SPC00529
NATIONAL INSURANCE CONTRIBUTIONS  - section 121C Social Security Administration Act 1992 – personal liability notice – liability of director for company's contributions – fraud or neglect on the part of a director 

COSTS – Regulation 21(1), Special Commissioners (Jurisdiction and Procedure) Regulations 1994  – Appellant withdrawing two grounds of appeal shortly before hearing – Whether appellant acting wholly unreasonably in connection with hearing 

THE SPECIAL COMMISSIONERS

	PETER INZANI	Appellant

	- and -

	THE COMMISSIONERS OF
	HER MAJESTY'S REVENUE AND CUSTOMS    	Respondents

				Special Commissioner:	Nicholas Aleksander

Sitting in public in London on 15 February 2006

James Green, solicitor, for the Appellant

K J Singal, HM Inspector of Taxes, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is the appeal of Mr Peter Inzani against the decision of the Inland Revenue to issue a personal liability notice in respect of unpaid national insurance contributions of IW Management Limited (IWM).  The Appellant was represented by Mr James Green, solicitor, and the Commissioners of Her Majesty's Revenue and Customs by Ms K J Singal, HM Inspector of Taxes, of the their Appeals Unit.

2.	There was one bundle of documents, and a statement of agreed facts.  I heard evidence from Mr Kirit Patel, an officer of the Revenue working at the Special Trades Investigation Unit in London, and from Mr Inzani.  A witness statement by Mr Graham Leslie Nicholas Cook, a director of Independent Way Limited, was admitted.

3.	By virtue of the Social Security (Transfer of Functions etc.) Act 1999 functions of the Contributions Agency were transferred to the Inland Revenue.  By virtue of the Commissioners for Revenue and Customs Act 2005, the Inland Revenue merged with HM Customs & Excise to form HM Revenue & Customs.  In this Decision, I use the term "the Revenue" to describe this succession of agencies.

BACKGROUND 

4.	This is an appeal against a personal liability notice that was issued to Mr Inzani on 30 November 2004 under Section 121C(2) of the Social Security Administration Act 1992 ("the Act"), following a decision under Section 8(1)(h) of the Social Security Contributions (Transfer of Functions etc.) Act 1999.	The personal liability notice states that the amount of unpaid NICs due from IWM was £212,937.61 and that pursuant to Section 121C(3)(a) of the Act, Mr Inzani is required to pay this amount to the Revenue.

5.	Section 121D of the Act provides that an individual who is served with a personal liability notice may appeal to the Special Commissioners against the Revenue's decision as to the issue and content of the notice.  Mr Inzani issued a notice of appeal dated 17 December 2004, which gave three grounds for his appeal:

(a)	that he did not accept that the quantum of the NICs sought accurately reflected the unpaid liability of IWM;
(b)	that IWM's inability to pay the NICs was not attributable to any fraud or neglect on the part of Mr Inzani; and
(c)	that the decision to issue a personal liability notice was unreasonable.  

6.	About a week before the hearing of the appeal, Mr Inzani withdrew grounds (a) and (c) of his appeal.  The only issue therefore to be determined in this appeal is whether the failure of IWM to account to the Revenue for national insurance contributions was attributable to fraud or neglect on the part of Mr Inzani.  

7.	Section 121D(4) of the Act provides that on an appeal under Section 121D, the burden of proof as to any matter raised by a ground of appeal shall be on the Revenue.  For the Revenue to succeed in this appeal, they must prove, on the balance of probabilities, that IWM's failure to pay NICs was attributable to the fraud of neglect of Mr Inzani.

FACTS

8.	IWM was incorporated on 17 November 1998 and commenced trading on 20 November 1998.  The company had issued share capital of £2.   The sole director and shareholder of IWM was Mr Inzani.  Mr Remo Bragoli was the company secretary, but he had no involvement in the running of IWM's business.  The business of IWM was the provision of bus drivers for bus companies.  There was a shortage of bus drivers in London, and many bus companies were reluctant to employ bus drivers directly due to absenteeism and union-related difficulties.  Mr Inzani therefore considered that there was an opportunity to make a significant profit by providing drivers to bus companies in London.

