Michael Owen Williams v Revenue & Customs [2012] UKFTT 302 (TC) (09 May 2012)
DECISION
1.
This appeal by Mr Michael Owen Williams is against a direction made
under reg. 72(5) of the Income Tax (Pay As You Earn) Regulations 2003 (“the
2003 Regulations”), a discovery assessment to income tax of £56,979.60 for tax
year 2006/07 raised under s.29(1) of the Taxes Management Act 1970 on 7 July
2010, and a decision of the Commissioners that he was liable to pay £4,367.15
national insurance contributions (“NIC”).
2.
Regulation 72 of the 2003 Regulations applies if it appears to the
Commissioners that the amount of income tax deductible from payments of PAYE
income to an employee exceeds the amount actually deducted by an employer and
one of two conditions applies. The second condition, condition B, is that the
Commissioners are of the opinion that the employer has received relevant
payments knowing that the employer wilfully failed to deduct the amount of tax
which should have been deducted from those payments, and it is that condition
which is relevant. The reg. 72(5) direction was given to Mr Williams on 15
October 2009. It informed him that the Commissioners had determined that his
employer, Instafix Ltd (“Instafix”), was not liable for tax of £56,979.60 it
ought to have deducted but did not in fact deduct from relevant payments,
defined in reg. 4(1) of the 2003 Regulations as “payments of, or on account of,
net PAYE income”, made to him in 2006/07.
3.
The tax assessment, made following the reg. 72(5) direction, was raised
against Mr Williams personally. It was raised as Instafix allegedly failed to
deduct sufficient tax from relevant payments and the Commissioners were of the
opinion that he received those payments knowing that his employer wilfully
failed to deduct sufficient tax therefrom. The Commissioners made the
assessment saying that they were satisfied that the failure to deduct
sufficient tax from Mr Williams net PAYE income was brought about carelessly or
deliberately by Instafix or a person acting on its behalf. Instafix went into
liquidation on 22 May 2007 owing the Commissioners £281,238.48, none of which
has since been paid.
4.
An officer of the Board also determined that Instafix failed to pay
sufficient primary Class 1 NIC in respect of earnings paid to Mr Williams, and
did not recover the contributions from him by way of deduction. A notice was
given to Mr Williams on 13 October 2009 under s.8(1)(c) of the Social Security
Contributions (Transfer of Functions) Act 1999 in respect of reg 86 Social
Security (Contributions) Regulations 2001 that he was liable to pay primary
Class 1 NIC contributions in the sum of £4,367.15. The officer expressed
himself satisfied that the failure was due to an act or default of Mr Williams
and not to any negligence on the part of Instafix.
5.
Mr Williams appealed the reg. 72(5) direction, the Commissioners’
decision that he was liable for the NIC on the sums he had received from
Instafix, and the discovery assessment.
6.
In his Notice of Appeal to the tribunal, Mr Williams gave the following
grounds for appeal:
“a)
The decision has been made without interview with me.
b)
HMRC suggest a ‘wilful’ non payment of tax by me – this is not the case.
c)
No documentary evidence shown to me.
d)
HMRC suggest I was a controlling party. This is not the case. I was not
a director nor a shareholder at the time of liquidation.”
7.
Notice of the hearing of the appeal was given to Mr Williams. He
responded saying that he did not propose to attend, but asked the tribunal to
deal with the appeal on the basis of what he claimed to be “the facts”. Those
“facts” were set out in a statement he provided as follows:
“I have written the following
in support of my appeal because I would find it difficult to accurately plead
my case verbally to the tribunal and I am unable to afford to fund any further
representation on this matter.
HMRC have never questioned or
interviewed me in relation to this matter either verbally or in written format,
it is therefore of great importance to me that I have chance for my defence to
be fully considered at this late stage.
Without consultation or the
chance to give any facts about my previous employment by Instafix Ltd I was
issued with a direction that I had ‘wilfully’ failed to make the PAYE
contributions. I strongly dismiss these allegations and fully believe that my
employer would meet the contributions according to my P60 end of year summary.
