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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Roberts & Anor v Revenue & Customs [2011] UKFTT 268 (TC) (26 April 2011) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01130.html Cite as: [2011] UKFTT 268 (TC) |
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[2011] UKFTT 268 (TC)
TC01130
Appeal number: TC2010/03599 & TC2010/03600
National Insurance Contributions; failure by limited company to pay contributions; Personal Liability Notice served on director; whether failure to pay attributable to neglect on the part of directors; Social Security Administration Act 1992 s 121C&D; Appeal dismissed.
FIRST-TIER TRIBUNAL
TAX
STEPHEN ROBERTS & ALAN MARTIN Appellants
- and -
TRIBUNAL JUDGE: J GORDON REID, QC., F.C.I.Arb.
Member: Ian M P Condie, CA,
Sitting in public at George House, 129 George Street, Edinburgh on Monday 21 March 2011
Stephen Roberts for the Appellants
Eugene Walsh (HMRC) for the Respondents
© CROWN COPYRIGHT 2011
DECISION
Introduction
2. A Hearing took place at Edinburgh on 21 March 2011. The Respondents (HMRC) were represented by Eugene Walsh, an official of HMRC who specialises in advocacy. He led the evidence of Andrew Pawley, a Personal Liability caseworker with HMRC. He works for the Specialist Investigation Department with HMRC’s Insolvency & Securities Team. He has carried out this type of work for over seven years. Before the Hearing, HMRC lodged and intimated a detailed Witness Statement by Mr Pawley which was fully cross-referenced to a substantial lever arch file of documents which had also been lodged and intimated prior to the Hearing. Mr Pawley spoke to his statement and the documents in evidence. The Appellants appeared without professional assistance. Mr Roberts spoke for both of them and also gave evidence. There was no dispute about the authenticity, and where appropriate the transmission and receipt of the documents produced.
Statutory Framework
4. The approach of HMRC is to serve a PLN only where they consider there to have been fraud or a serious level of neglect. Accordingly, a thorough and detailed enquiry will be carried out before a decision is taken by a senior officer, to authorise the service of a PLN.
Procedural Background
6. On or about 4 November 2009, a PLN was issued to each Appellant. The total sum claimed was £90,959 apportioned equally between each Appellant (£45,479.50). The total sum was made to best judgment as there were gaps in the records of Innova. However, there is no challenge to the validity of the notice, quantum or the apportionment.
Grounds of Appeal
8. The Grounds of Appeal embrace the terms of a long letter dated 15 January 2010 to HMRC from the Appellants’ solicitors. It is difficult to condense, but in essence the grounds of appeal are (i) the test for neglect involves considering what a reasonable and prudent man would do in the circumstances, (ii) when Innova started up there was no financial risk, (iii) it was reasonable not to have contacted HMRC as Innova had no proposals to make, (iv) even although Innova was not in a position to pay its statutory liabilities, a reasonable person would not necessarily in the circumstances have brought the business to an end, as it was reasonable to think that the business could be turned around, (v) the payments of salaries and expenses to the directors was not unreasonable, (vi) certain payments were made to ensure the ongoing viability of the business although no preference was given to particular creditors (vii) as Innova approached liquidation the overall indebtedness to creditors was reduced because this burden was taken on by the successor company, Cornerstone Resources Ltd, and (viii) professional advisers consulted by the Appellants at the time did not disagree with the directors’ proposed course of action.
Issues
Facts
11. Innova was a company incorporated under the Companies Acts on 21 June 2007. Its registered office was at Craigowan, 30 Brewlands Road, Symington, Ayrshire. The Appellants and SP Campbell were its directors. The company was essentially a staff agency. It provided personnel with specialist qualifications to businesses in the financial services industry such as banks, insurance companies and others on short term contracts. These individuals were either employees of Innova and hired out to third parties; or they were individuals whose services were engaged as independent contractors; Innova then sub-contracted these services out to third parties. The precise contractual arrangements were not explored in evidence and no sample documentation was produced. Whatever Innova paid the personnel on their books they charged a mark-up to their own third party clients. The mark-up varied from 50% to 8%; latterly it was nearer 8%.
12. Innova was the successor (or phoenix) company of Synergi Global Solutions Ltd, a company in which both Appellants were directors. It carried on a similar business to Innova, namely contract consultancy. Synergi went into liquidation by order dated 27 July 2007 with PAYE tax NIC and VAT debts of about £165,305 of which £103,733.07 was attributable to outstanding PAYE tax and NIC. Mr Roberts had given a personal guarantee up to £20,000 for the liabilities of Synergi. Following a dispute with Synergi’s liquidator about work-in-progress, Innova found itself, at the outset, under liability to pay the liquidator at least £73,000, a liability from which it never truly recovered. Innova was significantly underfunded from the outset as the Appellants must have known. Innova may never have been solvent.
22. No such instructions were ever given, as no NIC or PAYE tax was ever remitted by Innova to HMRC. Each month, from the outset of Innova’s trading, the Appellants conducted a financial review and each month they took the decision to refrain from making any payments of PAYE tax or NIC, preferring to pay their own substantial salaries and other creditors. The Appellants were, in effect, propping up Innova with funds which ought to have been remitted to HMRC. Innova did not at any stage generate enough funds to pay its debts as they fell due. The Appellants were aware of this.
