number of wages paid to furloughed employees to receive higher payments

• misuse of funds: using COVID-19 support funds for personal expenses or non-business-related activities

• multiple claims: applying for multiple COVID-19 support loans for the same business or for non-existent businesses

• failure to repay: not repaying COVID-19 support loans when the business was able to do so

Missing Trader Intra Community (MTIC)

This misconduct is on the higher bracket for disqualification period and examples of it include:

• buffer company role: acting as an intermediary in a supply chain to facilitate VAT fraud by reclaiming VAT that was never paid

• carousel fraud: participating in a a scheme where goods were repeatedly imported and exported across EU borders to create fraudulent VAT claims

• ignoring warnings: continuing to engage in suspicious trading activities despite warnings from HMRC about potential fraud

• undervaluing transactions: deliberately undervaluing goods in transactions to manipulate VAT liabilities

Excise Diversion Fraud

This misconduct is on the higher bracket for disqualification period and examples of it include:

• illicit distributions: diverting excise goods (like alcohol or tobacco) into the black market without paying the required duties

• false documentation: using fake or altered documents to misrepresent the movement of excise goods

• misdeclaration of goods: declaring excise goods as non-excisable items to avoid paying the appropriate taxes

Fraudulent Evasion of VAT

This misconduct is on the higher bracket for disqualification period and examples of it include:

• false VAT returns: submitting VAT returns with inaccurate or misleading information to reduce VAT liability

• undeclared sales: not reporting all sales transactions to avoid paying the correct amount of VAT

• phantom transactions: creating fake invoices or transactions to claim VAT refunds on non-existent purchases

• misuse of VAT schemes: abusing VAT schemes such as the Flat Rate Scheme to gain an unfair tax advantage

Mini Umbrella Companies

This misconduct is on the higher bracket for disqualification period and examples of it include:

• fragmentation of payroll: splitting a workforce across multiple mini umbrella companies to exploit Employment Allowance and reduce National Insurance Contributions

• false VAT claims: using mini umbrella companies to fraudulently claim VAT refunds under the VAT Flat Rate Scheme

• misrepresentation: creating the false impression that mini umbrella companies are independent entities when they are actually controlled by the same directors

• rapid changes in directorship: frequently changing the directors and locations of mini umbrella companies to evade detection by HMRC

• non-payment of taxes: failing to pay PAYE, National Insurance Contributions and other taxes owed to HMRC

Acting as Director Whilst Prohibited

This is where a disqualified director continues to perform their duties or be involved in the management of a company despite being legally banned from doing so. The disqualified director may also be held personally liable for the company's debts incurred during the period of disqualification (s.15 CDDA 86).

Breaching a disqualification order is also a criminal offence under s.13 CDDA 86 and criminal referral to The Insolvency Service (INSS) should be made.

This misconduct is on the higher bracket for disqualification period and examples of it include:

• shadow directorship: acting as a director through another person while officially disqualified

• false declarations: providing false information to conceal disqualification status

• proxy management: directing company operations indirectly through a proxy

• non-disclosure: failing to inform relevant parties of disqualification status

• breach of fiduciary duties: failing to act in the best interests of the company and its stakeholders

• negligence: demonstrating a lack of due care and diligence in managing company affairs

• financial mismanagement: mis-using company funds or assets for personal gain

• regulatory non-compliance: failing to adhere to legal and regulatory requirements

Code of Practice 9 (COP 9) Settlements

This misconduct is on the higher bracket for disqualification period and examples of it include:

• false disclosure: providing inaccurate or incomplete information during the COP 9 disclosure process

• failure to co-operate: not fully cooperating with HMRC during the investigation

• concealment of assets: hiding assets or income to avoid detection and settlement of tax liabilities

• repeated non-compliance: engaging in tax fraud or evasion despite previous warning or settlements

• misuse of settlement funds: using funds meant for settling tax liabilities for other purposes