First-tier Tribunal (Tax)

[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.

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).

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.

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.

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.

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.

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 19^th 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.

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