Personal liability for company taxes
Everald Dewar, Guest Columnist
In 1976, a local businessman was served a restriction notice by the then commissioner of income tax.
The notice read inter alia: "Take notice that you are required not to leave the island unless you have in your possession a certificate that you do not owe any income tax, and further take notice that if you fail to comply you may be taken into custody by an immigration officer and render yourself liable to penalties."
The claim against the businessman was that as the chief executive officer and principal shareholder of a company, he was liable for the payment of the taxes owed by it. The matter was eventually heard in the Court of Appeal.
The court made the decision that the director holds an office that places certain responsibilities on him, for which he is answerable, such as to retain "out of any money coming into his hands, sufficient as to pay income tax".
However, it does not mean he is personally liable to pay 'out of his own pocket'.
The court also made the proposition that: "If the legislature wishes to create a personal liability for officers of a company to pay the tax owed by the company, then it must do so in precise and clear language."
This the legislature did in 1986 when the creature called a 'responsible officer' (RO) was born.
Under the Tax Collection Act, it is possible for an employee designated as a RO to be liable for the taxes owed by the company.
If a RO is not named then the CEO or anyone appearing to be in charge will be deemed to be that RO. Where the RO fails or neglects to carry out his duties, he is 'jointly and severally liable' alongside the company for the payment of all taxes.
On appearance in court, the resident magistrate will caution him/her using language such as: 'You are required to pay the amount outstanding by such date; in default of payment, you will be liable for imprisonment of up to 10 days'.
These 10 days behind bars should give the RO a sober look at the realities of his job description.
It should be understood that at the end of the event, if the tax remains unpaid, the cycle could continue. However, he can escape if good reasons are given why the taxes were not paid - one such being he was overruled or prevented by the board of directors.
If the collector of taxes is satisfied that that the RO was hindered, then each of the directors will be liable together with the company, unless there was good justification or any director can show that he was not a party to the hindrance.
Criminal sanctions can be imposed on
directors punishing them for the non-payment of withholding taxes, such
as PAYE. This clearly is a liability imposed on officers of a company
for which they were never liable, and has shattered the concept that a
company having a separate legal existence is distinct from its
It is true that a person, wishing to avoid a
tax liability that would otherwise fall on him, may hide behind the
'corporate veil'. In that case, the piercing of the veil by putting the
tax liabilities of the company on its directors may appear appropriate,
but anyone seeing this carte blanche application at
work in reality will agree that it is harsh and may appear oppressive at
The court may not see any lawful reason for
depriving a director of his liberty where there is evidence that he was
not instrumental in the company not paying the tax. Nevertheless, the
judiciary will give effect to the legislation passed by Parliament even
if it is incompatible with established common-law
The rule of law will inhibit judicial
intervention and the director can be imprisoned for the company's tax
As the Companies Act limits a
shareholder's liability to the amount unpaid on his shares, this then
affects a person in his/her capacity only as director and not as
The other situations where persons are
liable for others' tax liabilities are: where the person has income
belonging to a non-resident; and where the income of a wife is deemed
that of her husband.
The latter is one of the last
vestiges of the historic tenets of common law that a wife's possessions
belong to her husband.
Everald Dewar is senior
taxation manager at BDO Chartered Accountants in