Test of Directors’ Negligence

In certain circumstances a director of a limited company can be held personally responsible for unpaid NICs. Section 121C(1)(b), Social Security Administration Act 1992 permits HMRC to impose a Personal Liability Notice (PLN) on a director but only if:

1. there has been a loss of NIC's which should have been paid over to HMRC by a body corporate; and
2. that loss is attributable to the fraud or neglect of an officer of that body corporate.

Mr O'Rorke was previously the Finance Director of L Wear & Co, a post that he resigned on 22nd February 2007. Soon after the company went into liquidation on 5th March 2007 owing £321,306.60 unpaid NIC's. On 3rd September 2009 HMRC issued a PLN to Mr O'Rorke for £290,307.60 which was reduced to £218,593.77 on 25th June 2010.

The ex FD appealed against the PLN arguing that the failure was not attributable to any fraud or neglect on his part. He claimed that he was suffering from an addiction which affected his behaviour and that this ought to be considered when assessing whether he was negligent in the carrying out of his duties.

HMRC rejected this submission and argued that the test of negligence was an objective one and the state of mind and/or mental capacity of Mr O'Rorke was irrelevant to determining his negligence.

In June 2010, a differently constituted Tribunal denied Mr O'Rorke permission to provide expert medical evidence in support of his case because the judge accepted HMRC's reasoning that the test of negligence was objective.

Mr O'Rorke argued that the Tribunal's Direction was wrong in law and that the negligence test was a subjective one. As such he should be allowed to produce his medical evidence as part of his defence. Subsequently both parties were invited to present written arguments on whether the test was objective or subjective.

The First Tier Tax Tribunal instructed that s.121C was a penal measure and that with regard to neglect the legislation required proof of culpability. The definition of 'culpable' was defined in the Oxford English Dictionary as guilty, criminal and deserving of punishment.

Neglect therefore did not have an objective meaning but had to be read as mens rea (a person's awareness of the fact that his or her conduct is criminal) of the individual concerned. The Tribunal therefore allowed Mr O'Rorkes' appeal.