HMRC is leading an increasingly tough stance against owners of businesses that have failed to pay their taxes before going bankrupt, says City law firm Wedlake Bell.
Figures from the Insolvency Service reveal that in the last year Bankruptcy Restriction Orders (or equivalent undertakings) were obtained against 443 bankrupts because of neglect of their business - a majority of which were alleged to have consistently failed to pay taxes to HMRC. This was an increase of 21% on last year and concern actions taken against sole traders and partnerships (Year ending March 31).
Bankruptcy Restriction Orders limit an individual's access to credit and can prevent them from becoming a director of a company for up to 15 years. (See box below)
Edward Starling, Head of Business Recoveries at Wedlake Bell, comments: "Personal bankruptcy is sometimes regarded as a means to a fresh start. But with HMRC and the Official Receiver taking an increasingly tough stance, it would be very dangerous to underestimate the long term consequences of being an owner of a bankrupt business."
"The authorities are making an example out of business owners who have allowed their businesses to run up insurmountable tax debts by banning them from involvement in senior management positions of a company for a long time."
"Business owners who find their businesses in serious financial difficulties need to face the possibility of bankruptcy at an early stage. Taking legal and insolvency advice before the worst has happened could help avoid career-wrecking consequences. These figures show that too many owners are burying their heads in the sand and kidding themselves and their creditors that everything is going to be alright."
Edward Starling continues: "HMRC is typically the last creditor to get paid where a business goes bust. Given the state of the public finances, the Government is keener than ever to minimise any non-payment of tax and HMRC will want to send a strong signal to the owners of struggling firms that if their businesses collapse without paying tax, they cannot expect any leniency."
Total number of Bankruptcy restriction orders due to neglect of business affairs
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Bankruptcy Restriction Orders and Undertakings (BROs and BRUs) are issued when the conduct of a bankrupt person is deemed dishonest, reckless or blameworthy. BRO/BRUs restrict an individual's access to credit and ban individuals from being Directors of a limited company or from being involved in the promotion, formation or management of a company for up to 15 years.
Grounds for issuing a bankruptcy restriction order include: incurring company debts with no intention of repayment, deliberately paying off some creditors in preference to others, gambling or making rash speculations, being unreasonably extravagant, failing to produce appropriate records, fraud, neglecting your business affairs, failing to supply goods or services that have been paid for.