Petrol Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 December 2018 |
| Neutral Citation | [2018] UKFTT 773 (TC) |
| Date | 27 December 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0773 (TC)
Judge Gething, Mr John Agboola
Mr Dougal Powrie of Kibworth tax Services Limited, appeared for the appellant
Mr Martin Priestly Presenting Officer of HM Revenue and Customs, appeared for the respondents
Income tax and National Insurance contributions – Whether payments from an office, a contract of service or a contract for services – Appeal dismissed.
The First-tier tribunal (FTT), dismissing the appeals, held that payments made by the appellant to a company and a partnership constituted earnings under s. 62 ITEPA 2003, and as such the appellant was liable to pay PAYE and NICs on those payments.
Petrol Services Ltd (the appellant) carried on a business of running a petrol station. The issue was whether the appellant was liable to pay PAYE and NICs on payments made by the appellant to a company and a partnership (referred to as the consultancy vehicles).
The appellant had no staff, offices or employees other than two directors, Mr Odedra and Mr Badiani (the directors). The directors and their spouses owned between them all of the shares in the appellant in equal shares. Each of the directors was named as a consultant alongside his consultancy vehicle under a contract entered into with the appellant in 1999.
The appellant argued that payments made to the directors were not earnings but payments for consultancy services rendered by the consultants to the appellant through the activities of the directors. As non-executive directors, the directors did not have and were not required to have written contracts which provided for remuneration and as they had never been voted remuneration by the appellant, the payments could not be attributed to the office held by them.
The FTT did not find this argument compelling. The directors, whether executive or non-executive, held an office the remuneration for which would be taxable as earnings. As the directors and their wives owned all the shares in the appellant, a formal resolution to approve remuneration was not required following re Duomatic Ltd [1969] 2 Chancery 365.
The FTT reviewed the 1999 contracts and concluded that they should properly be regarded as contracts of service.
The appellant also argued that the services provided under the 1999 contract were not of the sort provided by non-executive directors. The FTT stated that they found this a particularly unattractive argument. Firstly, it was normal in the case of closely held companies for the directors to perform all tasks however lofty or lowly they may be. Secondly, whereas the FTT accepted that it was legally possible for an individual to have their own individual business (for example as an accountant or solicitor) whilst also having the office of director of a company, in relation to the appellant, the directors conducted all of the activities that were conducted by the appellant. The FTT concluded, looking at the evidence, that the directors did not have an independent business which constituted the source of the payments, with the result that those payments arose from the directors' offices or employments with the appellant.
The appeal was therefore dismissed.
Having dismissed the appeal it was not necessary to consider whether or not the agreements between the appellant and Mr Odedra and his partnership and between the appellant and Mr Badiani and his company did not give rise to contracts of service. However, in case it was relevant, the FTT concluded that, on a review of the 1999 contracts that such contracts of service existed and that the payments were made under them, and were earnings for the following reasons:
- The 1999 contracts provided for services to be performed for the appellant for which there was an express right to be remunerated.
- To allow the contracts to run the directors had to be satisfied that the services were being performed to the required standard. This suggested that Mr Odedra as director scrutinised the activities of Mr Badiani and Mr Badiani as director scrutinised the services of Mr Odedra. The standard of each director was scrutinised and controlled by the appellant.
- There was no express right to substitute another individual in the performance of the services.
The FTT concluded that, taking all the factors into account, the relationship was that of employer and employee. Mr Badiani and Mr Odedra were part and parcel of the appellant's business. The 1999 contracts required oversight by the appellant. There was a framework to control the activities of each of the directors. The directors were under the control of the appellant.
The appeals were dismissed in full.
A liability to income tax and NICs on earnings from an office or employment and to provide for the collection of the income tax and NICs by the employer could not be side stepped by the appellant putting in place contracts that purported to be consultancy contracts under which the directors of the appellant (contracting alongside a vehicle owned by the director) exclusively conducted the entire business of the appellant.
It was clear from the facts that Mr Odedra and Mr Badiani did not have any business independent of the offices of director of the appellant with the result that payments arose from their respective offices or employments with the appellant.
[1] The issue in this case is whether Petrol Services Limited (“the Appellant”) is liable to pay income tax under the PAYE system and employee and employer national insurance contributions (Primary and Secondary Class 1 Contributions (“the NICs”)) on payments made by the Appellant to a company and a partnership (which I refer to as the consultancy vehicles) in circumstances where:
- the Appellant had no staff, officers or employees other than the two directors, Mr Odedra and Mr Badiani (the Directors).
