[2011] UKFTT 268 (TC)
TC01130
Appeal number: TC2010/03599 & TC2010/03600
National
Insurance Contributions; failure by limited company to pay contributions;
Personal Liability Notice served on director; whether failure to pay
attributable to neglect on the part of directors; Social Security
Administration Act 1992 s 121C&D; Appeal dismissed.
FIRST-TIER TRIBUNAL
TAX
STEPHEN
ROBERTS & ALAN MARTIN Appellants
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL JUDGE: J GORDON REID, QC., F.C.I.Arb.
Member: Ian
M P Condie, CA,
Sitting in public at George
House, 129 George Street, Edinburgh on Monday 21 March 2011
Stephen Roberts for the
Appellants
Eugene Walsh (HMRC) for the
Respondents
© CROWN COPYRIGHT
2011
DECISION
Introduction
1. These
are appeals against a Personal Liability Notice (“PLN”) served on each
Appellant under section 121C of the of the Social Security Administration Act
1992 which enables HMRC, in certain circumstances, to impose personal liability
on directors of companies who fail to pay National Insurance Contributions.
The total sum at stake is £90,959.00. Here, the company concerned is Innova
Business Solutions Ltd (“Innova”), of which both Appellants were directors.
2. A
Hearing took place at Edinburgh on 21 March 2011. The Respondents (HMRC) were
represented by Eugene Walsh, an official of HMRC who specialises in advocacy.
He led the evidence of Andrew Pawley, a Personal Liability caseworker with
HMRC. He works for the Specialist Investigation Department with HMRC’s
Insolvency & Securities Team. He has carried out this type of work for
over seven years. Before the Hearing, HMRC lodged and intimated a detailed
Witness Statement by Mr Pawley which was fully cross-referenced to a substantial
lever arch file of documents which had also been lodged and intimated prior to
the Hearing. Mr Pawley spoke to his statement and the documents in
evidence. The Appellants appeared without professional assistance. Mr Roberts
spoke for both of them and also gave evidence. There was no dispute about the
authenticity, and where appropriate the transmission and receipt of the
documents produced.
Statutory Framework
3. Section
121C of the Social Security Administration Act 1992, inserted by section 64 of
the Social Security Act 1998, provides HMRC with powers to recover unpaid
contributions, including National Insurance Contributions, plus interest and
penalties, from the directors and officers of a company provided certain
conditions are met. The purpose of the legislation was to tackle abuse of the
National Insurance system and to act as a deterrent to future abuse. The
legislation applies to contributions that a body corporate is liable to pay,
where it has failed to do so within the prescribed time, and where the failure
appears to HMRC to be attributable to fraud or neglect on the part of one or
more individuals who were officers (which includes directors) of that body at
the material time. There are safeguards for companies who have genuinely failed.
The burden of proof on any matter raised in an appeal lies on HMRC (section
121D).
4. The
approach of HMRC is to serve a PLN only where they consider there to have been
fraud or a serious level of neglect. Accordingly, a thorough and detailed
enquiry will be carried out before a decision is taken by a senior officer, to
authorise the service of a PLN.
5. Section
121D specifies the grounds on which a PLN may be appealed. In summary, these
are (a) the amount claimed or part of it is not the proper subject of a PLN,
(b) the failure to pay was not attributable to any fraud or neglect by the
individual in question, (c) the individual was not an officer of the company at
the time, and (d) HMRC’s opinion was unreasonable. This appeal is concerned
only with (b).
Procedural Background
6. On
or about 4 November 2009, a PLN was issued to each Appellant. The total sum
claimed was £90,959 apportioned equally between each Appellant (£45,479.50).
The total sum was made to best judgment as there were gaps in the records of
Innova. However, there is no challenge to the validity of the notice, quantum
or the apportionment.
7. On
22 February 2010, the Appellants requested an internal review. On 19 March
2010, the review officer concluded that the decision to issue the PLNs was justified.
On 15 April 2010, the Appellants appealed to this Tribunal.
Grounds of Appeal
8. The
Grounds of Appeal embrace the terms of a long letter dated 15 January 2010 to
HMRC from the Appellants’ solicitors. It is difficult to condense, but in
essence the grounds of appeal are (i) the test for neglect involves considering
what a reasonable and prudent man would do in the circumstances, (ii) when
Innova started up there was no financial risk, (iii) it was reasonable not to
have contacted HMRC as Innova had no proposals to make, (iv) even although
Innova was not in a position to pay its statutory liabilities, a reasonable
person would not necessarily in the circumstances have brought the business to
an end, as it was reasonable to think that the business could be turned around,
(v) the payments of salaries and expenses to the directors was not
unreasonable, (vi) certain payments were made to ensure the ongoing viability
of the business although no preference was given to particular creditors (vii)
as Innova approached liquidation the overall indebtedness to creditors was
reduced because this burden was taken on by the successor company,
Cornerstone Resources Ltd, and (viii) professional advisers consulted by the
Appellants at the time did not disagree with the directors’ proposed course of
action.