9.	The business of Independent Way Limited ("Limebourne") was operating buses in London.  Carol Inzani, Mr Inzani's wife, was a shareholder in Limebourne holding 16,750 shares, which was approximately 30% of its issued share capital.  

10.	IWM supplied Limebourne with bus drivers.  Limebourne was IWM's sole customer.  The agreement governing the supply of the drivers was that Limebourne would pay an amount equal to IWM's reasonable operating expenses plus a "performance related fee".  The agreement was never reduced to writing. 

11.	Prior to establishing IWM, Mr Inzani had been a director and/or company secretary of other companies – including companies operating buses and coaches, and in the travel business.  A number of those companies became insolvent owning significant amounts to the Revenue in respect of income tax and national insurance contributions (NICs).  Mr Inzani was aware of the requirement that an employer had to account to the Revenue each month for income tax and NICs arising in respect of employees' wages.

12.	IWM employed a large number of drivers.  It is apparent from the payroll records in the bundle that several hundred drivers were employed by IWM during its brief life.  For the period from April 1999 to November 1999 its gross payroll was nearly £1.5 million.

13.	IWM did not have a bank account.  Although the company applied to Barclays Bank plc to open a current account, that application was refused.  No other bank account was established prior to the liquidation of the Company.  

14.	IWM maintained little in the way of accounts or accounting records beyond the timesheets it kept for its drivers.  These were faxed to the Royal Bank of Scotland, to whom payroll calculations were outsourced.  The Royal Bank of Scotland computed the income tax, national insurance contributions (NICs) and net wages due in respect of each of the employees and faxed the amounts back to Mr Inzani.  Because IWM did not have a bank account, it asked Limebourne to pay the wages of the employees on its behalf by cheque.  It never issued any invoices to Limebourne. 

15.	On 13 February 1999 income tax of £13,069.68 and NICs of £16,052.63 was paid on behalf of IWM to the Revenue.  However no amounts were paid in respect of income tax or NICs for at least the period from 6 April 1999 until the liquidation of the company in November 1999.  Although Limebourne paid (on behalf of IWM) wages to the drivers (net of income tax and PAYE), it did not pay the Revenue the income tax or NICs due in respect of those wages – at least for the period from 6 April 1999 until the liquidation of the company.

16.	IWM had difficulties in recruiting and retaining employees.  Limebourne was penalised under contracts it had with Transport for London because of the failure by IWM to provide it with sufficient numbers of drivers.  Limebourne refused to pay IWM unless the quality of the service IWM provided improved.  Yet despite these complaints (which presumably were raised no later than April 1999 when Limebourne stopped paying the income tax and NICs due on the wages of IWM's drivers), IWM continued to provide drivers to Limebourne for a further seven months (and Limebourne continued to meet IWM's "net" payroll) until IWM went into liquidation.

17.	IWM went into liquidation on 24 November 1999, and was dissolved on 17 March 2004.

18.	Limebourne showed in its audited accounts a debt owing to IWM of £340,080 as at its balance sheet date of 31 March 2000.  In the statement of affairs signed and dated by Mr Inzani on 24 November 1999, Limebourne was shown as a debtor with a liability of £75,000.  Mr Inzani explained that the amount of £340,080 represented the total amount owed by Limebourne to IWM – representing income tax and NICs on wages and a small profit.  However Limebourne had a claim against IWM in respect of its failure to provide sufficient drivers.  The figure of £75,000 represented the settlement Mr Inzani negotiated with Limebourne.  He considered that it was the best that could have been achieved in the circumstances, given that he did not have funds to pursue litigation – which would be long and protracted.  It is unexplained why a settlement achieved by Mr Inzani in November 1999  for £75,000, was not reflected in Limebourne's balance sheet some four months later – which shows £340,080 as a liability due to IWM.  I consider that the absence of any documented terms of business between IWM and Limebourne and the lack of accounting records would have weakened IWM's bargaining position and therefore contributed to the poor level of the settlement achieved.  

