[2011] UKFTT 525 (TC)
TC01372
Appeal number TC/2009/14787 & 14788
PAYE-
Company failed to pay tax in circumstances where the directors and owners knew
that PAYE and NIC had not been deducted- the Income Tax (Pay As You Earn)
regulations 2003 Regulations 72 and 188 – Social Security (Contributions)
Regulations 2001 Regulations 86 – PAYE and NIC payable by directors - appeal
dismissed.
FIRST-TIER TRIBUNAL
TAX
DEREK
STUART PINION Appellants
and
CHRISTINE ANNE PINION
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
DAVID S PORTER (JUDGE)
PETER
WHITEHEAD (MEMBER)
Sitting in public at Alexandra
House, Manchester on 15 July 2011
Mr Derek Stuart Pinion for the
Appellants
Mr Eugene Walsh, instructed by
the General Counsel and Solicitor to HM Revenue and Customs, for the
Respondents
© CROWN COPYRIGHT
2011
DECISION
1. Derek
Stuart Pinion (Mr Pinion) appeals on behalf of himself and his wife, Christine
Anne Pinion (Mrs Pinion), against the Directions raised under Regulation 72 of the
Income Tax (Pay As You Earn) Regulations 2003 and Regulation 86
of the Social Security (Contributions) Regulations 2001 in the sum of £39,720.64
for him and £34,233.58 for Mrs Pinion, and the discovery assessments on 3
December 2008 under section 29 the Taxes Management Act 1970 ( the 1970 Act) to
give effect to the same. Mr Pinion says that he and his wife relied on the
accountants for Expernet Ltd (the company) to prepare the PAYE and NIC returns
and that they were unaware that the amounts due had not been paid. They had
submitted and amended their self-assessment returns and the Respondents (HMRC)
should have been aware that PAYE and NIC had not been paid and they could not
now raise a discovery assessment, as they were out of time. Furthermore the
company’s accountant had not taken into account either an allowance for the
research and development relief, to which the company was entitled, or start up
or terminal loss allowances. HMRC say that Regulation 72 of the Income Tax (Pay
As You Earn) Regulations 2003 and Regulation 86 of the Social
Security (Contributions) Regulations 2001 allowed HMRC to assess Mr and Mrs
Pinion to the company’s PAYE and NIC obligations because Mr and Mrs Pinion knew
that the company had wilfully failed to deduct the correct amount of Tax and
NIC.
2. Mr
Eugene Walsh (Mr Walsh), an Inspector for HMRC, appeared on behalf of HMRC and
called Douglas Smalley, a Higher Officer of HMRC and a case worker for the PAYE
Directions unit, who gave evidence under oath. Mr Walsh produced a bundle of
documents for the tribunal. Mr Pinion appeared for the Appellants and gave
evidence.
3. We
were referred to the case of Regina v Commissioners of Inland Revenue; Queen’s
Bench Division. C)/3724/94
The Law
4. The
Income Tax (Pay As You Earn) Regulations 2003, Regulation 21 requires an
employer to deduct the appropriate tax from an employee based on that
employee’s Tax Code and under Regulation 66 prepare the appropriate work sheet.
Regulation 72 (and Regulation 86 (1) a (ii)
of the Social Security (Contributions) Regulations 2001, which is in similar
terms) allow HMRC to recover PAYE and NIC respectively from an employee where
insufficient PAYE and NIC have been deducted and:-
A. Not applicable
B. They are of the opinion
that the employee has received the relevant payments knowing that the
employer wilfully failed to deduct the amount of tax which should have been
deducted from those payments.
an appropriate Notice has to be served on the parties.
Regulation 73 requires an employee to provide forms P35
and P14 identifying the employees and the amount of tax deducted before the 20
May following the end of a tax year.
Regulation 686 identifies the time when the payment is to
be made in respect of directors who receive income from their employment. Rule
3 (a) provides that this is when the sums on account of income are credited in
the company’s accounts or records…..
Section 8 (1) (c) of the Social security Contributions
(Transfer of Functions etc) Act 1999 provides for Officers of the Board to
decide whether a person is or was liable to pay contributions by removing the
liability for NIC from the employer and transferring it to the employee.
Section 9A of the 1970 Act allows HMRC to enquire into a
return within 12 months of the filing date of the return or if delivered after
the filing date up to and including the quarter day next following the
anniversary of the day on which it was delivered
Section 29 of the 1970 Act refers to the raising of the
assessment and provides that an assessment may not be raised outside the above
time limits unless:
Section 29 (4) .. the
situation is attributable to fraud or negligent conduct on the part of the
taxpayer or the person acting on his behalf (our emphasis)
Section 29 (5) (b) there was insufficient
information either in the return or accompanying documentation for the Officer
of the Board to have been aware of the matter which gave rise to the further assessment.