9. The
following additional or overlapping points were set forth in the statutory
appeal form, namely (i) the directors did not act negligently; the non-payment
of PAYE Tax and NIC was a result of adverse business conditions, (ii) the
directors were prudent in that they inter alia held monthly meetings and
allocated funds to business critical activities, (iii) the Appellants never
planned not to pay HMRC what was due, and (iv) the economic business climate
ensured that they were, in effect, not in a position to pay.
Issues
10. The only issue
in the appeals is whether the failure by Innova to pay National Insurance
Contributions, was attributable to neglect on the part of the Appellants.
Fraud is not in issue. HMRC apportioned liability equally to each Appellant.
That apportionment (if liability were to be established) was not disputed by
the Appellants. Quantum was also not in dispute.
Facts
11. Innova was a
company incorporated under the Companies Acts on 21 June 2007. Its registered
office was at Craigowan, 30 Brewlands Road, Symington, Ayrshire. The
Appellants and SP Campbell were its directors. The company was essentially a
staff agency. It provided personnel with specialist qualifications to
businesses in the financial services industry such as banks, insurance
companies and others on short term contracts. These individuals were either
employees of Innova and hired out to third parties; or they were individuals
whose services were engaged as independent contractors; Innova then sub-contracted
these services out to third parties. The precise contractual arrangements
were not explored in evidence and no sample documentation was produced.
Whatever Innova paid the personnel on their books they charged a mark-up to
their own third party clients. The mark-up varied from 50% to 8%; latterly it
was nearer 8%.
12. Innova was the
successor (or phoenix) company of Synergi Global Solutions Ltd, a company in
which both Appellants were directors. It carried on a similar business to Innova,
namely contract consultancy. Synergi went into liquidation by order dated 27
July 2007 with PAYE tax NIC and VAT debts of about £165,305 of
which £103,733.07 was attributable to outstanding PAYE
tax and NIC. Mr Roberts had given a personal guarantee up to £20,000 for the liabilities of Synergi. Following a dispute with
Synergi’s liquidator about work-in-progress, Innova found itself, at the
outset, under liability to pay the liquidator at least £73,000, a liability from which it never truly recovered. Innova was
significantly underfunded from the outset as the Appellants must have known.
Innova may never have been solvent.
13. On 30 June 2009,
Mr Pawley obtained copies of Innova’s books and records from its liquidator.
Mr Pawley’s examination of these books and records revealed that between 9
October 2007 and 2 April 2008, Innova received payments amounting in total to
£672,400 throughout the period of its trading.
14. Innova kept
payroll records showing that PAYE tax and National Insurance contributions (NIC)
had been regularly deducted from the wages of its employees. The records
showed that between 31 July 2007 and 31 March 2008, PAYE tax and National
Insurance of £220,708.36 were due and payable to HMRC. No sums in respect of
PAYE or National Insurances were ever remitted by Innova to HMRC although
throughout that period, the Appellants paid themselves substantial salaries and
expenses. Mr Martin’s salary was £75,000 per year and Mr Roberts’ was £125,000
per annum.
15. Innova’s records
did not identify separate total figures for PAYE tax and NIC. HMRC estimated
the NIC liability to the best of their judgment from the available records
which included monthly Payroll records and a PAYE nominal ledger account. The
Appellants have not provided any additional records from which a more precise
sum might have been calculated. Nor have they suggested an alternative figure.
16. After receiving
Innova’s books and records, Mr Pawley sent opening letters dated 2 July
2009 to the directors, which offered them the opportunity to complete a
questionnaire which the Appellants did. It became clear early in the
investigation that a third director of Innova, Mr Stuart P Campbell, did not
attend monthly finance meetings, was unaware that payments to HMRC were
overdue, and was not a signatory on Innova’s bank account. No further
proceedings were taken against him. In any event, he appears to have resigned
as a director of Innova on 29 February 2008.
17. The Appellants
produced a joint response to the questionnaire. It appears to have been
prepared by Mr Martin but Mr Roberts did not dispute its authenticity. The
following points emerge from the Appellants’ response and HMRC’s further
investigations.
18. Mr Martin was
operations director, responsible for the Consultancy revenue stream. Mr
Roberts was the sales director. Mr Campbell was responsible for the Recruitment
revenue stream.
19. At the outset of
trading, Innova was in dispute with the Liquidator of Synergi who was claiming
£126,000 from Innova. In addition, Innova did not generate the business
anticipated as a number of contractors did not give them the business they
expected to receive.
