Understanding director redundancy and HMRC Right of Set-off

Can HMRC use your director redundancy pay to offset tax debts?

Company directors are able to claim redundancy pay when their business is liquidated, if they meet the eligibility criteria. A redundancy payout can be used to cover the costs of liquidation where necessary, helping directors avoid being forced into compulsory liquidation.

With the average director redundancy claim currently standing at £9,000 it can certainly represent a significant sum. So could you be eligible to make a claim? You may be able to claim redundancy pay as a director if you’re also classed as an employee of the company.

Eligibility criteria include taking a regular salary via PAYE, and working for your company under an employment contract for at least two years continuously. You also need to have worked in a practical role within the company, for a minimum of 16 hours per week.

Can HMRC offset your redundancy pay against company tax debts?

It’s important to be aware that HMRC has a right to offset director redundancy pay against any tax debts owed to them by the company. HMRC is commonly a creditor in cases of company liquidation, but directors may not be aware of this right of set-off.

The ability to set off their debt can seriously deplete the amount of redundancy pay a director receives. Furthermore, if the redundancy payment doesn’t cover the entire tax debt, HMRC may continue to try to recover the debt.

So what is HMRC’s right of set-off in more detail?

 

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What is HMRC’s right of set-off in relation to director redundancy?

HMRC has a right of set-off when a limited company in liquidation has tax debts. Maybe financial distress has prevented the company from keeping up with its tax liabilities, or directors have been unable to put money aside for future tax bills as they would when cash flow was healthy.

When company directors claim redundancy pay on the liquidation of their business, the tax body can use some or all of the money to repay the tax arrears. HMRC are known to act purposefully in recouping monies owed to them, and they may also use their right of set-off if directors’ loan accounts are overdrawn.

If you’ve taken money out of the company that isn’t salary or dividends, and it’s more than you’ve invested in the business, your director’s loan account will be classed as overdrawn. Essentially, this money belongs to the company – it represents a company asset and must be repaid by the director.

Offsetting director redundancy pay against tax owed is a method of recovering debt that’s widely used by HMRC. If you would like more information on director redundancy, and whether you’re eligible, please contact our expert team at CFS Redundancy Payments.

We have more than 30 years’ experience of helping insolvent companies, and understand how the director redundancy system works. Please get in touch to arrange a free, same-day consultation – we operate an extensive network of offices nationwide, so you’re never far away from the professional support you need.