Background Information
I was involved with Instafix
Ltd from the point of incorporation. It was essentially a business arrangement
between Mr Milligan (Director) and me. We were both to be full time employed
by the company. The initial start-up costs and working capital were introduced
by me together with a portfolio of manual sub-contract labourers. Mr Milligan
supplied the client base, business contacts, sales and health and safety
qualifications necessary to make the business succeed. I was made majority
shareholder (65/100) to protect my investment, I was not a director. It was
agreed that as the company developed and my investment was returned then the
shareholding would be equally shared with Mr Milligan.
My day to day job was making
sure that the installation sites were fully manned and operated smoothly.
Also, I had to collate weekly information from sub contractors regarding the
amount and type of work they had carried out each week. I then had to make
sure clients were issued invoices to reflect the sub contractor’s work. I then
had to make sure that the sub contractors were paid at the end of each week.
I had a remit from the directors and authority at the company bank to pay
subcontractors and to issue any necessary payments to suppliers to implement
work completion. I did not control cash flow, debt collection, credit control,
regular bill payment, HMRC payments or returns etc. These were entirely
handled by the director.
This arrangement continued
until I became concerned that the Director was taking on larger installation
projects that the company did not have the facilities to fund or manage. The
situation became intolerable for me and I transferred my remaining shares to Mr
Milligan and severed all ties with Instafix Ltd. Some months later Instafix
Ltd entered administration.
Supporting Statement
At no time have I been
responsible in the company for making PAYE returns or payments. These were all
prepared by book keeping and accountancy staff, they were approved and signed
by Mr Milligan and the HMRC cheques signed by Mr Milligan.
The evidence from company
records produced by HMRC marked ‘Extracts from company records’ is supposed to
suggest that I controlled the company finances. This is not the case. The
evidence produced in folder ‘E’ is simply documentation from sub contractors
indicating the work carried by them over previous week, and payments authorised
by me to sub contractors. This was my job.
I have not been allowed
access to any company documentation which may support my case because all
paperwork and records are either with the insolvency practitioner or with HMRC
and because I was not a director or shareholder I am not entitled to view them.
I am sure if I had the opportunity to read records there would be more
contained in correspondence and documents to prove that I did not have ‘wilful’
knowledge that PAYE payments would not be made as required by the director.
I would like to refer to the
correspondence folder sheets C35 and C36 from Instafix accountants to HMRC
which seems to show that my remuneration was entirely accounted for correctly.
This has been disregarded by HMRC without explanation.
Summary
It would appear to me that
the case against me by HMRC has no solid evidence to prove their allegations
under regulation 72(5) condition B of the Income Tax (PAYE) Regulations 2003
that I had knowledge that there would be wilful non payment of PAYE.
I have not had opportunity to
build a more detailed defence because I do not have the specialist accountancy
knowledge to represent myself, nor have I been allowed access to any company
records that may prove my innocence.”
8.
In a number of material aspects we do not accept the truth of Mr
Williams’ statement, and shall explain why we do not do so when dealing with
the facts as we find them.
9.
Since the hearing had been properly notified, in the circumstances we
determined to proceed in Mr Williams’ absence.
10.
At the hearing the Commissioners were represented by Mr PG Kane of their
Specialist Investigations department. He produced a bundle of documents, and
called the case officer, Mrs Susan Jane Elston, to give oral evidence. Where
necessarty we shall refer to the contents of the bundle by reference to the tab
and page numbers. From that evidence and the statement provided by Mr Williams,
we make the following findings of fact.
11.
