West
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 August 2016 |
| Neutral Citation | [2016] UKFTT 536 (TC) |
| Date | 03 August 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Clark, Sandi O'Neill
Tony Slater of TS Tax Ltd appeared for the appellant
Simon Bates, Local Compliance, Appeals and Reviews, HM Revenue and Customs, appeared for the respondents
Income tax – PAYE – Direction under Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 72(5) that liability to be transferred to employee – Whether tax deducted – Meaning of deducted – Tax remaining unpaid by employer – Allocation of remuneration to discharge loan account – Held on facts that this constituted payment of remuneration and that tax was deducted – National Insurance Contributions – Primary contributions remaining unpaid by employer – Decision by HMRC that employee liable to pay these contributions – Whether employer wilfully failed to pay – Held on facts that failure not wilful – No basis for transfer to employee of liabilities either for income tax or primary NICs – Appeal allowed.
The Appellant challenged HMRC's contention and assessments that they were liable personally for a failure by their company to operate Pay As You Earn (PAYE) and National Insurance Contributions (NIC) properly on liquidation. The judge and member disagreed here but the judge found that the appellant had shown that PAYE and NIC had been deducted (even if not paid) and this the conditions of SI 2003/2682, reg. 72 had not been fully met and therefore the appeal was allowed.
From 2003 Mr West was the sole director and shareholder of Astral Telecom Ltd (Astral); Astral's trade consisted of selling satellite space to the telecoms industry. In evidence and in submissions for Mr West, it was stated that in accordance with the widespread practice customarily adopted by profitable small businesses, for a number of years Mr West regularly drew money from Astral during the year, those drawings being recorded in the director's loan account as loans. At the end of the year a small amount of remuneration and a much larger amount of dividend were approved and credited to the loan account, thereby extinguishing the loan.
Towards the middle of 2011, Mr West became concerned about the state of Astral's business. He knew that he could be liable for Astral's debts if it traded while insolvent. Following advice from his accountant, he decided to seek advice from an authorised insolvency practitioner, whom he met in June 2011. The insolvency practitioner advised him to put Astral into liquidation. In addition, he advised Mr West 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 also 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. This net remuneration, which was equivalent to the outstanding director's loans of £129,150, would be grossed up by a calculated PAYE and NICs liability to arrive at the figure for director's remuneration in the profit and loss account of £202,967. The company's loan to Mr West would be repaid in full by the net remuneration. The PAYE and NICs were shown on the balance sheet as current liabilities.
In February 2013 HMRC began enquiries with a view to establishing why Astral had not paid its PAYE liability to HMRC. These enquiries were pursued by letters addressed to FA Simms & Partners Ltd, the firm which had dealt with the liquidation of Astral, and Mr West as the director and sole employee of Astral. In his response, Mr West acknowledged that he had drawn monies from Astral and that the tax and NICs due in respect of these payments had not been paid to HMRC. He also stated that he was prepared to consider voluntarily paying the amounts due to HMRC.
In response to Mr West's offer to settle, HMRC wrote stating that they were prepared to recalculate the PAYE liability by treating the repayment of Mr West's £129,150 loan account rather than the figure for director's remuneration in the draft Management Accounts of £202,967 as his income, thereby considerably reducing the amount payable. They invited Mr West to settle with HMRC on this basis. In October 2013, in the absence of a response to their settlement offer, HMRC issued separate income tax and NIC decisions formally transferring the PAYE liabilities from Astral to Mr West on the assumption that he received payments from Astral knowing that it had wilfully failed to deduct sufficient tax.
Following receipt of these decisions from HMRC, Mr West sent a without prejudice letter to HMRC offering to pay £25,000 in full and final settlement. HMRC refused this offer on the grounds that it was insufficient. Subsequently there were various exchanges of correspondence and telephone calls between Mr West and HMRC. In early 2014, Mr West appointed Mr Slater to act for him in relation to the arrears of income tax and NICs owed by Astral; Mr Slater made contact with Mr Gunamal at HMRC. On 5 March 2014, through Mr Slater, Mr West appealed to HMRC against the above decisions. In a letter dated 17 March 2014, Mr Gunamal agreed to accept the late appeal.