20. Innova had an
accountant who prepared monthly payroll sheets showing payments due to
employees and the total PAYE Tax/National Insurance Contributions.
21. Monthly payroll
sheets were produced showing payments due to employees and total PAYE tax and
National Insurance Contribution (NIC). The Appellants were aware that Innova
had a statutory obligation to pay PAYE tax and NIC to HMRC each month. Innova’s
accountant was responsible for sending PAYE tax and NIC to HMRC on the
instructions of a director. The Appellants were the sole signatories on
Innova’s bank account.
22. No such
instructions were ever given, as no NIC or PAYE tax was ever remitted by Innova
to HMRC. Each month, from the outset of Innova’s trading, the Appellants
conducted a financial review and each month they took the decision to refrain
from making any payments of PAYE tax or NIC, preferring to pay their own
substantial salaries and other creditors. The Appellants were, in effect,
propping up Innova with funds which ought to have been remitted to HMRC.
Innova did not at any stage generate enough funds to pay its debts as they fell
due. The Appellants were aware of this.
23. Innova’s Profit
and Loss Account for the period 1 July 2007 to 14 April 2008 disclosed total
sales of 964,231.33, direct costs (consultants and sub-contractors) of
694,413.45, leaving a gross profit of £269,817.88. Total HQ staff overheads
(of which £166,893.67 was attributable to directors) amounted to £335,574.24;
general expenses amounted to £75,329.22; office and admin overheads (including
rent, IT support and bookkeeping fees) amounted to £127,308.93, producing total
overheads of £538,212.39 and an operating loss of £268,394.51.
24. Innova factored
its book debts to Bibby Financial Services. This aspect of Innova’s trading
arrangements was not explored in evidence.
25. At no stage,
while Innova was trading, did the Appellants or either of them contact HMRC to
discuss Innova’s failure to pay PAYE tax or NIC. They knew or suspected that
if they did so, HMRC would likely have taken steps to put Innova into
liquidation. Instead, they resolved to pay creditors on a business critical
basis. This basis involved continuing to pay their own salaries and
creditors with whom they might do business with any successor company to
Innova.
26. Shortly before
Innova went into liquidation, certain contractors were paid to ensure that
their services could be used by a planned successor company (Cornerstone
Resources Ltd). In particular, between March and April 2008, trade creditors
were reduced from £104,025.21 as at 17 March 2008 to £24,119.51 as at 2 April 2008. However, no payments were made to HMRC.
27. Innova ceased
trading on or about 18 April 2008. It failed to submit VAT returns for the
quarters to October 2007, January 2008 and April 2008. In other words, it did
not submit any VAT returns at all. Innova’s VAT liability has since been
assessed at £18,623 which has not been paid. On 21 August
2008, Innova was ordered to be wound up, a provisional liquidator having been
appointed on 18 April 2008.
28. Innova’s interim liquidator reported, on 30 September 2008 an
estimated deficiency of funds of £248,871.
29. Cornerstone
began trading in about May 2008 when a PAYE scheme was set up. It had the same
registered office as Innova. The Appellants were the directors of Cornerstone
and they awarded themselves the same salaries they had received from Innova.
HMRC officers visited Cornerstone’s accountant on 27 February 2009 to examine
Cornerstone’s payroll records in order to quantify the debt owed to HMRC.
Thereafter, the Appellants made their first contact with HMRC in early March in
relation to Cornerstone’s liabilities.
30. No payments of
PAYE tax or NIC were made by Cornerstone until 26 November 2009 when £5,000 was
paid. Cornerstone’s PAYE tax and NIC liability for the tax
year 2008/09 has been assessed at £126,677.86 of which £121,677.86 was still outstanding as at 6 September 2010.
31. On 28 June 2010,
the Appellants were each disqualified from holding the office of director for a
period of four years. Mr Martin, who was a chartered management accountant,
has had to resign from the accountancy body of which he was formerly a member.
Decision
32. We were referred
to a number of authorities on the meaning of neglect, including Blyth v
Birmingham Waterworks Co 1856 11 EX 781 at 784 for a definition of
negligence, Livingstone v HMRC TC 00369, 15/1/10, a PLN case,and Inzani
v HMRC 1996 SPD 529.
33. We do not need
to consider these cases in detail. In our view, neglect consists of a
failure to do what, in the circumstances, a reasonable and prudent person would
have done. Neither party disputed that proposition. It is unnecessary and
possibly inappropriate to embark on a consideration of negligence insofar as
this may be thought to be different from neglect in the present context.
Had we considered that necessary, an examination of modern Scottish
authority on negligence would have been required. The modern notion of
negligence is probably not quite the same as it was in 1856. Negligence
involves identifying a duty of care, specifying the standard of duty to be
achieved, foreseeability, causation and remoteness and raises the question
whether it would be fair just and reasonable to impose a duty and consequent
liability on the person concerned.