Instafix was incorporated on 23 January 2003, and its trading activity
was described in documents submitted to Companies House as “joinery
installations”. Its sole director was Mr Glenn Milligan. In the notes to the
company’s accounts for the year to 31 March 2005, under the heading
‘Controlling interest’, it was said, “Mr M O Williams owns 65% of the issued
share capital of the company, although he is not also a director he is deemed
to be the controlling party….” We accept that statement as fact. The issued
share capital consisted of 100 £1 shares. We further accept a claim by
the Commissioners that Mr Williams was a significant controlling influence
within Instafix, and for all practical purposes was a shadow director thereof.
Mr Williams was also a signatory to Instafix’s bank account, a fact to whose
relevance we shall later return.
12.
In the tax year 2004/05, Mr Williams received a salary from Instafix of
£4,680 and a dividend of £58,000. In the following year, he received a salary
of £4800 and a dividend of £110,000. The Commissioners accepted that Instafix
might structure its payments to directors and shareholders in that way, so that
they were satisfied that the company had no liability to account for tax on the
salaries paid to Mr Williams, each being below his personal allowance for the
years in question. Instafix was however required to prepare and maintain a
deductions working sheet for PAYE purposes (see reg 66 of the 2003
Regulations). We find that it did not do so. We infer that Instafix was
provided with a PAYE code for Mr Williams.
13.
From the accounts produced to us, it would appear, and we find, that in
the tax year 2006/07 Instafix moved into a loss making situation. Consequently,
in November 2006 it was not in a position to pay a dividend for 2006/07 out of
income, or for that matter out of reserves. Nevertheless, from April 2006
onwards Mr Milligan and Mr Williams both continued a practice of withdrawing
round sums from the company’s bank account on a weekly basis. Such monies were
initially shown in the company’s nominal activity ledger as “dividends” (E8 and
9). The sums in question were not insignificant, in Mr Williams’ case being of
the order of £2000 per week. He continued withdrawing similar sums until 4
April 2007, but claimed that from April 2006 onwards they represented salary
net of tax and NIC. On 10 July 2009 (C36), CCW, Instafix’s accountants, wrote
to Mrs Elston saying, “ We were later advised, prior to the liquidation, that
the November 2006 dividend was not declared as there was concern as to whether
it was legal (i.e. a possible lack of distributable funds) – so we therefore
presume the loan account was cleared by way of a bonus, but as we have not seen
the payroll records as they were submitted to Campbell, Crossley & Davis
[the firm in which the liquidator was a partner], we are unable to comment
further.” (The reference to the clearing of Mr Williams’ loan account must be
read against a background of the account having been overdrawn at 31 March 2006
to the extent of £102,163). In our judgment, the accountants’ letter speaks
for itself as indicating that Mr Williams was advised, and thus was well aware,
of Instafix’s precarious financial position at the end of 2006 and in the early
part of 2007.
14.
Mr Williams claimed to have severed all connection with Instafix in
January 2007, and to have transferred his shareholding to Mr Milligan on 3 January
of that year (Statement of Company’s Affairs filed by the liquidator pursuant
to section 95/99 of the Insolvency Act 1986 at B99 et seq). Yet on 24 February
2007 Mr Williams signed “[an authorisation] in accordance with the [RBS] Bank
Account Mandate” (E1) sending a CHAPS payment of £4526.10 from Instafix’s
account to Clear View Windows. He continued to withdraw sums of approximately
£2000 per week from Instafix’s bank account through to April 2007 (D9-D14). We
find that he did not sever his connection with the company in January 2007: he
remained the controlling party of Instafix until the company went into
liquidation, was closely connected with the daily operation of its financial
affairs and dealt with its finances. .
15.
Further, Mr Williams instructed Instafix’s bookkeeper, Mrs Angela
Stanworth, to reconstruct the company’s nominal activity account on its Sage
system, and we find that she did so on 22 February 2007. In an email of 9
February 2007 (E6) Mrs Stanworth had informed Mr Williams that she had
“finished calculating the amended wages for the current year”, adding “This
will increase the company PAYE liability by £63,400”. She asked that he
“confirm that this is ok so that I can amend the sage account accordingly”. We
are satisfied that he did so confirm for, in a note endorsed on the print out
of that account, in handwriting we find on the balance of probabilities to have
been that of Mrs Stanworth, she recorded (E11):
“Reallocation of dividends posted
in error for MOW [Mr Williams] per MOW 9/2/07 all amounts for him in 06/07
related to net wages, shares were reallocated but forgot to advise. Have
reworked wages to take this into account and advised of additional [tax]
liability.”