24. Innova factored its book debts to Bibby Financial Services. This aspect of Innova’s trading arrangements was not explored in evidence.
27. Innova ceased trading on or about 18 April 2008. It failed to submit VAT returns for the quarters to October 2007, January 2008 and April 2008. In other words, it did not submit any VAT returns at all. Innova’s VAT liability has since been assessed at £18,623 which has not been paid. On 21 August 2008, Innova was ordered to be wound up, a provisional liquidator having been appointed on 18 April 2008.
29. Cornerstone began trading in about May 2008 when a PAYE scheme was set up. It had the same registered office as Innova. The Appellants were the directors of Cornerstone and they awarded themselves the same salaries they had received from Innova. HMRC officers visited Cornerstone’s accountant on 27 February 2009 to examine Cornerstone’s payroll records in order to quantify the debt owed to HMRC. Thereafter, the Appellants made their first contact with HMRC in early March in relation to Cornerstone’s liabilities.
Decision
32. We were referred to a number of authorities on the meaning of neglect, including Blyth v Birmingham Waterworks Co 1856 11 EX 781 at 784 for a definition of negligence, Livingstone v HMRC TC 00369, 15/1/10, a PLN case,and Inzani v HMRC 1996 SPD 529.
33. We do not need to consider these cases in detail. In our view, neglect consists of a failure to do what, in the circumstances, a reasonable and prudent person would have done. Neither party disputed that proposition. It is unnecessary and possibly inappropriate to embark on a consideration of negligence insofar as this may be thought to be different from neglect in the present context. Had we considered that necessary, an examination of modern Scottish authority on negligence would have been required. The modern notion of negligence is probably not quite the same as it was in 1856. Negligence involves identifying a duty of care, specifying the standard of duty to be achieved, foreseeability, causation and remoteness and raises the question whether it would be fair just and reasonable to impose a duty and consequent liability on the person concerned.
34. We have, however, no difficulty in holding on the balance of probabilities, that Innova’s failure to pay the NIC specified in the PLNs was attributable to the neglect on the part of the Appellants. HMRC have discharged the onus of proof which rested on them. It was plain that the Appellants were fully aware of the statutory obligations in relation to payment of NIC. They received information each month about the financial health of Innova including the amount of NIC due and payable by the 19th of the month. They were personally responsible for ensuring the payment of NIC and PAYE tax. They were responsible for the decision each month, while Innova traded, not to pay NIC and PAYE tax and chose instead to pay other creditors and their own salaries; they thus propped up for as long as possible an ailing business with funds which should have been remitted to HMRC. No attempt was made to discuss matters with HMRC. They made no reasonable provision for the payment of NIC or PAYE tax; even although they must have been aware that the liability to HMRC was increasing each month.
35. Viewing the figures set out in our findings of fact broadly, Innova needed a turnover in excess of £2m per annum (which allows a generous 33% mark up on direct costs) in order to service outgoings of about £500,000 and break even. Their actual sales over the life of the company fell far short of that rate.
37. No reasonable and prudent businessman would have behaved in this way or conducted business in this manner. No reasonable and prudent businessman would have neglected to pay the NIC as it fell due. Any reasonable and prudent businessman, having control of the operations of Innova, would probably have ceased trading within a few months of start-up at the latest or attempted to make arrangements with HMRC about deferring payment. The irresistible inference from the facts as we have found them to be is that Innova’s business was being funded at least in part by money which ought to have been remitted to HMRC to meet the company’s statutory obligations. In our view, no reasonable and prudent business man would, in the circumstances, have conducted his business in such a manner. In our view, Innova’s persistent failure to pay NIC at or within the prescribed time is attributable to neglect on the part of the Appellants, who throughout the period of that neglect were directors of Innova. The relevant requirements of s121C of the Social Security Administration Act 1992, as amended, have been met.
39. The Appellants produced no documents or any evidence on which we felt confident enough to rely, to support the contentions advanced in their grounds of appeal. Apart from his acknowledgement in evidence that he was aware at the material time of Innova’s statutory responsibilities, there was little of what Mr Roberts said in evidence which we were prepared to accept. In cross examination he was evasive and devious. At one point he asserted that he and Martin had approached HMRC about Cornerstone’s PAYE tax and NIC liabilities before HMRC had started making enquiries. However, he eventually accepted (what he must have been aware of all along) that his approach to HMRC followed on from HMRC’s visit to Cornerstone’s accountant. He asserted that Innova’s business was viable at the outset and would not accept that his conduct as director of Innova fell short of what a reasonable and prudent businessman would have done in the circumstances. We were prepared to accept his evidence that he had no formal qualifications whatsoever. He said he was a salesman and an optimist. In some of the company records produced he is described as a nightclub owner and operator. By the end of his evidence he was referring to Mr Pawley and Mr Walsh by their first names.
Disposal
41. The appeals against the Personal Liability Notices are dismissed.
42. 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.