HMRC successfully argues that director is responsible for liquidated company’s liabilities

In case, R & C Commrs v West [2018], HM Revenue and Customs (“HMRC”) have successfully appealed a decision made by a First-tier Tribunal (“FTT”) Judge, John Clark, and Ms Sandi O’Neill, (Judge Clarke made the casting vote with Ms O’Neill dissenting) in which the FTT allowed a taxpayers appeal against HMRC’s directions with respect to unpaid Pay as You Earn (“PAYE”) and National Insurance Contributions (“NICs”).

Background

Mr West was the sole director and shareholder of Astral Telecom Limited (“Astral”) from 2003. Following advice from an insolvency practitioner, Astral was put into creditors’ voluntary liquidation in 2011, with a deficiency on the joint liquidators’ Statement of Affairs of £146,611. The Statement showed that PAYE and NICs totalling £99,886 were owing at that time to HMRC.

For several years, Mr West had drawn money from Astral during the year and this had been recorded in a director’s loan account (“the Loan Account”). At the end of each year, Astral would pay Mr West a small amount of remuneration and a larger dividend, thereby extinguishing the Loan Account.

From the accounting period ended 30 April 2007 onwards, Mr West’s usual pattern changed. Mr West continued receiving remuneration and dividends but the amount outstanding on the Loan Account was not extinguished at the end of each year and subsequently it increased for several years.

Mr West was advised by the insolvency practitioner that he could not receive a dividend from Astral for 2011 because there were insufficient profits available in the company, and he would have to be paid by way of salary. An accountant was instructed to prepare a set of accounts which showed an amount of director’s remuneration which, after deducting PAYE and NICs, would offset the amount outstanding on the Loan Account which currently stood at £129,150.

On 2 October 2013, HMRC;

1. Issued directions that Astral was not liable to pay the outstanding PAYE amounts in respect of the years 2010-11 and 2011-12, under regulation 72 of the Income Tax (PAYE) Regulations 2003 (“the PAYE regulations”). The purpose of this direction was to render Mr West as personally accountable for the liabilities.
2. Made decisions that Mr West was liable to pay the NICs not paid by Astral, under regulation 86 of the Social Security (Contributions) Regulations 2001 (“the NIC Regulations”) and section 8(1)(c) of the Social Security Contributions (Transfer of Functions) Act 1999 (SSC(TF)A”).
3. Issued an assessment of income tax for 2010-11, and a closure notice amending Mr West’s self-assessment for the 2011-12 tax year

Summary of liabilities as a result of HMRC’s actions on 2nd October

The FTT’s decision

Mr West’s appeal to the FTT was successful. Mr West held that the PAYE and NIC liabilities should not be formally transferred from Astral to himself despite HMRC stating that he was aware that Astral had wilfully failed to;

• deduct sufficient PAYE
• pay sufficient class 1 primary NICs

Judge Clark accepted that in order to determine whether regulation 72 of the PAYE regulations applied, there were three main issues which needed to be considered;

1. On making the relevant payment, did Astral deduct the amount of tax which it should have deducted?
2. If not, was Astral’s failure to deduct wilful?
3. If so, did Mr West receive the relevant payment knowing that Astral had wilfully failed to deduct?

Judge Clarke decided that Astral had deducted tax in accordance with the PAYE regulations therefore there was no basis for transferring Astral’s liability to account for PAYE to Mr West.

With regards to the unpaid NICs and HMRC’s Regulation 86 determination, Judge Clark contented that the consideration was different to the consideration of PAYE. The question did not concern wilful failure to deduct, but whether there was a wilful failure on the part of Astral to pay the NICs and if so, whether Mr West knew that Astral had wilfully failed to pay those contributions.

Judge Clark found that Astral’s failure to pay was not wilful since, at the time the liability arose, Astral had not been in a position to pay the resulting NICs to HMRC and so, Astral’s NIC liabilities could not be transferred to Mr West.

HMRC appealed the FTT’s decision.

The Upper Tribunal’s decision

On the issue of whether, for PAYE purposes, Astral had made a deduction of the relevant amount of tax, the Upper Tribunal (“UT”) considered that it should follow the ruling made in a case which HMRC had relied upon, R v IR Commrs, ex parte McVeigh [1996], and that Judge Clark erred in dismissing this case in the original appeal.

The UT considered McVeigh and concluded that, on the making of the relevant payment, Astral did not deduct the amount of tax which should have been deduced.  The UT also found that Mr West’ knowledge of matters must have been sufficient to satisfy the two following conditions;

• Mr West, the influential mind of Astral, intentionally failed to deduct tax and,
• He knew that that had happened

For the same reasons, the UT found that Mr West had made no deduction of primary contributions, and the UT was satisfied that, by paying an amount to Mr West, Astral deliberately created a debt to HMRC knowing that it would be unable to pay that debt.

The UT decided to allow HMRC’s appeal and to set aside the FTT’s decision.

It was agreed between the parties that relevant earnings only arose in 2011-12 and so, the UT re-made the decision by determining that for the tax year 2011-12, the taxable earnings of Mr West for the purposes of income tax and NICs were £129,150. The assessment and decision for 2010-11 were reduced to nil.

Aspire Comment

Yet another case whereby a higher court has disagreed with the decision made by the court below it, further highlighting that, when it comes to technical points of law, it’s not always black and white!

If you have been issued with a determination from HMRC, or if you have a current investigation into PAYE/NIC, please get in touch with Aspire to discuss how we can help.