16.
We do not accept that dividends were posted ‘in error’ to Mr Williams or
that he ‘forgot to advise’ Mrs Stanworth of the ‘reallocation’ of his shares;
indeed we find to the contrary. All the evidence, and particularly that of the
company not having declared a dividend in November 2006, points to his having
been advised, or realised, that the company was not in a position to pay a
dividend in 2006-07. We further find that he deliberately instructed Mrs
Stanworth to reconstruct Instafix’s records in such a way as hopefully to
ensure that he had no personal tax or NIC liability on the drawings he had made
from the company in that year.
17.
On 15 May 2007 Instafix submitted its annual return of the PAYE tax and
NIC for which it had to account (reg. 73 of the 2003 Regulations) showing tax
due of £174,465.20 and NIC of £75,892.01. The majority of the tax returned
related to payments made to Mr Milligan and Mr Williams, and has never been
paid.
18.
Mr Williams included a salary of £249,400 from Instafix in his
self-assessment return for 2006/07, and claimed that tax of £91,706 had been
deducted therefrom, so that he was entitled to a tax refund of £1,265.36. His
net salary on the declared basis would have been £157,694, which closely
compares with the figure of £156,700 showed as paid to him in the company’s
bank statements and BACS payment sheets (D3 et seq). No explanation has ever
been provided for the discrepancy between the amount returned and Mr Williams’
actual receipts.
19.
We might add that Mr Williams was asked by the Commissioners to provide
evidence of deduction of tax and NIC from his salary but, apart from his
producing payslips which the Commissioners rejected as having being prepared no
earlier than February 2007 and being designed to deceive (see the submissions
of Mr Kane below), he never did so. Mr Milligan claimed that Mr Williams was
responsible for Instafix’s financial affairs throughout the events with which
we are concerned. Since Mr Williams chose not to attend the hearing, we are
unable to test his own claim that he was not so responsible and, on the basis
of all the evidence before us, we conclude that Mr Milligan’s claim was
correct.
20.
The law we must apply in dealing with the appeal is that set out in the
Schedule to this decision.
21.
In his closing submissions, Mr Kane dealt with Mr Williams’ reasons for
appealing seriatim. We propose to follow that pattern, but to omit those
matters on which we have already made findings of fact. Of Mr Williams’ claim
that the Commissioners’ decision to assess tax and NIC was made ‘without
interview with me’, Mr Kane accepted that to be the case, but observed that two
offers of interview been made to Mr Williams which had not been taken up. He
added that, since there was no requirement in law for interview, Mr Williams’
claim in that behalf took matters no further.
22.
Mr Kane observed that ‘wilful non payment of tax’ as specified in Mr
Williams’ second reason for appealing, was not a statutory requirement of reg.
72; rather the Commissioners had to be of the opinion that the employee had
received relevant payments ‘knowing that the employer wilfully failed to deduct
the amount of tax which should have been deducted from these payments’. Mr
Kane maintained that, on the evidence of what had occurred in the two years of
assessment immediately preceding that of 2006-7, we should infer that it was
always the intention of Mr Williams to cover his drawings by the payment of
dividends. We do so infer. When it became apparent that Instafix had
insufficient distributable reserves, and no doubt those behind the company
having been advised that any such distribution would be closely scrutinised by
any liquidator who might have to be appointed and would almost certainly result
in its having to be repaid, an alternative method was sought to ‘cover’ the
monies already withdrawn from the company. Mr Kane contended that the method
selected was to instruct Mrs Stanworth to recategorise the distributions as
salary (E11 and E6). He maintained that Mr Williams did so instruct her in the
full knowledge that the company was significantly in arrear with payments due
to the Commissioners (a further fact we find) and had no prospect of being able
to account for the tax and NIC calculated on the grossing-up of the monies he
had withdrawn from the company (B102).
