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Director forced to pay his company’s tax debt

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Following a series of failed businesses, HMRC finally ran out of patience and passed the company’s unpaid PAYE liability to the sole director.

10th May 2022
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Michael Eames was the sole director/shareholder of A1 Recovery Portsmouth Limited (A1RP), a company that maintained and repaired motor vehicles and provided roadside recovery for national breakdown services.

A1RP entered compulsory liquidation in July 2017, owing HMRC £108,059.07 (plus interest) in unpaid PAYE. HMRC decided to exercise its right to allocate this debt to Eames via a Personal Liability Notice (PLN) under s121C of the Social Security Administration Act 1992, on the basis that Eames had been negligent in his behaviour.

Making it personal

Section 121C allows HMRC to effectively take a corporate PAYE liability and make it a personal liability of an officer (or officers) of the company. 

This can only be done where the company has failed to pay the required amount and the failure to pay can be attributed to fraud or negligence on the part of one or more officers. HMRC made no allegations of fraud, but did believe Eames had been neglectful. As the sole officer, the entire PAYE debt was passed to him.

Series offender

Part of the decision to exercise s121C was due to Eames’ business history. Prior to A1RP he had been the sole director of A1 Recovery & Garage Services Limited. Before that, he had been the sole director of A1 Recovery Limited. 

Each of these companies had entered liquidation shortly after commencing to trade, each had owed over £70,000 of unpaid PAYE at liquidation, and the assets of each had been acquired by the next company in the chain.

HMRC was therefore taking no chances this time!

Reasonable behaviour

The definition of “neglect” had been established in Blyth v Birmingham Waterworks Co to be where a taxpayer either omits to do what a reasonable person would do or does what a person taking reasonable precautions wouldn’t have done.

The case of O’Rorke confirmed that “negligence” and “neglect” have the same meaning for tax purposes.

Eames did not believe he had been neglectful and so appealed to the first tier tribunal (FTT) (TC 8450).

Selective payments

HMRC’s main argument to the FTT in support of Eames being neglectful was that while owing large sums of money to HMRC he had arranged for A1RP to make payments to companies under his control, as well as to himself directly.

Eames countered that his failure to pay was not attributable to neglect, rather that he had made poor business decisions in a difficult marketplace. The intercompany payments were necessary to prevent the failure of the related businesses.

Finally, he pointed out that he had entered a “time to pay” arrangement with HMRC regarding the company’s PAYE liability – hardly, he felt, the actions of a negligent person.  

Learning from experience

The FTT was not convinced by Eames’ arguments. They noted that having already experienced how difficult the roadside assistance industry was, a prudent/reasonable person would have taken steps to avoid repeating past errors.

In particular, Eames should have ensured his company was in a position to meet its PAYE requirements, which he did not.

The bank of HMRC

Turning to the intercompany payments, the FTT noted that £393,344.45 (net) in total had been paid to related companies. Eames explained he had not personally benefited from these payments; however this fell on deaf ears. 

The FTT noted the criteria for a valid PLN is not whether the officer has benefitted personally, rather whether the failure to pay was due to the officer’s neglect. A prudent and reasonable person, the FTT said, would not have used money owed to HMRC to fund their businesses – HMRC are not a short-term lender after all.

It was also noted that Eames had paid himself a salary while owing HMRC for PAYE – effectively spending HMRC’s money to increase the amount owed to HMRC! Again, the FTT noted this was not the behaviour of a reasonable person.

Keeping up the payments

The FTT looked into the payment plan Eames had arranged. It transpired he had only set up the plan after A1RP had missed three PAYE payment deadlines and only after a visit from HMRC. Further, the agreement was to pay six instalments of £7,000 per month and to keep up to date with accruing payments. In reality, only three instalments were paid and the accruing liability was left to increase.

The time to pay arrangement could therefore not be counted in his favour and so did not improve his position.

FTT decision

Eames had used money owed to HMRC to pay himself and fund his businesses. He had failed to keep to agreed payment terms to clear his PAYE debts and he had seemingly not learned from his prior business failings. The FTT, therefore, agreed he had been negligent and dismissed the appeal. 

Replies (16)

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By CJaneH
10th May 2022 15:40

When studying we were always told that director's are responsible for debts incurred when permitting the company to continue to trade when they knew, or should have known the company was insolvent. So about time HMRC started to collect from company directors who abuse the limited liability status.

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By Hugo Fair
10th May 2022 15:44

I like the dryness exhibited by the FTT in saying:
"They noted that having already experienced how difficult the roadside assistance industry was, a prudent/reasonable person would have taken steps to avoid repeating past errors."

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paddle steamer
By DJKL
10th May 2022 16:50

This is news to celebrate.

We do our bit with failed tenants, word gets passed to other local landlords as they try to phoenix their entities, but the numbers who just play the system is unbelievable and it is about time someone started catching them and making them pay.