Section 54 of the 1970 Act allows HMRC and the taxpayer
to reach an agreement as to any liability which agreement has the same effect
as a decision by the Tribunal.
Preliminary matters
5. Mr
Walsh sort to introduce a second witness statement by Mr Smalley dated 22 June
2011 and invited the Tribunal and Mr Pinion to read the same. Having done so,
the Judge observed that the statement consisted almost entirely of the ‘without
prejudice’ negotiations between the parties leading up to the raising of the
assessment and the appeal. As a result, the Judge disallowed the introduction
of that evidence. Mr Pinion advised that he had been unable to afford to
instruct the TACS Partnership, who had been instructed as experts by his second
accountants, Messrs G J Wood & Co, and as a result he appeared on behalf of
himself and his wife. The hearing was adjourned at 1.00pm for lunch, at which
point Mr Pinion advised the Tribunal that he had a medical appointment in Crewe
at 3.00pm and that he would not be returning after lunch. The Judge pointed out
to him that since he must have known the appeal was listed for one day, he
should either have sought an adjournment or cancelled his medical appointment.
Mr Pinion indicated that he only knew of the hearing date on Wednesday 13 July
(this week) and that he needed to go to the medical appointment although he did
not indicate what the appointment was for. The Judge asked if there were any
points upon which he wished to cross-examine Mr Smalley, who by that time had
given evidence (as had Mr Pinion) and he indicated that he and his wife had
relied on the accountant, Robert Graves (Mr Graves), against whom it was
intended to commence proceedings for negligence, depending on the outcome of
this appeal. Furthermore, he submitted that if the company’s accounts had been
completed correctly by Mr Graves there would be nothing fanciful about their
content. The Judge told Mr Pinion that in view of the fact that all the
evidence had been heard and there was nothing more Mr Pinion wished to add, the
Judge and the member would hear the submissions from Mr Walsh in Mr Pinion’s
absence as it was not appropriate, so far into the appeal, to adjourn the case.
Mr Pinion understood that the appeal would continue in his absence.
The facts
6. Mr
Pinion gave evidence under oath. The company was formed in 1999 and had
initially traded as website designers. The company had expanded into
traditional software developers and had designed a programme which interrogated
information within a business computer in such a way that useful data could be
extracted for management purposes. The accounts for the company have been
produced for the years 31 May 2004 and 2005 by Mr Graves, the proprietor of the
franchise business “Tax Assist”. The accounts revealed a turnover of £229,081
and £178,738 respectively. Mr Pinion told us that the company outsourced its
accountancy function to Mr Graves. Mr Pinion appeared to know surprisingly
little about the financial arrangements within the business. He could not say
what the profits for the two years were or the amount of the PAYE and VAT
outstanding. He indicated that he and his wife did not realise the company was
in difficulties until Mr Graves advised them that it was insolvent. Mr Pinion
appeared unable to explain why that should be, but said that Mr Graves had
recommended that the company should cease trading. The company has been struck
off the register by companies house on 9 March 2010. It appears from his
letter to Mrs England, acting for HMRC, dated 5 July 2006 that he acquired some
furniture and computer servers from the company for £10,940. He was unable to
tell the Tribunal what had happened to that money save that he assumed it had
been paid into the company’s account. He also indicated in the letter that the
company had very few creditors, an overdraft facility of £15000, and owed £11,358.86
by way of VAT. When cross-examined by Mr Walsh, he confirmed that he and his
wife had formed three other companies; Chiron Solutions Ltd; Chiron Support Ltd
and Chiron Software Ltd. He thought that Chiron Solutions might owe some PAYE
but he was not sure. We found his evidence to be unbelievable. There are in the
bundles, copies of the accounts as mentioned above. The accounts to 31 May 2005
reveal an operating loss of £155,924. The turnover, however, was only £50,000
less than the year to 2004. We note, however, that the directors emoluments
have increased from £9,400 in the year to 2004 to £147,965 in the financial year
ending 31 may 2005. Mr Pinion told us that he and his wife were drawing between
£50 - 60,000 each year from the bank. We do not believe that Mr Pinion had no
idea how much profit the company was making or how much money he and his wife
had drawn out of the company. £147,965 is a considerable sum of money to
receive as drawings in one year and almost equated to the turnover for the year
to 31 May 2005. He has formed several companies and had designed a software
application to provide this type of information to businesses.