23.
In Mr Kane’s yet further submission, it was only when Mr Williams became
aware that were his drawings to be treated as dividends and constitute “a
financial pitfall that might hold for him” that he personally instructed Mrs
Stanworth to recategorise the statements as salary. The basis of recalculation
was to gross up the net payments he had received in the previous months of tax
year 2006-7, he knowing full well that Instafix was not in a position to
account for the tax and NIC concerned. Mr Kane maintained that the method
adopted for payment to Mr Williams was a most unusual one for someone who was
no longer a shareholder in Instafix and was not an officer of the company.
24.
Of Mr Williams’ claim that no documentary evidence was shown to him, Mr
Kane merely observed that Mr Williams had been supplied with copies of all the
documents on which the Commissioners’ relied and, in any event, Mr Williams’
claim was not a reason for appealing.
25.
We have already dealt with Mr Williams final reason for appealing as
dealt with by Mr Kane - that he was not a controlling party, and was neither a
director nor a shareholder when Instafix went into liquidation – but, in view
of its importance, we repeat that, even after the date on which Mr Williams
claimed to have transferred his entire shareholding in Instafix to Mr Milligan,
he continued to give instructions as to the company’s finances (E6), as well as
continuing to draw monies from its bank account (D6 et al).
26.
In all the circumstances, Mr Kane submitted that we should dismiss the
appeal in its entirety.
27.
We accept the interpretation put upon the facts by Mr Kane, but observe
that it is not that interpretation on which we are required to decide the case.
28.
In our judgment, the Commissioners correctly dismissed Mr Williams’
appeal against the reg 72(5) direction: he did receive the payments from
Instafix knowing that the company wilfully failed to deduct the amount of tax
which should have been deducted from the payments.
29.
In relation to the s29(1) tax assessment, we are required to be, and
are, on the balance of probabilities satisfied that Instafix failed to deduct
sufficient tax from relevant payments made to Mr Williams, and that he received
those payments knowing that Instafix wilfully failed to deduct sufficient tax
therefrom. We are also satisfied that the situation in which Mr Williams was
assessed to tax was brought about deliberately by his acting on Instafix’s
behalf. The Commissioners most fairly treated the monies withdrawn by Mr
Williams from Instafix in 2006/07 as a gross payment of salary and/or bonus, so
that we are also satisfied that the quantum of the assessment is correct. We
dismiss the appeal against the tax assessment of £56,979.60. Mr Williams will
be liable to interest on the tax assessed under reg. 72(7) of the 2003
Regulations.
30.
We are further satisfied that the primary Class 1 NIC which ought to
have been deducted by Instafix from Mr Williams’ salary and/or bonus in 2006/07
were not recovered from him by way of deduction. That failure was, in our
judgment, due to an act or default of Mr Williams and not to any negligence on
Instafix’s behalf. We thus hold that Mr Williams is liable to pay the
contributions in question of £4,367.15
31.
We dismiss the appeal in its entirety.
32.
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: 9 May 2012
THE SCHEDULE
The Income Tax (Pay as You Earn)
Regulations 2003
Net PAYE income
3.-
(1) “Net PAYE income” means PAYE
income less any –
(a) allowable pension
contributions, and
(b) allowable donations
to charity.
Relevant payments
4.-
(1) In these Regulations, any
reference (however expressed) to relevant payments means payments of, or on
account of, net PAYE income.
Deduction and repayment of tax by
reference to employee’s code
21.-
(1) On making a relevant payment
to an employee during a tax year, an employer must deduct or repay tax in
accordance with these Regulations by reference to the employee’s code, if the
employer has one for the employee.
