Parmar and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 February 2016 |
| Neutral Citation | [2016] UKFTT 142 (TC) |
| Date | 29 February 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Christopher Staker, Ms Amanda Darley
Mr D Doshi of Doshi & Co Accountants and Tax Consultants appeared for the Appellants
Mrs G Millward, Presenting Officer, appeared for the Respondents
Income tax and National Insurance – Recovery of PAYE income tax and Class 1 National Insurance from employee/shareholder/ director of company – Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 72(5) – Social Security Contributions (Transfer of Functions, etc.) Act 1999 (SSC(TF)A 1999), s. 8(1)(c) – Whether moneys were salary or dividends – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed Mr and Mrs Parmar's appeals against PAYE and NIC assessments under the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 72(5) and the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (SSC(TF)A 1999), s. 8(1)(c) finding that the couple had admitted to retaining company profits for their own use without declaring those profits for corporation tax or as income on their own self assessment tax returns and there was nothing to support treating the amounts as dividends drawn rather than salary received from the company (subject to PAYE and NIC). The couple further put forward no evidence to support that HMRC's assessments in respect of other years raised on the presumption of continuity were excessive and the assessments stood.
Mr and Mrs Parmar ran a newsagents shop, initially as a partnership but later through a limited company. Mr and Mrs Parmar had taken a basic salary from the company just below the income tax threshold. However, all business takings were in cash and Mr and Mrs Parmar's practice was to retain the cash and pay into the company bank account only so much as was necessary to pay the company's liabilities. The couple also took company stock for their own use. HMRC opened an enquiry into the company and partnership's tax returns and subsequently notified Mr and Mrs Parmar that they intended to raise discovery assessments and penalties on Mr and Mrs Parmar personally in respect of undeclared company profits over a number of years. However, as the business had been sold and the company dissolved, Mr and Mrs Parmar responded that they could not be made liable for debts for the dissolved company.
HMRC then changed tack and issued determinations under SI 2003/2682, reg. 72(5) and decisions under SSC(TF)A 1999, s. 8(1)(c) seeking recovery from Mr and Mrs Parmar, as employees, of unpaid PAYE and NI by their employer (the dissolved company) on the grounds that money they took from the company was undisclosed employment income paid out of evaded profits. Mr and Mrs Parmar appealed to the FTT.
HMRC had calculated a figure for undisclosed profits for the year ended 31 December 2007 which mainly comprised amounts which had been shown as capital introduced in the accounts but which represented cash takings of the company business initially retained by the appellants but then subsequently paid into the company bank account to meet liabilities. HMRC had then treated the amount as having been incurred in other years as well on the presumption of continuity. The appellants did not dispute HMRC's figures but argued that:
1) the amounts should be treated as received by the appellants from the company as dividends not as salary; and
2) the principle of continuity did not apply. The company's accounts showed capital introduced during one year only and it must be concluded that these amounts were cumulative undisclosed profits from all previous years, not profits made regularly by the company on an annual basis.
The FTT noted that it was not disputed that cash takings of the company were taken by the appellants, some of which they then kept for their own use, without these being recorded as profits in the company accounts, and without these being returned as income by the appellants in their own tax returns. The result of this was, inevitably, that it could not now be known exactly how much money the company made, or how much of that money was ultimately taken by the appellants for their own use.
The FTT did not accept that the amounts drawn by the appellants ought to be treated as dividends rather than salary. There was no paperwork to support dividends having been paid and even if it was the appellants' intentions that the only salary paid would be the basic personal allowance salary with all additional amounts drawn as dividends, intentions alone could not determine the tax liability of a transaction. Whilst it may have been that the appellants formed the company because of certain advantages offered by that legal structure, that did not mean that the appellants were free to take the advantages offered by that arrangement, but otherwise to conduct their affairs as if the company did not exist. Having incorporated the Company, the appellants were subject to all the legal consequences of that particular arrangement.
As for the years other than 2007, once it was accepted that the appellants took profits from the business for their own use, without these profits being declared in the company's accounts or in the appellants' own tax returns, it had to be concluded that there was material from which an assessing officer could rationally form the opinion that there was an insufficiency of tax paid. Having reached that conclusion, the burden then passed to the appellants to show that the assessments actually made were excessive. The FTT found that the appellants had not discharged that burden. On the material before the FTT, it could not be known how much money the appellants took from the business for their personal use and essentially, nothing was put before the FTT by way of evidence to support the argument that the assessments were excessive. Even if the appellants could demonstrate that the methodology used by HMRC was unsatisfactory in certain respects, that would not be sufficient to succeed in the appeals unless the appellants could point to a more satisfactory methodology that showed that the HMRC assessments were excessive and the appellants had not done that.
Accordingly, the appeals were dismissed.
Mr and Mrs Parmar had operated a newsagents business through a limited company but had retained all of the company's cash takings, banking only as much as was needed to cover the company's liabilities. Although HMRC initially considered raising assessments on Mr and Mrs Parmar personally for unpaid corporation tax on undisclosed profits, as the company had been dissolved, HMRC instead raised assessments on Mr and Mrs Parmar for unpaid PAYE and NI on the basis that the amounts taken by them constituted salary subject to PAYE and NI. Mr and Mrs Parmar tried to argue that the amounts were dividends rather than salary but the FTT found that there was nothing to support this, particularly, no paperwork. Mr and Mrs Parmar also tried to argue that there was no basis for HMRC's presumption of continuity to justify similar assessments in other years but the FTT found that it was for Mr and Mrs Parmar to show that HMRC's assessments were excessive and they had not done that. Accordingly, the appeals were dismissed.
[1] The Appellants appeal against HMRC determinations under regulation 72(5) of the Income Tax (Pay As You Earn) Regulations 2003 (the 2003 Regulations) and decisions under s 8(1)(c) of the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (the 1999 Act), in respect of tax years 2005–06 to 2008–09.
[2] By way of general background, the Appellants' representative, Mr Doshi, stated as follows.
[3] The Appellants are husband and wife. At some point they started a small business together. This business was a newsagent shop, which sold newspapers and also other items such as confectionary. Originally the business was run as a partnership. At that time, the business did not operate PAYE as the Appellants took all of the profits as partnership profits rather than as salary.
[4] Pursuant to professional advice that there would be advantages to running the business through a company including tax efficiency, the Appellants incorporated a company called Whitford (UK) Ltd (the Company) on 15 December 2004. The Appellants were the sole shareholders and directors of the Company. They were also employees of the company. They each took a basic salary from the Company that was just below the income tax threshold. As a result, the Company had to operate PAYE in the sense that it was registered for PAYE and submitted PAYE returns, but was in fact required to deduct no PAYE tax and submitted nil returns. The intention was that all other profits of the business would be taken by the Appellants from the Company as dividends.
[5] During the period of the Company's existence, the partnership also continued to exist. The partnership owned the business assets, including the premises from which the Company's business traded, so that the Company paid the partnership rent and service charges for use of these assets. The Appellants therefore ultimately had three sources of income from the Company: salary, dividends, and rent and service charges.
[6] The Appellants sold the business on 6 June 2009. Subsequently, on 15 June 2010, the Company was dissolved.
[7] At the hearing on 10 February 2016, Mr Doshi made a frank admission on behalf of the Appellants. He said that the business takings were all in cash. The Appellants' practice was simply to retain the cash, and to pay so much of it into the Company's bank...
To continue reading
Request your trial