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Newth Talks Tax: Potential tax liability

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23rd Mar 2009
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Geoff (see 14 December 2007) disclosed that he was currently involved in a PAYE review which could potentially give rise to a large PAYE liability. The PAYE liability would exceed the assets of the company by 5 to 1, and the company would not be able to settle the debt due to HMRC.

The directors have enquired as to the HMRC response if the company was put into liquidation, resulting in HMRC only receiving part of the tax due. Would they be able to go after the directors for the balance?

The potential liability is due as a result of tax benefits which had not been taxed on the employees and also due to the status of some of the subcontractors who may have been recategorised as employees. Geoff later confirmed that the potential tax liability is in respect of van benefits for the employees and the status issues were in respect of subcontractors that the directors had engaged.

If HMRC go after the directors and the shortfall disappears, would the directors be able set up another company and recommence the business?

Stephen Kendrew considered the powers of HMRC depended on what the tax related to. He used as an example the issue of company car benefits. It is usually convenient for everything to be dealt with in a PAYE settlement agreement. If this is not possible because the company cannot pay, then they would go after the individuals. Presumably, as in this case one is considering van benefits, then HMRC would attempt to try and obtain the tax from the relevant employees. However, Stephen confirmed that, unless it is the directors' own status that is under challenge, then the company cannot pursue the directors in respect of tax due in respect of the subcontractors.

William Stevenson confirmed that it is unlikely that HMRC would go after the company in connection with employee benefits, unless they relate to a member of the director’s family. Also, subcontractors should have been making their own returns and paying their own tax, so why should the company get involved in a status issue? I have to say that, in view of the Demibourne case, I do not necessarily agree with this, as technically HMRC would look to the company for back PAYE and Class 1 NIC, and the former subcontractor would apply to HMRC for repayment of tax on trading. The issue may depend on whether the company is still in touch with former subcontractors, and whether subcontractors are prepared to sign an indemnity for their overpaid tax to be set against the company’s PAYE.

Kevin Lucas observed that, if the company were to go into liquidation, then HMRC could only seek to recover unpaid PAYE on directors’ remuneration plus unpaid NIC on all employees' pay where the failure to pay was due to fraud or neglect on the part of the directors.

Once in liquidation the liquidator could take any number of actions against the directors, meaning that they might have to contribute towards the company’s debts. Kevin is an insolvency practitioner, and considered that, on the facts outlined, there would be little chance of a claim against the directors by the liquidator or HMRC. However, additional facts could change that view.

As regards setting up the business again, Kevin observed that ‘phoenixism’ is very common, and the directors would be able to start again. The biggest legal hurdle is the issue of re-use of the company name. There are permitted exceptions in the Insolvency Rules, should the directors wish to use an identical or very similar company name. However, there are many practical problems such as funding ‘the phoenix’ and obtaining credit from suppliers who were not paid as a result of the insolvency. However (and this was written before the current credit crunch) there will always be someone who will provide finance, possibly not a great amount and at a more expensive rate. There are enough suppliers of goods in nearly all industries that someone will nearly always supply on credit.

I can only add my misgivings about the subcontractors. Did the directors really investigate whether they were self-employed, or were they just told that they would be self-employed? Did they sign contracts for services, and have they filed their own self-assessment tax returns and paid tax on their trading? This is a possible area where HMRC could take action against the directors. If the subcontractors were genuinely self-employed, why was no action taken in defending their status? Retaining self-employed status would have benefited both worker and the company.

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