Revenue and Customs Commissioners v West
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 March 2018 |
| Neutral Citation | [2018] UKUT 100 (TCC) |
| Date | 29 March 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0100 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Sir Geoffrey Vos, Chancellor of the High Court, Judge Roger Berner
Ms Laura Poots, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Mr Tony Slater, TS Tax Limited, appeared for the respondent
Income tax and National Insurance contributions (NICs) – Calculation of gross remuneration in an amount which, after deduction of PAYE and NICs, would equal and extinguish liability of director to company on director's loan account – Company insolvent and unable to pay tax and NICs – Whether tax deducted by company – Whether director received relevant payments knowing that the company had wilfully failed to deduct PAYE – Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 72 – Whether company failed to deduct and pay primary NICs and the director knew that the company had wilfully failed to pay – Social Security (Contributions) Regulations 2001 (SI 2001/1004), reg. 86 – Appeal allowed and decision set aside and remade.
The Upper Tribunal (UT) overturned the First-tier Tribunal (FTT) decision in West [2016] TC 05285, ruling that the taxpayer was liable personally for a failure by their company to operate PAYE and National Insurance contributions (NIC) properly on liquidation.
Following advice from an insolvency practitioner, in 2011 Astral was put into voluntary liquidation. Mr West was also advised that Astral could not pay him any dividends for that year, as there were insufficient available profits. Instead, payment to him would have to be wholly by way of salary.
Mr West instructed his accountant to prepare accounts showing an amount of director's remuneration which, after deducting PAYE and NICs, would be sufficient to offset the drawings on the loan account of £129,150. The PAYE and NICs were shown on the balance sheet as current liabilities. Forms P35 were filed with HMRC and the gross remuneration and tax deducted were entered in Mr West's tax returns.
HMRC issued income tax directions (under the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 72 and NIC decisions (under the Social Security (Contributions) Regulations 2001 (SI 2001/1004), reg. 86) formally transferring the PAYE and NIC liabilities from Astral to Mr West on the assumption that he received payments in 2010–11 and 2011–12 from Astral knowing that it had wilfully failed to: (a) deduct sufficient PAYE; and (b) pay sufficient Class 1 primary NICs. As a result of discussions with Mr West, the earnings figure used by HMRC was not the gross amount of the director's remuneration shown in the draft management accounts, but the net amount, after the deduction of PAYE and NICs, which had extinguished Mr West's loan account.
In relation to PAYE the FTT accepted that in order for HMRC to succeed they had to show that:
- the employer did not deduct PAYE;
- the failure was wilful and deliberate; and
- the employee received the remuneration knowing that the employer had wilfully failed to deduct the tax.
The FTT judge decided that Astral had deducted tax in accordance with the PAYE regulations and therefore HMRC could not succeed. In particular the judge had regard to the draft management accounts for the relevant period which had been approved and signed by Mr West and showed the total amount of the PAYE and NIC liabilities of £99,886 and the form P35 showing a liability for PAYE and employer's NICs. Thus the indebtedness to HMRC resulting from the grossing up calculation was acknowledged, thereby confirming the deduction of the tax and employee NICs from the remuneration. The judge distinguished R v IR Commrs, ex parte McVeigh [1996] BTC 35, on which HMRC had relied.
As regards NICs, Judge Clark noted that the question to be considered was different to that raised in relation to PAYE. The question did not concern wilful failure to deduct, but whether there was a wilful failure to pay the primary Class 1 contributions, and if so, whether Mr West knew that Astral had wilfully failed to pay those contributions. It was clear that there had been no payment. However, Judge Clark found that Astral's failure to pay was not wilful, since at the time the liability arose Astral was not in a position to pay the resulting NICs to HMRC. Accordingly, the relevant condition in reg. 86 had not been fulfilled, and Astral's liability to pay the NICs could not be transferred to Mr West.
The FTT's decision to allow Mr West's appeal was made on the casting vote of Judge Clark, with Ms O'Neill dissenting.