34. We have,
however, no difficulty in holding on the balance of probabilities, that
Innova’s failure to pay the NIC specified in the PLNs was attributable to the
neglect on the part of the Appellants. HMRC have discharged the onus of proof
which rested on them. It was plain that the Appellants were fully aware of the
statutory obligations in relation to payment of NIC. They received information
each month about the financial health of Innova including the amount of NIC due
and payable by the 19th of the month. They were personally
responsible for ensuring the payment of NIC and PAYE tax. They were
responsible for the decision each month, while Innova traded, not to pay NIC
and PAYE tax and chose instead to pay other creditors and their own salaries;
they thus propped up for as long as possible an ailing business with funds
which should have been remitted to HMRC. No attempt was made to discuss
matters with HMRC. They made no reasonable provision for the payment of NIC or
PAYE tax; even although they must have been aware that the liability to HMRC
was increasing each month.
35. Viewing the
figures set out in our findings of fact broadly, Innova needed a turnover in
excess of £2m per annum (which allows a generous 33% mark up on direct costs)
in order to service outgoings of about £500,000 and break even. Their actual
sales over the life of the company fell far short of that rate.
36. Having traded in
the consultancy business for a number of years through the medium of Synergi,
the Appellants were well aware of a company’s statutory obligations in relation
to the payment of PAYE tax and NIC. From the outset Innova was probably
underfunded. If it was not, then one must ask why no PAYE tax or NIC was ever
paid. It is no defence to say that HMRC were not chasing for payment. Innova
had a statutory obligation to pay whether or not HMRC demanded payment sooner
or later.
37. No reasonable
and prudent businessman would have behaved in this way or conducted business in
this manner. No reasonable and prudent businessman would have neglected to pay
the NIC as it fell due. Any reasonable and prudent businessman, having control
of the operations of Innova, would probably have ceased trading within a few
months of start-up at the latest or attempted to make arrangements with HMRC
about deferring payment. The irresistible inference from the facts as we have
found them to be is that Innova’s business was being funded at least in part by
money which ought to have been remitted to HMRC to meet the company’s statutory
obligations. In our view, no reasonable and prudent business man would, in the
circumstances, have conducted his business in such a manner. In our view,
Innova’s persistent failure to pay NIC at or within the prescribed time is
attributable to neglect on the part of the Appellants, who throughout the
period of that neglect were directors of Innova. The relevant requirements of
s121C of the Social Security Administration Act 1992, as amended, have been
met.
38. If the foregoing
were not enough, it is clear that a pattern has developed over the years
whereby a company controlled by the Appellants fails to pay NIC and PAYE tax;
the company becomes insolvent, with debts due to inter alios, HMRC, and
then goes into liquidation; a new successor company rises phoenix like from the
ashes of the insolvent company, trades for a time, becomes insolvent, with
debts due to inter alios, HMRC, and then goes into liquidation; another
new phoenix company starts up and trades until it becomes insolvent; and so on.
39. The Appellants
produced no documents or any evidence on which we felt confident enough to
rely, to support the contentions advanced in their grounds of appeal. Apart
from his acknowledgement in evidence that he was aware at the material time of
Innova’s statutory responsibilities, there was little of what Mr Roberts
said in evidence which we were prepared to accept. In cross examination he was
evasive and devious. At one point he asserted that he and Martin had
approached HMRC about Cornerstone’s PAYE tax and NIC liabilities before HMRC
had started making enquiries. However, he eventually accepted (what he must
have been aware of all along) that his approach to HMRC followed on from HMRC’s
visit to Cornerstone’s accountant. He asserted that Innova’s business was
viable at the outset and would not accept that his conduct as director of
Innova fell short of what a reasonable and prudent businessman would have done
in the circumstances. We were prepared to accept his evidence that he had no
formal qualifications whatsoever. He said he was a salesman and an optimist.
In some of the company records produced he is described as a nightclub owner
and operator. By the end of his evidence he was referring to Mr Pawley and Mr
Walsh by their first names.
40. Individuals such
as the Appellants should not be allowed to shelter behind the shield of limited
liability of companies which they use to trade in order to pay themselves large
salaries at the expense of ordinary business creditors who follow ordinary
standards of business decency, and the general taxpayer, who suffers a double
loss, firstly the NIC Innova did not pay, and secondly the enormous hidden cost
to the general taxpayer of investigating the affairs of these individuals and
their companies and bringing them to book. Whether the lost NIC can be
recovered from the Appellants remains to be seen.
Disposal
41. The appeals
against the Personal Liability Notices are dismissed.
42. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
J GORDON REID, QC., F.C.I.Arb.
TRIBUNAL JUDGE
RELEASE DATE: 26 APRIL 2011