- Each of the Directors was named as a consultant alongside his consultancy vehicle under a contract entered into with the Appellant in 1999.
- The directors actually carried out all the activities necessary to conduct the Appellant's business.
[2] For the tax years ending 5 April 2012 to 2015 determinations were issued under regulation 80 of The Income Tax (Pay as You Earn) Regulations SI 2003/2682 (“the PAYE Regulations”) and for the tax years 2009 to 2015 decisions were made pursuant to section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999 (“the SSCA 1999”) in the following amounts:
| 1 | 2 | 3 | 4 | 5 |
| Tax Year | Director | Pay (£) | Tax (£) | NICs (£) |
| 2009–10 (1 month only) | Mr Odedra | 5,000 | 942 | |
| Mr Badiani | 5,000 | 942 | ||
| 2010–11 | Mr Odedra | 60,000 | 8,338 | |
| Mr Badiani | 60,000 | 6,948 | ||
| 2011–12 | Mr Odedra | 46,664 | 19,221 | 9,777 |
| Mr Badiani | 46,664 | 16,081 | 5,463 | |
| 2012–13 | Mr Odedra | 33,332 | 13,826 | 6,653 |
| Mr Badiani | 33,332 | 9,494 | 3,566 | |
| 2013–14 | Mr Odedra | 36,800 | 12,129 | 7,501 |
| Mr Badiani | 36,800 | 10,805 | 4,016 | |
| 2014–15 | Mr Odedra | 53,400 | 21,360 | 10,571 |
| Mr Badiani | 53,400 | 13,855 | 6,271 | |
| Total | 116,771 | 70,625 |
[3] We heard evidence from Mr Odedra on behalf of both of the Directors (as Mr Badiani has hearing issues and as his first and best language is Guajarati and would need a translator) and Mr Odedra was cross examined by HMRC's presenting officer.
[4] We also heard evidence from Mrs Jones, an officer of HMRC and the case worker in relation to the enquiry that led to this appeal. Mrs Jones had served third party notices requesting information from third party suppliers as to the capacity in which Mr Odedra and Mr Badiani acted in their dealings with the third parties.
[5] In the periods under consideration we find the facts as follows:
- The Appellant carried on a business of running a petrol station business.
- The Directors were not paid any remuneration directly by the Appellant.
- The Directors and their spouses owned between them all of the shares in the Appellant in equal shares (25% each). (The shares had been acquired by their wives on 16 July 2007).
- There were no written contracts between the Appellant and the Directors other than the agreements (called Consultancy Agreements) entered into in 1999, which we refer to as the 1999 contracts.
- The two contracts were as follows:One is between the Appellant on the one hand and Mr Odedra/ his consultancy vehicle on the other dated 15 June 1999. The consultancy vehicle specified in the contract is a limited company. (Mr Odedra said that this was a mistake, it is a general partnership of which he and his wife were 50/50 partners that had provided the consultancy services).The other is between the Appellant on the one hand and Mr Badiani/his consultancy vehicle on the other dated 20 June 1999. The consultancy vehicle in this case was a company called Jadeprime Limited. The shares in the company are owned by Mr Badiani and his wife in equal shares.The contracts are almost identical. Clause 1 entitled particulars defines a number of terms. It reads as follows in relation to the meaning of consultant: 1.2 the consultantThen in hand writing below the following appears: J&J Enterprises (Leicester) Ltd /OR B.ODEDRAIn the case of Mr Badiani's contracts it is identical save that the handwritten entry reads JADEPRIME LTD/MR N. BADIANIWe refer to Jadeprime Ltd (or the partnership that Mr Odedra says was intended to be the vehicle) and J&J Enterprises (Leicester) Ltd as the Consultancy vehicles.Clause 1.4 defines the term. Mr Odedra's contract has an initial term of 5 years terminable on two years notice. Mr Badiani's term was one year terminable on 6 months' notice:1.4 The terma period of 5 years from the commencement date and thereafter unless terminated by either party giving to the other not less than two years notice in writing.1.5 The initial feethree thousand pounds per calendar month exclusive of VAT.1.6 The fee paid shall be reviewed every twelve months and increased having regard to the...
To continue reading
Request your trial