De Facto Director Avoids Tax Liability

A recent Supreme Court judgment appears to make it easier for de facto directors to avoid the responsibilities of regular directors.

A de facto director is a person deemed to be a director in practice, even if they are not officially labelled as such. The Supreme Court decision in Holland v Revenue and Customs Commissioners and another (HMRC), given by a majority of three judges to two, saw a man whom HMRC regarded as a de facto director able to avoid personal liability for unpaid corporation tax on companies where he was, in effect, the main decision-maker.

Mr Holland was a director of a company which was, itself, director of 42 insolvent companies. As such the HMRC sought partial payment of a corporation tax bill from Mr Holland. Three of the Lords agreed that Mr Holland was not a de facto director of some of the insolvent companies for which corporation tax was owing. The other two judges reasoned Mr Holland was a de facto director, but they were a minority opinion. There are worries that the decision could be used to make it easier for people to use corporate structures to escape liability to an insolvent company’s unsecured creditors.

Interestingly the HMRC didn’t argue that Mr Holland was a shadow Director, an argument that may have provided a different outcome. The reason probably lay in their belief that proving Mr Holland as a de facto Director would not be difficult. We are now left with a position whereby it may be possible for people to not be held responsible for their actions within a Company, despite being a major player.

Geoff Kew

Published on 26/11/2010