What is the corporate veil and does it help company directors to evade liability?

The concept of the corporate veil traditionally protects company directors and shareholders from being personally liable for a company’s debts and obligations.

However, the Revenue Commissioners have the option to pierce this veil so to speak, particularly in cases involving deliberate misstatements of VAT returns and unpaid taxes. This article delves into the circumstances under which the corporate veil can be lifted in Ireland, focusing on the implications for directors and the importance of timely professional advice.

Understanding personal liability penalties

As an example, when a company fails to pay its VAT due to insolvency, the Revenue Commissioners could seek to recover the penalties originally levied against the company directly from the directors. Such penalties could amount to as much as 100% of the tax owed, posing a significant financial burden on the individuals involved. To illustrate the point, take this hypothetical example:

• Company: "ABC Ltd," a construction company in Ireland.
• Situation: ABC Ltd experiences financial difficulties due to a downturn in the construction sector. They have significant outstanding corporation tax liabilities.
• Director Actions: Despite the financial difficulties and tax debt, the directors of ABC Ltd continue to pay dividends to the shareholders.
• Revenue Action: The Revenue Commissioners investigate the company's finances and find that the directors were aware of the tax debt but chose to prioritise the financial gain for the shareholders through dividend payments.
• Outcome: The Revenue Commissioners could pursue the directors personally for the unpaid corporation tax, arguing that their actions constituted improper conduct and a breach of their duties to consider the interests of creditors (including the Revenue Commissioners). Also, if it was clear that the directors knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation, but continued to trade, they could be held personally liable for the debts incurred during that period and this includes unpaid taxes.  In the case of other payments like fees and salaries to the directors rather than shareholder dividends, the same liabilities would apply.

Factors that could influence the outcome:

• The extent of the tax debt: The larger the debt, the more likely Revenue is to pursue personal liability.
• The directors' knowledge and intent: If they knowingly and deliberately paid dividends while the company was unable to meet its tax obligations, this strengthens Revenue's case.
• The company's financial position: If the company was insolvent or nearing insolvency, the directors' actions could be seen as reckless and irresponsible.

This hypothetical example illustrates the general principle that directors can be held personally liable in Ireland if they prioritise their own interests over those of creditors, including Revenue, particularly when a company is facing financial difficulties and has outstanding tax liabilities.

The Role of Pay-As-You-Earn (PAYE)

Another common instance where the corporate veil could be pierced in Ireland involves the misuse of PAYE. In cases where, for example, directors attempt to evade tax liabilities by engaging in ‘phoenixism, - closing one company to start another with the same business operations.

Furthermore, the Revenue Commissioners will closely examine the new company to establish any connections with the old company, such as: 

• Same directors or shareholders: Are the same people involved in both companies?
• Similar business activities: Is the new company carrying on essentially the same business as the old one?
• Transfer of assets: Were assets transferred from the old company to the new company at less than market value?

The courts and the corporate veil

Irish courts have consistently lifted the corporate veil when fraud has been committed, when there has been improper conduct affecting the public interest at large, or when the sole purpose of incorporating the company was to evade taxes.

Real-World examples and tribunal decisions in Ireland

There have been cases heard by the Irish Tax Appeals Commission where the Revenue Commissioners have successfully pursued directors for personal liability in cases involving tax evasion and non-compliance. These cases often involve:

• Phoenix companies: As mentioned above, these involve directors deliberately liquidating a company to avoid paying taxes and then setting up a new company to carry on the same business.
• Misrepresentation of financial information: Falsifying accounts or tax returns to reduce tax liabilities.
• Failure to comply with tax obligations: Neglecting to pay taxes or file returns, even when aware of the obligations.

The imperative of early action

The consistent theme across these cases is the critical need for directors to seek professional advice at the earliest indication of a tax dispute. Early cooperation with the Revenue Commissioners can significantly reduce the penalties imposed and, in some cases, prevent them altogether. Proactive engagement and a timely response to enquiries are essential in mitigating the risk of personal liability.

Key takeaway for directors

It is crucial for company directors in Ireland to understand their responsibilities regarding tax compliance. Seeking professional advice from tax experts and legal professionals is essential to ensure adherence to Irish tax laws and avoid the potential of a personal liability.