Can a Director Become Liable for Unpaid Corporation Tax?

Usually, no. Directors of limited companies are not normally personally liable for unpaid corporation tax because the company is a separate legal entity and limited liability is one of its core features.

That said, limited liability is not absolute. In some situations, HMRC or a liquidator may pursue directors personally, particularly where non-payment is linked to misconduct, insolvency issues or unlawful distributions.

When can directors become personally liable?

The risk rises where unpaid corporation tax is connected to deliberate behaviour, negligence or fraud.

For example, problems can arise if directors pay themselves instead of settling the company’s tax liabilities, or if the company pays connected creditors, such as family members or friends, while leaving corporation tax unpaid. In an insolvency, this kind of conduct may be treated as evidence of misconduct. The risk is greater in a liquidation, especially as HMRC is now a preferential creditor in certain circumstances.

Fraudulent and wrongful trading

Under insolvency law, directors can become personally liable if they engage in fraudulent trading or wrongful trading.

Fraudulent trading happens where the business is carried on with intent to defraud creditors, or for any fraudulent purpose. If that is proven, the court can order the directors to contribute personally to the company’s assets.

Wrongful trading has a lower threshold. It applies where directors continued trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.

If corporation tax liabilities build up during the period of fraudulent or wrongful trading, a liquidator may apply to court for an order requiring the directors to contribute personally. HMRC may not bring that claim directly, but unpaid corporation tax is often a significant part of the loss.

Unlawful dividends

Shareholders also benefit from limited liability, but unlawful dividends are an important exception.

Under the Companies Act 2006, dividends can only be paid out of distributable profits. In simple terms, that means accumulated realised profits less accumulated realised losses. So, a dividend may still be lawful in a loss-making year if there are enough retained profits brought forward. On the other hand, if past losses exceed total realised profits, a dividend cannot lawfully be paid.

The company must also follow the proper corporate process. If a director authorises a dividend when there are insufficient reserves, and knew or had reasonable grounds to believe the payment was unlawful, the amount may have to be repaid.

In an insolvent company, a liquidator may seek recovery where dividends were paid while corporation tax remained unpaid and the distribution worsened the company’s financial position. In owner-managed businesses, where the directors and shareholders are often the same people, that exposure can be significant.

Capital distributions after asset sales

There can also be risk where a company sells assets, realises chargeable gains and then makes a capital distribution to a shareholder without paying the corporation tax that arises.

If the company fails to pay the associated corporation tax within six months of the due date, HMRC has statutory powers to pursue the recipient of the capital distribution. An assessment may be raised on that shareholder within two years of the corporation tax due date.

Practical point

Directors are not automatically liable for unpaid corporation tax, but personal exposure can arise in specific cases.

The main risk areas are:

• Trading whilst insolvent
  
  
• Fraudulent or wrongful trading
  
  
• Paying connected parties ahead of HMRC
  
  
• Paying unlawful dividends
  
  
• Making capital distributions without providing for the corporation tax due
  
  

Directors should make sure corporation tax is prioritised, check that dividends are supported by distributable reserves, and consider the company’s solvency before taking money out of the business.

Frequently Asked Questions: Director Liability & Corporation Tax

Can I be personally liable for my Birmingham company's unpaid Corporation Tax?

Generally, no. A limited company based in Birmingham operates as a separate legal entity, meaning directors are protected by limited liability. However, a liquidator or HMRC can hold you personally liable if the unpaid Corporation Tax is explicitly linked to fraud, wrongful trading, or unlawful financial distributions.

My business in Sutton Coldfield is insolvent. Will HMRC pursue me for tax debts?

HMRC rarely pursues directors directly for standard Corporation Tax debts unless the company made a capital distribution after an asset sale without settling the tax. However, if your Sutton Coldfield business enters liquidation, the appointed liquidator can force you to contribute personally if they find evidence that you paid connected parties (like family) instead of settling HMRC liabilities.

What happens if I took dividends but my West Midlands company owes Corporation Tax?

If you authorized a dividend payment without having sufficient accumulated realized profits to cover it, that payment is legally classed as an "unlawful dividend." If your West Midlands company becomes insolvent, a liquidator can demand that you personally repay those funds to the company to cover outstanding debts, including unpaid Corporation Tax.

How can directors in Birmingham and the West Midlands protect themselves?

The best defense against personal liability is demonstrating that you acted responsibly and took reasonable steps to minimize creditor losses the moment you realized the company was struggling. Directors in Birmingham, Sutton Coldfield, and the wider West Midlands should urgently consult a local licensed insolvency practitioner or corporate tax specialist to avoid wrongful trading claims.

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