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Cite as: [2006] UKSPC SPC529, [2006] UKSPC SPC00529

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Peter Inzani v Revenue & Customs [2006] UKSPC SPC00529 (29 March 2006)

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

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.

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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."

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."