19.	On 20 May 2003 Mr Kirit Patel, an authorised officer of the Revenue, certified that an amount of £212,937.61 in respect of NICs had not been paid by IWM.  On 30 November 2004 a Personal Liability Notice was issued under Section 121C(2) Social Security Administration Act 1992 requiring Mr Inzani to pay £212,937.61 in respect of unpaid Class 1 National Insurance Contributions due from IWM.  On 17 December 2004, Mr Inzani appealed against the decision to issue the Notice.

20.	Mr Inzani was disqualified from acting as a director pursuant to Section 7, Company Directors Disqualification Act 1986 for the period from 24 August 2001 to 2 August 2008.  Mr Inzani admitted in the course of giving evidence that the disqualification proceedings were not contested by him, and related (at least in part) to his conduct as a director of IWM.

The Law

21.	Section 121C(1) and (2) of the the Act, provide as follows

(1) This section applies to contributions which a body corporate is liable to pay, where—  
  (a)    the body corporate has failed to pay the contributions at or within the time prescribed for the purpose; and  
  (b)    the failure appears to the Inland Revenue to be attributable to fraud or neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers of the body corporate (“culpable officers”).  

(2) The Inland Revenue may issue and serve on any culpable officer a notice (a “personal liability notice”)—  
  (a)    specifying the amount of the contributions to which this section applies (“the specified amount”);  
  (b)    requiring the officer to pay to the Secretary of State—  
  (i)    a specified sum in respect of that amount; and  
  (ii)    specified interest on that sum; and  
  (c)    where that sum is given by paragraph (b) of subsection (3) below, specifying the proportion applied by the Inland Revenue for the purposes of that paragraph.  

22.	The only officers of IWM were its sole director, Mr Inzani, and the company secretary Mr Bragoli.  It is common ground that Mr Bragoli had no involvement in the running of IWM's business – and therefore he could not be a culpable officer.  Under Section 121D(4) of the Act, the burden of proof as to any matter raised by a ground of appeal is on the Revenue.  For the Revenue to succeed in this appeal, they must prove, on the balance of probabilities, that IWM's failure to pay NICs was attributable to the fraud or neglect of Mr Inzani.

23.	Neither "fraud" nor "neglect" are defined for the purposes of the Act.  As to the meaning of fraud, I was referred to R v Sinclair and others [1968] 3 All ER 241 at 246 where James J says 

"To cheat and defraud is to act with deliberate dishonesty to the prejudice of another person's proprietary right."

24.	As to the meaning of neglect, I was referred to the decision of Alderson B in Blyth v Birmingham Waterworks Co (1856) 11 Exch 781 at 786, where he says

"Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.  The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a person taking reasonable precautions would not have done."

25.	I was also referred to dictionary definitions, but I prefer the meaning established by the courts to that in the dictionaries.  I consider that for these purposes the meaning of "neglect" and "negligent" are identical.

26.	For the personal liability notice to be upheld, the Revenue only need to prove, on the balance of probabilities, that the failure of IWM to pay the NICs was attributable to Mr Inzani's neglect.

27.	Having weighed up the evidence, I am satisfied that the failure of IWM to pay the NICs was attributable to the neglect of Mr Inzani.  

28.	Mr Inzani started a business which he recognised had substantial risks.  He proposed to supply drivers to bus companies.  He was aware that there was a shortage of drivers, and that he would need to address absenteeism and potential union related difficulties.  But, of course, it was because of these inherent risks that he saw opportunities to make substantial profits.  

29.	He chose to start (and continue) in business without a bank account.  Because of this IWM would have to rely upon its sole customer to provide it with the facilities to pay staff and other liabilities.  One of the consequences was that Limebourne had the ability to exert leverage beyond that which might normally be expected over one of its principal suppliers.