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By ireallyshouldknowthisbut
10th May 2022 17:11

About time. HMRC got stuck into this sort of case, it is far too common. if HMRC spent 10% of the money they are wasting on MTD on tackling real issues like this they would be able to pay for the other 90% of MTD out of the proceeds both from direct compliance collection, and far more importantly, disincentive for others. if you know you are going to get caught you don't take a risk.

That said this chap still seems to have come out streets ahead however if he has serially walked away from his tax debts and only been stuck up for one of them.

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Ivor Windybottom
By Ivor Windybottom
10th May 2022 17:36

Seems like this director may have been operating a little close to the wire for some time:
https://www.dailyecho.co.uk/news/9998893.cowboy-parking-firm-making-hamp...

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By richard thomas
10th May 2022 22:16

The headline is wrong. There is nothing about PAYE liabilities in this company in the case report, because section 121C SSAA92 applies only to NICs, as is apparent from para 1 of the decision. Sloppy!

There is no provision that passes PAYE liabilities to negligent/fraudulent directors; there is now an ability for HMRC to seek security for PAYE debts, but that's not the same thing and was not the subject of the case.

Nor, despite what some commenters suggest, is there anything new here. HMRC have been very active with s121C and all the security rules (VAT especially) for some time - I've dealt with many cases myself.

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Replying to richard thomas:
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By Justin Bryant
11th May 2022 12:03

But presumably HMRC could potentially have done a reg 72 determination for such a bust company director (assuming he received the dosh):

https://www.legislation.gov.uk/uksi/2003/2682/regulation/72/made

https://www.gov.uk/hmrc-internal-manuals/compliance-operational-guidance...

Although I note it can be a complex point. See: https://www.taxation.co.uk/articles/2012-06-20-290601-recovery-position

The above article also confirms that to recover from the employee in such a case, HMRC must show (under Condition B, as Condition A won't be relevant presumably) that “the employer had wilfully failed to deduct the amount of tax which should have been deducted from those payments".

This willful default point is supported at para 53 here:

https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j8905/TC0...

And see this case: https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j9262/TC0...

And: https://www.rpc.co.uk/perspectives/tax-take/tribunal-rejects-hmrcs-attem...

PS I don't know why Aweb don't provide a case link: https://www.bailii.org/uk/cases/UKFTT/TC/2022/TC08450.html

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Replying to Justin Bryant:
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By richard thomas
11th May 2022 12:58

I agree they could have used reg 72, but they didn't or at least it wasn't part of the case.

On your PS, there was a link at the end of the paras headed "Reasonable behaviour".

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Replying to richard thomas:
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By Justin Bryant
11th May 2022 13:04

Noted, many thanks.

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By meadowsaw227
11th May 2022 10:14

Now just apply the same logic to the BBL miscreants.

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A Putey FACA
By Arthur Putey
11th May 2022 17:10

And said entrepreneur is a director of JLE HAVANT LTD whose August 2020 accounts show negative net assets of £892K and £781K of creditors for ..... taxation and social security. He might be concerned about whether the company will pay him the £44K shown as owing to him, and if it has been repaid to him at the expense of HMRC, whether this might be a fraudulent preference.

Tax law aside, there are lots of provisions in the Companies Acts for dealing with delinquent directors, but no one seems to enforce them.

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Replying to Arthur Putey:
A Putey FACA
By Arthur Putey
11th May 2022 17:22

... said company apparently having claimed between £10K and £25K a month in CJRS grants between March and September 2021. Not that this in any way paints a picture of course.

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Replying to Arthur Putey:
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By Hugo Fair
11th May 2022 17:32

... and back in 2012 (as per link above kindly supplied by Ivor Windybottom):
* he was also the Director of Shoal Enforcement Ltd who (according to the Southern Daily Echo) were operating illegally - as well as, you guessed it, preparing to be kicked off the CH register for failure to make timely submissions.

Why is previous behaviour not taken into account when determining the penalty?

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Replying to Hugo Fair:
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By richard thomas
11th May 2022 17:57

Are you referring to CH penalties? In these cases the FTT does indeed take previous behaviour very much into account - see paras 41-45 of the FTT decision. HMRC usually only go for serial evaders and Phoenixers under these provisions and the security ones and they provide evidence in detail of past wrongs.

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By moneymanager
11th May 2022 18:30

"Once is happenstace, twice a coincidence, three times is enemy action" Goldfinger, - Ian Flemming.

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By rememberscarborough
12th May 2022 12:23

Surely we're getting to the time where companies are not allowed to employ people because the directors are not "fit and proper" people? When they are refused a licence and still employ people then they should be liable to criminal prosecution under the Modern Slavery Act.

Until the penalties outweigh the risk then people will continue to have HMRC for mugs.

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