When a company nears collapse, directors often make fast decisions to protect their income or extract value before liquidation. But what may seem like reasonable planning can easily cross the line into disguised remuneration, which is a red flag for HMRC and liquidators alike.
In 2025, we are seeing increased enforcement around the reclassification of payments made to directors in the final months of a failing company’s life. This post explores what disguised remuneration looks like in a distressed business, why HMRC is aggressively pursuing it, and how directors can stay on the right side of the law.
What Is Disguised Remuneration?
Disguised remuneration refers to income or benefits received by directors or employees in a form intended to avoid tax, typically income tax and National Insurance Contributions (NICs). In an insolvency context, it often includes:
- Loans from the company that are never repaid
- Dividends paid when there are no distributable profits
- Expense claims that are not genuinely business-related
- Asset transfers (cars, property, equipment) without market value consideration
- Use of EBTs (employee benefit trusts) or similar schemes
HMRC’s stance is clear: if the payment functions like income, it should be taxed as income.
Why It Matters More During Insolvency
When a company is solvent, there may be some leeway in how directors choose to remunerate themselves. But once a business is approaching insolvency, everything changes.
At this stage, directors must act in the interests of creditors, not themselves. Any attempt to take value out of the company may be challenged as misfeasance or unfair preference, particularly if HMRC or trade creditors are left unpaid.
Additionally, liquidators are legally required to investigate pre-insolvency transactions, including director payments and withdrawals. These are routinely reported to the Insolvency Service and may be referred to HMRC for tax enforcement.
Key Risk Areas HMRC Focuses On
1. Director Loan Accounts (DLAs)
Directors sometimes take cash from the company as a loan rather than salary or dividends. This avoids PAYE and NICs, temporarily.
- If not repaid within 9 months of the company’s year end, it triggers a Section 455 tax charge.
- In insolvency, these loans are often written off or forgotten, making them a target for both tax recovery and misfeasance claims.
2. Unlawful Dividends
Dividends may be classed as unlawful if they are paid:
- When there are no available profits
- Without adequate board documentation
- While the company is technically insolvent
In these cases, HMRC may reclassify the payment as salary, demanding unpaid PAYE and NICs. The director may also be personally liable to repay the dividend in liquidation.
3. Personal Use of Company Assets
Using company assets like vehicles, phones, or property without declaring them as benefits in kind can amount to disguised remuneration. This applies even in the final months of a company’s life.
- HMRC looks at asset logs, insurance policies, and fuel receipts.
- IP’s may claw back value if no formal lease, agreement, or fair usage is in place.
Enforcement Trends in 2024–2025
HMRC has become significantly more active in challenging disguised remuneration in insolvency settings, particularly where:
- Bounce Back Loans or CBILS were misused for personal expenses
- Directors continued to pay themselves while defaulting on VAT or PAYE
- DLAs were written off as “paper-only” balances just before liquidation
- Companies used EBTs or umbrella structures to avoid direct PAYE costs
HMRC now works closely with the Insolvency Service to bring parallel civil and criminal actions, especially where deliberate avoidance is suspected.
Case Example: Misclassified Dividends Lead to Director Liability
In a 2023 case, a director of a property consultancy withdrew £60,000 in dividends while the company was running a tax arrears balance of £45,000 and had no retained profits.
Following liquidation, the appointed IP flagged the dividend as unlawful. HMRC also issued a PAYE determination notice, reclassifying the withdrawals as untaxed salary. The director was:
- Ordered to repay £60,000 as part of a misfeasance claim
- Hit with a personal tax liability on top
- Flagged for future disqualification consideration by the Insolvency Service
How to Protect Yourself as a Director
- Avoid “loans” from the company unless they are formal, interest-bearing, and repayable
- Do not pay dividends unless backed by formal accounts and board minutes
- Treat any personal use of company assets as a taxable benefit and report accordingly
- Keep payroll fully compliant and avoid “pay later” arrangements on salary
- Seek professional advice before making any payments during financial distress
Disguised remuneration might seem like clever accounting during a crisis, but HMRC and insolvency practitioners now see it as a marker of poor director conduct. If a company is struggling, directors must be extra cautious with how they pay themselves or access company resources.
At IL Advisory, we help directors assess their exposure and act responsibly under pressure. Whether you are heading into insolvency or looking to clean up historic issues, early advice makes all the difference.
Need Advice on Director Remuneration and Risk?
If you’re concerned about how payments you’ve taken may be viewed by HMRC or a future liquidator, we can help.
- Confidential review of your current position
- Advice on protecting yourself from misfeasance claims
- Guidance on communicating with HMRC or creditors
Call 020 7692 8456
Email info@iladvisory.co.uk
IL Advisory: Helping Directors Make Informed, Defensible Decisions.