Personal PAYE Liability

Directors can, in rare circumstances, be held personally liable for non payment of their company's PAYE and NICs.

Derek and Christine Pinion were the directors and owners of Expernet Ltd, a company formed in 1999 which initially traded as website designers. The company had then expanded into traditional software developers.

The accounts for the two years ended 31^st May 2005 showed turnover of £229,081 and £178,738 respectively. The 2005 year revealed an operating loss of £155,924. Despite the decrease in turnover it was noted that director's emoluments increased from £9,400 in 2004 to £147,965 in 2005.

Mr Pinion appeared to know surprisingly little about his company's financial arrangements and he said that he and his wife did not realise the company was in financial difficulties until their accountant advised them that it was insolvent and that the company should cease trading. On 9^th March 2010 the company was struck off the register by Companies House.

Mr Pinion informed the Tribunal that he and his wife had been drawing between £50,000 – £60,000 each year from the bank but the Tribunal were of the opinion that Mr Pinion's claim of being unaware of his company's financial affairs lacked credibility, as £147,965 was a substantial amount of money to receive in one year and almost equated to the turnover in the year ended 31^st May 2005. Furthermore, Mr Pinion had formed several other companies and had designed a software application to provide this type of information to businesses.

HMRC discovered that there were arrears of PAYE and NICs due to a failure of the company to make necessary deductions. Believing that the Pinions must have been aware of the PAYE and NICs debts, HMRC raised assessments under Regulation 72 of the Income Tax (PAYE) Regulations 2003 and Regulation 86 of the Social Security (Contributions) Regulations 2001 in the sums of £39,721 (Mr Pinion) and £34,234 (Mrs Pinion).

Regulations 72 and 86 mentioned above allow HMRC to recover PAYE and NIC respectively from an employee where insufficient PAYE and NIC have been deducted and they are of the opinion that the employee has received the relevant payments knowing that the employer wilfully failed to deduct the amounts of tax which should have been deducted from those payments.

The Tribunal found that Mr Pinion had acted negligently and knew that the company had wilfully failed to deduct the appropriate PAYE and NIC and that the assessment had been properly raised.

Although the legislation referred to does not receive a lot of publicity due to the rarity of its usage, this case nevertheless serves as a timely reminder to directors of their own companies that  they can be left holding the baby if they allow things to go seriously awry with the PAYE.