HMRC appealed against the decision to the UT, which allowed the appeal.
On the issue of whether, for PAYE purposes, Astral had made a deduction of the relevant amount of tax, the UT considered that it should follow McVeigh, and that Judge Clark was wrong not to do so. This was because:
- it did not regard the distinctions between the facts of this case and those in McVeigh as of particular significance;
- the ratio of McVeigh was not about the detail of the accounting or record-keeping procedures undertaken by the company or the individual director, but about the essential nature of the transaction that was being undertaken; and
- it thought that Judge Clark misunderstood McVeigh, and distinguished it on a false premise – in both cases the crediting of the remuneration to the director's loan account was properly to be regarded as payment, and in each case there were book entries regarding the liability of the company to tax (and NICs), but no actual payment of that tax to HMRC.
Considering McVeigh, the UT concluded that, on the making of the relevant payment, Astral did not deduct the amount of tax which should have been deducted.
The UT then considered whether Astral had failed to deduct tax wilfully and, if so, whether Mr West knew that. The UT found that for a person wilfully to bring about a particular legal outcome, it was not necessary for that person to be aware of the legal consequences of his or her actions. It was necessary only for that person intentionally or deliberately to put in train the various actions that in the event had the material consequences in law.
The UT accepted that Mr West did not deliberately set out to avoid a tax liability on the salary voted in his favour. But such intentions were not conditions that needed to be met. What mattered was whether Mr West (as the guiding mind of Astral) intentionally failed to deduct tax and whether he knew that that had happened. The UT concluded that Mr West's knowledge of matters must have been sufficient to satisfy both those conditions.
For the same reasons the UT found as a matter of law that Astral made no deduction of primary contributions. And again, the UT was satisfied that, by paying an amount to Mr West (through credit against Mr West's liability to the company on his loan account), Astral deliberately created a debt to HMRC, knowing that it would be unable to pay that debt. In those circumstances, Astral's failure to pay the NICs was wilful and Mr West, as the directing mind of Astral, knew that.
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, but HMRC argued in the UT that the amounts of income tax and NICs due should be increased to reflect Mr West's gross earnings of £202,976. The UT did not consider that, based on the evidence, it was possible to conclude that Mr West should be regarded as having received those gross earnings.
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.
The original FTT decision to allow the appeal had let an owner of a business liquidate his company and to pay himself without paying the required PAYE and NIC. This UT decision rectifies what many people, including the dissenting FTT member, considered to be an inappropriate interpretation of the legislation.
[1] This is an appeal by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) against the decision of the First-tier Tribunal (Judge John Clark and Ms Sandi O'Neill) (“FTT”), on the casting vote of Judge Clark (Ms O'Neill having dissented), to allow Mr West's appeal against HMRC's directions with respect to PAYE, and a consequent assessment and amendment in relation to income tax, and decisions with respect to national insurance contributions (“NICs”), arising in the circumstances we will describe.
[2] Judge Clark in the FTT refused permission to appeal, but in this tribunal permission was given by Judge Herrington.
[3] Mr West was, from 2003, the sole director and shareholder of Astral Telecom Limited (“Astral”). Astral was put into creditors' voluntary liquidation in 2011, with a deficiency on the joint liquidators' Statement of Affairs of £146,611. That statement showed that PAYE and NICs totalling £99,886 were owing at that time to HMRC.
[4] For a number of 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.
[5] There was a change to this pattern from the accounting period ended 30 April 2007 onwards. Although salary and dividends continued to be paid to Mr West, the amount outstanding on the Loan Account was not extinguished at the end of each year, and it in fact increased for several years. For the year ended 30 April 2010, Mr West was paid a salary of £5,715 and received a dividend of £51,000. The amount left outstanding on the Loan Account as at 30 April 2010 was £40,719.
[6] Towards the middle of 2011, Mr West became concerned about the state of Astral's business. He...
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