7. Mr
Pinion referred us to the letter from the TACS Partnership, dated 11 August
2010, and invited us to read the same as he did not understand the
technicalities of the appeal. The letter indicated that the company accounts
revealed a director’s overdrawn loan account of £45,957 as at 31 May 2004 and
£82,082.14 by 31 May 2005. It appears that Mr Graves had recommended that Mr
and Mrs Pinion should vote themselves a bonus of £82,082.14. In the Notice of
Appeal the accountants stated that Mr Pinion had given specific written
instructions to Mr Graves that no action should be taken that would result in
the directors incurring liability for the company’s future debts, although a
copy of these instructions were not shown to us. They appeared as one of the
reasons for the appeal in the appeal notice. Following that bonus payment, the
loan account became overdrawn again, such that by November 2005 the balance had
reached a total of £33,538.44, at which time a further bonus was voted. The
TACS Partnership suggested that it was necessary to decide when the relevant
payments were made. HMRC had suggested that this must have been when the monies
were drawn from the business. The TACS partnership suggested, however, that Mr
and Mrs Pinion were merely paying back sums they had borrowed from the company.
This was consistent with the entry “other debtors” to note 8 in the accounts to
31 May 2004. On that basis, the relevant payment for PAYE purposes did not
arise when the monies were loaned to the directors, but rather at the point
when the bonus was voted to clear the loan account. When the bonus was paid the
company’s previous accountants grossed up the payment as follows:-
Overdrawn balance to be dealt with by bonus £82,082.14
Salary payments
Mr Pinion £37,191.07
Tax £
3,850.00
Mrs Pinion £37,191.07
£
3,850.00 £82,082.14
---------------------------------------------------
Overdrawn balance May 2005 Nil
Drawings May 2005 – November 2006 £33,538.44
Salary payments 16,769
x 2 £33,538.44
---------------------------------------------------
Nil
The net benefit to Mr and Mrs Pinion was the amount of
salary voted less the tax deducted. As a result it was suggested that
Regulation 72 could not apply because condition B requires the employer (the
company) wilfully to fail to deduct the amount of tax which should have been
deducted from the payments. The failure to pay over the tax to HMRC is not
dealt with by the Regulation and not, therefore, in their view relevant. Mr and
Mrs Pinion had in their self-assessment returns, as repaired in March 2006,
shown their incomes as £62,351.89 with tax paid of £17,141.30 which had
resulted in a tax refund of £2,958. Although forms P35 and P14 had been
submitted on time to HMRC, as required by the legislation, the record of
payments made to HMRC for both years 2004/05 and 2005/6 showed underpayments.
Mr and Mrs Pinion had been receiving drawings on a monthly basis in advance of
salaries, which had not had the PAYE tax and NIC deducted at the time of
payment.
8. We
have been advised that an enquiry had been opened into the company’s accounts
for the period ending 31 May 2005 on 26 May 2006 and closed on 30 October 2006.
During the course of the enquiry, the review of the loan account took place and
it was accepted by HMRC that disclosure of the conversion of the debt to salary
was disclosed when the accounts were received. As a result, the grounds of
appeal submitted that as the 2005 return had been repaired in March 2006 and a
letter detailing the circumstances of the repair had been submitted to HMRC, HMRC
could not rely on the discovery provisions and the 2005 tax return could not be
amended as the time limit had expired in July 2007 and section 29 (5) (b) of
the 1970 Act applied.