30.	Mr Inzani maintained little in the way of accounts or accounting records beyond timesheets and the payroll data provided by the Royal Bank of Scotland.  No invoices were ever issued. He did not document the terms of his relationship with his sole customer in any way.  There was no document of any kind setting out the terms agreed with Limebourne for the provision of drivers, even though the amounts payable under that agreement would be very substantial   On the basis that the payroll for a seven month period was nearly £1.5 million, it would be reasonable to project that the annual fees payable by Limebourne to IWM (if it had been successful), would have been significantly greater.  

31.	Moreover the profit margin on the contract was never established – it was agreed that IWM would be entitled to a "performance related fee", but how that fee would be determined was never set out.  

32.	Mr Inzani was aware of the obligation to account each month for NICs to the Revenue.  Yet he failed to ensure that Limebourne accounted for income tax and NICs on behalf of IWM for seven consecutive months from April 1999 to November 1999 – although over the same period Limebourne paid the drivers' wages (net of income tax and NICs).   Thus, in substance, IWM procured that wages were paid and that income tax and NICs were deducted from those payments, but failed to account for such deductions to the Revenue.

33.	I consider that a prudent and reasonable person would not conduct business in this manner – particularly given the scale of the business and the inherent risks identified by Mr Inzani at the outset.

34.	Mr Green, on behalf of Mr Inzani, submitted that for there to be a finding of neglect, the Revenue would need to demonstrate that there was a duty of care, and that there was a breach of that duty of care.  Mr Green submitted that the only duties of care relevant to this case was the duty of the company to pay NICs under statute, and a duty of the company towards its employees.  Mr Green argued that the duty to account for NICs was a duty owed to the Revenue by the company and not its directors.  The duty of the directors was to act in the best interests of the company, but the directors had no duty of care to outsiders – such as creditors (for example the Revenue).  Mr Green submitted that Mr Inzani fulfilled his duties as a company director by seeking to maximise the profits of the company, and that the reasons for the company's failure were entirely outside Mr Inzani's control.

35.	I am not persuaded by Mr Green's arguments.  This case does not concern the duties of directors owed under company law, but the provisions of the Social Security Administration Act 1992.   The issue under the Act is whether the failure of the company to account for NICs is attributable to the negligent conduct of a director.  Whilst factors outside the control of Mr Inzani may have contributed to the ultimate failure of the company, I consider that the failure of the company to account for NICs was attributable to the imprudent manner in which Mr Inzani conducted the affairs of the company – as outlined above. 

36.	Accordingly I dismiss the appeal.

COSTS

37.	Two of the grounds of appeal were withdrawn by the appellant at a late stage – on 9 February 2006, less than a week before the hearing.  These grounds related to the quantum of the NICs and the reasonableness of the Revenue's decision.  The Revenue argue that these were issues which Mr Inzani could reasonably have been expected to have considered at a much earlier stage, thus saving preparation time for the Revenue.

38.	The powers of the Special Commissioners to award costs are limited. Under regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994, SI 1994/1811, the Tribunal may only make an award of costs against a party to the proceedings if it is of the opinion that that party has acted wholly unreasonably in connection with the hearing in question. This is a stringent test, and I do not consider that the conduct of the appellant in this case was such as would justify an award of costs.

NICHOLAS ALEKSANDER
SPECIAL COMMISSIONER
Release Date: 29 March 2006

Authorities referred to in argument but not referred to in the decision:

Wellington v Reynolds 40 TC 209
Hurley v Taylor 71 TC 268
Nunn v Gray SpC 123
Hancock v CIR SpC 213
In Re City Equitable Fire Assurance Co Ltd [1924] All ER 485
In Re H and others [1996] AC 563
JR Kane & Co v CIR 12 TC 303
Jones v Garnett SpC 432.  

SC/3020/2005