After considering information on his file, together with further information provided by Mr Slater, Mr Gunamal wrote to Mr West on 1 May 2014 confirming HMRC's view that the direction and decision to transfer the liabilities to Mr West was appropriate in his case. If Mr West did not agree, he could either ask for a review or notify his appeal to the Tribunal.
Mr West in his appeal referred to the general principles of PAYE; the basic rule was that the obligations fell on the employer. This basic rule was only set aside in limited circumstances. These were narrowly defined:
1) the employer did not deduct PAYE;
2) the failure was wilful and deliberate;
3) the employee received the remuneration knowing that the employer had wilfully failed to deduct the tax
In order for HMRC to succeed, they had to show that all three of these circumstances were present.
Mr Bates acting for HMRC confirmed that HMRC's position had changed since the submission of their Statement of Case. Following discussions with Mr Slater and interested parties within HMRC, they now accepted that the monies drawn by Mr West during 2010–11 and 2011–12 were loans and not payments on account of remuneration. HMRC accordingly acknowledged that there was no failure to operate PAYE at the time when the payments were made, as had been suggested in the statutory review letter and earlier correspondence. However, HMRC did contend that the retrospective exercise of grossing up director's remuneration to extinguish Mr West's indebtedness to the company carried out in the summer of 2011 by Astral's then accountant did not constitute the proper operation of PAYE as required by the relevant regulations. In support of this, HMRC relied on McVeigh, where it had been held that book-keeping entries without the concomitant payment of tax and NICs to HMRC did not constitute the operation of PAYE.
In addition, HMRC contended that this was no more than a paper exercise authorised by Mr West with the aim of clearing his overdraft loan account and with a view to preventing the joint liquidators from recovering the debt from him personally.
There is a difference of view between the members of the Tribunal panel. It did not prove possible to resolve that difference. As a result, respective views were set out and with great reluctance, the Judge had had to decide to use the casting vote available in the last resort to the chairman of the Tribunal panel. His view was to allow the appeal.
In oral evidence, Mr West emphasised his belief that PAYE had been operated. The accountant had produced a set of accounts showing that tax and NICs had been deducted. Mr West believed that for that year, PAYE was still being operated. He had signed the necessary paperwork for the creditors meeting. For that particular year Mr West recalled signing a P35; this showed that PAYE and NICs had been deducted. Because of all of this, his belief was that PAYE was being operated as in previous years. He did not believe that PAYE was not being operated.
The judge found that tax was deducted from the remuneration provided by Astral to Mr West. It is clear from the draft Management Accounts, and from the Summary Statement of Affairs included in the joint liquidators' Report for Meeting of Creditors dated 13 September 2011, that the total amount of the PAYE and NIC liabilities shown in Astral's records was £99,886. 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. As the judge was satisfied that tax was properly deducted, he further found that the first precondition to the operation of SI 2003/2682, reg. 72 (i.e. that the deductible amount exceeds the amount actually deducted) was not fulfilled. As all three must be fulfilled, there was no basis for transferring Astral's liability to account for income tax under PAYE to Mr West.
Whether Mr West knew that Astral wilfully failed to pay the primary NICs was then dealt with. The question to be considered under SI 2001/1004, reg. 86 is different from that under SI 2003/2682, reg. 72; it is whether there has been a wilful failure to pay, rather than a wilful failure to deduct. The issues to be considered were, first, whether the employer has wilfully failed to pay the employee's contributions on the latter's behalf, and secondly, if so, whether the employee knows that the employer has wilfully failed to pay those primary NICs. It was clear on the evidence that Astral has not paid these contributions. The initial question to be considered is therefore whether Astral's failure to pay was wilful.
In the Grounds for Appeal, Mr Slater made the following submission on Mr West's behalf:
Clearly, the company did not...
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Revenue and Customs Commissioners v West
...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) ......
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...an extension of time to apply for permission to appeal. SummaryOn 3 August 2016 the FTT released a decision allowing Mr West's appeal ( [2016] TC 05285) (referred to as the decision). On 28 September 2016 (the normal deadline for applying for permission to appeal) HMRC applied for an extens......