Deductions working sheets
66.-
(1) Paragraph (2) applies if a
code has been issued to an employer in respect of an employee.
(2) The employer must, on making
a relevant payment to the employee, prepare a deductions working sheet (unless
the employer has already done so).
(3) The employer must record in
the deductions working sheet –
(a) the employee’s name
(b) the employee’s
national insurance number, if known
(c) the employee’s code,
and
(d) the tax year to
which the deductions working sheet relates
(4) The employer must record in
the deductions working sheet in respect of every relevant payment which the
employer makes to the employee –
(a) the date of the
payment
(b) the amount of the
payment, and
(c) the
amount of tax, if any, deducted or repaid on making the payment, or to be
deducted or accounted for under regulation 62(4) or (5) (notional payments).
Recovery from employee of tax not
deducted by employer
72.
(1) This regulation applies
if-
(a) it appears to the Inland Revenue that the deductible amount exceeds
the amount actually deducted, and
(b) condition A or B is met
(2) In this
regulation-
“the deductible
amount” is the amount which an employer was liable to deduct from relevant
payments made to an employee in a tax period;
“the amount
actually deducted” is the amount actually deducted by the employer from
relevant payments made to that employee during that tax period;
“the excess”
means the amount by which the deductible amount exceeds the amount actually
deducted.
(3) …
(4) Condition
B is that the Inland Revenue are of the opinion that the employee has received
relevant payments knowing that the employer wilfully failed to deduct the
amount of tax which should have been deducted from those payments.
(5) The
Inland Revenue may direct that the employer is not liable to pay the excess to
the Inland Revenue.
(7) If
condition B is met, tax payable by an employee as result of a direction carries
interest, as if it were unpaid tax due from an employer, in accordance with
regulation 82 (interest on tax overdue).
(8) The tax
payable carries interest from the reckonable date until whichever is the
earlier of-
(a)
the date on which payment is made, or
(b) the date
(if any) immediately before the date on which it begins to carry interest under
section 86 of TMA(a)
INCOME
TAX
The
Income Tax (Pay as you Earn) (Amendment) Regulations 2004
Employee’s appeal against a direction notice where condition
B is met
72C. –
(1) An employee may appeal against a direction notice under
regulation 72(5A)(b) –
(a) by notice to the Inland Revenue
(b) within 30 days of the issue of the direction
notice,
(c) specifying the grounds of the appeal.
(2) For the purpose of paragraph (1) the grounds of appeal
are that –
(a) the
employee did not receive the payments knowing that the employer wilfully failed
to deduct the amount of tax which should have been deducted from those
payments, or
(b) the excess
is incorrect.
(3) On an appeal under paragraph (1) the Commissioners may –
(a) if it
appears to them that the direction notice should not have been made, set aside
the direction notice; or
(b) if it
appears to them that the excess specified in the direction notice is incorrect,
increase or
reduce the excess specified in the notice accordingly.
Taxes Management Act 1970
(1) If an officer of the Board or
the Board discover, as regards any person (the taxpayer) and a year of
assessment-
(a) that any
income which ought to have been assessed to income tax, or chargeable gains
which ought to have been assessed to capital gains tax, - have not been
assessed, or
(b) that an
assessment to tax is or has become insufficient, or
(c) that any
relief which has been given is or has become excessive,
the officer or, as the case may be, the board may …
make an assessment in the amount, or the further amount which ought in his or
their opinion to be charged in order to make good to the Crown the loss of tax.
(2) …
(3) Where the taxpayer has made and
delivered a return under section 8 or 8A of this Act in respect of the relevant
year of assessment, he shall not be assessed under subsection (1) above – (a)
in respect of the year of assessment mentioned in that subsection: and (b) in
the same capacity as that in which he made and delivered the return, unless one
of the two conditions mentioned below is fulfilled.
(4) The first condition is that the
situation mentioned in subsection (1) above was brought about carelessly or
deliberately by the taxpayer or a person acting on his behalf.