9. HMRC
had agreed that Mr Graves should have claimed a Research and Development tax
credit of £38,959, but that no corporation tax loss or section 419 (4) Income
and Corporation Taxes Act 1988 (loans to participators) was available to the
company in the absence of the receipts of Returns for the relevant periods and
in respect of which there was a two year time limit and any application would
now be out of time. As a result of the appropriate allowances being made, the
liability under the PAYE and NIC legislation is as follows:
Tax and NIC
2004/5 £77,329.00
Mr & Mrs Pinion £54,262
Non Director £23,067
2005/6 £47193.00
Mr & Mrs Pinion £32,780
Non director £14,413
---------------------------------------------------------------------
Total tax due £124,522.00
R & D Tax credits £
38,959.00
Tax due £
85,563,.00
Submissions
10. Mr Walsh
submitted, in Mr Pinion’s absence, that Mr Pinion must have been aware of the
amounts outstanding as he had specifically written to the accountant to make
sure that he and his wife should not incur any liability. The appropriate
amounts of PAYE and NIC had not been paid over to HMRC and Mr and Mrs Pinion
knew that was the case. HMRC were entitled to rely on Regulation 72 in such
circumstances and although there was no apparent time limit in which such
claims could be made, HMRC had acted within the relevant time limits. Mr and
Mrs Pinion were 50% shareholders in the company and must have been aware of the
company’s financial position. Company Law requires directors to act responsibly
in the running of their companies and Mr Pinion could not abrogate his
responsibility by relying entirely on the company’s accountants. He had signed
the forms P35 and P14 and it was his responsibility to ensure that they were
completed correctly and that the PAYE and NIC contributions had been properly
accounted for. Mr Walsh referred us to Mr Justice May’s decision in Regina v
Commissioners of Inland Revenue; Queen’s Bench Division. C)/3724/94. That
case dealt with earlier legislation, but the facts were not materially
different. Mr McVeigh, the director in question, had been paid a bonus and
details of the tax deductable had been entered in the books of McVeigh
Construction (Nottingham) Limited of which Mr McVeigh was a 50% owner. Mr
Justice May decided that as the tax had never been paid it could not be said to
have been deducted and Mr McVeigh was therefore liable to pay the tax
personally as he had acted wilfully. In the circumstances the assessments
should be confirmed.
11. Mr Pinion had
not been present to sum up the position from his point of view. He made it
abundantly clear at the hearing that he and his wife had relied on the accountant
to whom the company had outsourced all the taxation matters. For his part, he
started that he did not understand the legal representation made by his
accountants in the Notice of Appeal. As a result, it was not unreasonable for him
and his wife to be unaware of what was required. In his absence, we can only
refer to the comments by Mr Graves and the grounds for the appeal set out in
the Appeal Notice. It appears that the accountants are of the opinion that
section 29 (5) (b) of the 1970 Act applies as HMRC had sufficient information
at the time of the submission of the self-assessment return, as repaired, to
have been alerted to the fact that that PAYE and NIC had not been paid, the
more so because the company had been subjected to an enquiry. HMRC could not
avoid that section by relying on Regulation 72. In any event they had taken
over two years to raise the assessment and it was not reasonable in the
circumstances for them so to do.
The decision
12. We have
considered the law and the facts and have decided that the assessment should be
confirmed. We do not accept that Mr Pinion was unaware of the reasons why the company
was insolvent. He had seen the accounts for 2003/4 and must have known that the
company had only made a profit of £2,624. He told us that he and his wife were
drawing £50,000 to £60,000 out of the business and that the company turned over
between £150,000 and £200,000. He must have known that in drawing the bonuses
in addition to the drawings, a total of £147,965 that the emoluments would have
equated to the gross turnover of the company. He told us the company had
developed a software system that allowed businesses to interrogate their own
computers to obtain the salient information to improve the ability to run their
business. Mr Pinion could not have developed such a system without himself
having the knowledge as to how a business operated. In fact he and his wife had
3 other companies and he conceded that one of those companies might also owe PAYE
to HMRC. We find that Mr Pinion acted negligently and that he knew that the
company had wilfully failed to deduct the appropriate PAYE and NIC and that an
assessment under Regulation 72 was properly raised. The company’s accountants
contention that the discovery assessment could not be raised because of section
29 (5) (b) of the 1970 Act applies is ill-conceived. Mr Pinion has told us
that he will be suing Mr Graves in negligence as a result of this decision.
Section 29 (4) of the 1970 Act allows a discovery assessment where the return
resulted from the fraudulent or negligent conduct on the part of the taxpayer
or the person acting on his behalf. The discovery assessment can be
raised as a result of the negligence on Mr Pinion’s and his accountant’s part.
There appears to be no time limit as to when the Regulation 72 direction should
be made. We do not consider that HMRC have taken an unreasonable time in making
the direction. As Mr Justice May has said in Regina v Commissioners of
Inland Revenue; Queen’s Bench Division. C)/3724/94:
“.. But in this case the
employer, to Mr MCVeigh’s knowledge, has neither accounted for nor paid the tax
and these failures were wilful… In these circumstances I consider it would be a
misuse of language to say that the book-keeping and accounting alone, without
actual payment, and without any procedures which the Regulations require,
constitute a deduction of tax from the gross payments. There was, on the
contrary, a wilful failure to do anything relating to Tax obligations, beyond
making some internal paper entries which the company proceeded to ignore for
tax accounting purposes and which Mr McVeigh also ignored when he submitted his
own tax return”.
We confirm the assessment and make no order as to costs since
the cost regime under Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax
Chamber) Rules 2009 applies.
13. 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.
TRIBUNAL JUDGE
RELEASE DATE: 2 August 2011
