In certain circumstances HMRC can seek payment of PAYE and Class 1 NIC from employees rather than the company. Where insufficient PAYE has been deducted by an employer and the employee has received payments in the knowledge that the employer wilfully failed to deduct the correct amount of tax from such payments, then Regulation 72 of the Income Tax (PAYE) Regulations 2003 allows HMRC to recover it from the employee.
Mr Michael Owen Williams started up Instafix Ltd, a joinery installations company, in January 2003 with a Mr Glenn Milligan. To reflect and protect the level of investment made by Mr Williams he was made the majority shareholder, holding 65% of the share capital, although he was not a director whereas Mr Milligan was. In fact Mr Milligan was the sole director. It was agreed that as the company developed and Williams’ investment was returned the shareholding would be divided equally with Milligan.
In May 2007 Instafix went into liquidation owing HMRC over £281,000 which, at the date of hearing, was still outstanding.
In October 2009 HMRC served notice on Mr Williams that he was liable to pay employees Class 1 NIC of £4,367.15 and in July 2010 an income tax assessment for £56,979.60. Both were for the year ended 5th April 2007 and HMRC justified their actions as being satisfied that the failure by Instafix to pay sufficient NIC was due to an act of default of Williams and not due to any negligence on the part of Instafix. With regard to the failure to deduct sufficient tax this was brought about carelessly or deliberately by Instafix or a person acting on its behalf.
Mr Williams appealed but did not attend the appeal hearing. Instead he provided a statement setting out the facts as he saw them. He claimed that HMRC had never questioned or interviewed him about the matter, dismissed HMRC’s suggestion that he was a controlling party on the basis that he was neither a director nor shareholder at the time of liquidation and fully believed that Instafix “would meet the contributions according to my P60….”
Williams’ day-to-day job was to ensure that sites were fully manned and operated smoothly. He also had to extract weekly information from sub-contractors for the purposes of issuing client invoices. He was also given authority by the company to pay sub-contractors out of the company bank account and to make any necessary payments to suppliers to ensure completion of works. Other financial functions such as cash flow control, debt collection, credit control, the making of payments and returns to HMRC, etc., were all handled by Milligan, so Williams claimed. This regime continued until Williams became concerned that the company was biting off more than it could chew, causing him to transfer his remaining shares to Milligan on 3rd January 2007 and sever all connection with Instafix that same month.
The Tribunal however was not buying Mr Williams’ version of events. In the company accounts for the year to 31st March 2005, under the heading ‘Controlling interest‘ it was stated that Mr Williams owned 65% of the issued share capital and although he was not a director he was deemed to be the controlling party. HMRC claimed that Williams was a significant controlling influence within Instafix and for all practical purposes was a shadow director, which the Tribunal Judge accepted.
In the years ended 5th April 2005 and 2006, Williams received a salary of £4,680 and £4,800 respectively, and dividends of £58,000 and £110,000.
In 2006/07 Instafix moved into a loss making situation and was not in a position to pay dividends neither out of income nor reserves. Had they done so, then such dividends would have been rendered illegal. Nevertheless, from April 2006 Messrs. Milligan and Williams continued a practice of withdrawing weekly round sums from the company’s bank account. In Mr Williams’ case, sums in the region of £2,000 per week were being withdrawn up until 4th April 2007. Williams claimed that from April 2006 these amounts represented salary net of tax and NIC.
Despite claiming to have severed all ties with Instafix in January 2007, Williams authorised a CHAPS payment of just over £4,500 on 24th February 2007. This, together with the fact that Williams continued to withdraw approximately £2,000 per week from Instafix’s bank account up until April 2007, led the Tribunal to conclude that he remained the controlling party until the company went into liquidation and was closely connected with the daily operation of its financial affairs and dealt with its finances. This was endorsed by Mr Milligan who claimed that Williams was responsible for Instafix’s financial affairs throughout.
Furthermore, Williams instructed Instafix’s bookkeeper to reconstruct the company’s nominal activity account on its Sage system to reallocate dividends, posted in error, to net wages. This was done in February 2007 which increased the company’s PAYE liability by £63,400. As Williams was well aware of Instafix’s precarious financial position, the Tribunal found that he deliberately instructed the bookkeeper to reconstruct the company’s records so as to ensure that he had no personal tax or NIC liability on the drawings he had extracted in the year 2006/07, knowing full well that Instafix was not in a position to account for the tax and NIC concerned.
In completing his 2007 self assessment tax return, Williams recorded a salary from Instafix of £249,400, with tax deducted of £91,706 and claimed a tax refund of £1,265.36.
When asked to provide evidence of tax and NIC deduction from his salary, Williams could only produce payslips which were rejected by HMRC as having been prepared no earlier than February 2007 and being designed to deceive.
With regard to Mr Williams’ claim that HMRC had gone ahead raising assessments on him without first interviewing him, HMRC accepted that was the case but did point out that two offers of interview had been made to him which he did not take up.
Mr Williams’ appeal was dismissed and he was found to be liable for the employees Class 1 NIC and tax plus interest.
Whilst it is unlikely that the vast majority of contractors will find themselves in a similar position to Mr Williams, this decision is a reminder that in a very specific set of circumstances company directors can be left holding the baby and not able to use their company’s shield of limited liability.
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