Tax Writer
Share this content

Wilful failure to deduct PAYE costs £276,000

The first tier tribunal found three co-directors must pay tax of £276,000 as the company they controlled failed to pay over PAYE and NIC deducted from their salaries.   

3rd Jul 2020
Tax Writer
Share this content
Payslip
istock_tattywelshie_aw

HMRC issued directions under Income Tax (PAYE) Regulations 2003, reg 72: Recovery from employee of tax not deducted by employer to Budhdeo, Hundal, and Mathew to recover tax that Intecare Homecare Limited (IHL) should have deducted from payments of employment income made to them in 2008/09.

Background

The directors’ appeal (TC07679) was the latest in a long line of cases involving this group of taxpayers and the companies they controlled (see below).

This case involved the liquidation of IHL, which was founded by Budhdeo and Hundal in 2002, who were both its directors and shareholders. IHL provided pharmacy homecare. Budhdeo was IHL’s CEO while Hundal, as a pharmacist, was responsible for logistics, sales, and operational support. Mathew was an accountant and acted as IHL’s finance director from mid-2008.

At its peak, IHL had more than 100 staff and a turnover of between £8m-£9m. But the firm was making losses and had a working capital funding gap of between £700,000 and £800,000.

IHL went into administration on 4 December 2008, into liquidation on 17 November 2009 and was dissolved on 20 February 2010.

By the time IHL went into administration, at least six cheques to HMRC for PAYE and NIC had bounced. In the period 6 April to 4 December 2008, IHL only paid PAYE and NIC to HMRC for April to June. Cheques for PAYE and NIC for July to September 2008 were dishonoured by IHL’s bank.

Purchase of IHL

On 4 December 2008 IHL’s business and assets were sold to Blackbay Ventures Limited (BVL) and its subsidiaries Venture Pharmacies Limited and Intecare Direct Limited.

Under the contract, BVL was required to offer employment to all the IHL employees. Budhdeo, Hundal and Mathew became employees of Venture Pharmacies Limited (see Gold Nuts & others cases listed below).

The P14s

In March 2009, the company’s administrators, filed a P35 PAYE return for IHL for 2008/9, together with P14s for 101 employees. The forms related to the period between 6 April 2008 and IHL’s administration on 4 December 2008. The P14s reported:

  • Budhdeo – total earnings of £305,000, PAYE of £118,002 and £44,800 NIC (employee and employer).
  • Hundal – total earnings of £305,000, PAYE of £115,781 and £44,800 NIC (employee and employer).
  • Mathew - total earnings of £113,333, PAYE of £40,224 and £18,350.47 NIC (employee and employer).

The P14s all stated that the taxpayers’ employments with IHL ended on 4 December 2008.

In 2010, chartered accountants Dewanis became involved in the case. Dewanis dealt with IHL’s and BVL’s tax affairs, and prepared Budhdeo’s and Hundal’s personal tax returns. In June 2010 Dewanis filed a further P35 on behalf of IHL, along with P14s for Budhdeo, Hundal, and Mathew.

The second P14s showed additional earnings for Budhdeo and Hundal of £300,000, with income tax of £120,000 and £41,400 NIC (employees and employers). The P14 for Mathew reported earnings of £90,000, PAYE of £36,000 and £12,420 NIC (employee and employers).

These amounts of PAYE and NIC were not paid to HMRC. Again, the P14s all stated that the taxpayers’ employments with IHL ended on 4 December 2008.

The tax returns

On their 2008/09 tax returns Budhdeo and Hundal reported the income on both sets of P14s (ie £605,000). Both taxpayers claimed credit for the PAYE that was declared as withheld on both P14s.

Mathew filed his 2008/09 return late and reported total pay from IHL of £113,333 and a PAYE credit for £40,224. This amount matched the earnings and PAYE shown on the first P14 only.

The taxpayers claimed credits for the PAYE despite the fact IHL had only accounted to HMRC for some of the PAYE shown on the first set of P14s, and for none of the PAYE shown on the second set. HMRC only pursued the taxpayers for the tax declared on the second set of P35/P14s.

Informal signing-on bonus

All three taxpayers argued that there was no evidence that the amounts shown on the second set of P35/P14s was ever paid to them by IHL. Rather amounts were made available to them by BVL in the form of a loan account as an informal signing-on bonus.

As this was a new arrangement between BVL and the taxpayers, any PAYE arising in respect of those signing-on bonuses was a liability of BVL and not of IHL. As such, the taxpayers argued a direction under regulation 72 was incorrect, and their appeals should be allowed.

Credibility

The FTT noted it had not been told the whole story by the taxpayers.

It found that Hundal and Mathew were not credible witnesses. Budhdeo was not permitted to give oral evidence as he had not submitted a witness statement in accordance with the tribunal’s instructions.

What really happened?

The most likely explanation of what had occurred was that the amounts shown on the second set of P14s were paid to the taxpayers as earnings immediately before IHL went into administration. These sums were then immediately lent to BVL, to enable it to fund the purchase consideration and to provide it with working capital.

IHL did not account to HMRC for the PAYE shown as having been deducted on the P14s.

As the amounts in the second P14s were earnings, and the taxpayers received those earnings knowing IHL did not have the funds to account for the PAYE due to HMRC, and knowing that IHL would not do so, the failure to deduct PAYE was “wilful” for the purposes of PAYE reg 72, condition B.

The FTT found in favour of HMRC in all matters.

History

This case is one of many this group of taxpayers have been involved in, with appeals having been lodged against the issue of information notices (excluding IHL) and penalties for non-compliance with those notices, as well as attempts to stop COP9 enquiries:

  • Gold Nuts ltd and others [2015] UKFTT0432 (TC04609)
  • Gold Nuts Ltd and others [2016] UKFTT 82 (TC04875)
  • Gold Nuts Ltd and others [2017] UKFTT 84 (TC05602)
  • Budhdeo, Hundal and Mathew [2019] UKFTT 216 (TC7063)
  • Hundal [2018] UKFTT 469 (TC06647)
  • Mathew [2017] UKFTT 869 (TC06264)
  • Mathew [2015] UKFTT 139 (TC04342)

Replies (14)

Please login or register to join the discussion.

avatar
By Justin Bryant
03rd Jul 2020 17:27

Para 174 is odd as it suggests the 20 year DA period applies to negligence (c.f. deliberate misconduct).

Thanks (0)
Replying to Justin Bryant:
avatar
By thehaggis
04th Jul 2020 22:43

It did. See par 110.

Thanks (1)
Replying to thehaggis:
Psycho
By Wilson Philips
05th Jul 2020 11:00

But, as far as I recall, the relevant legislation re time limits and assessments should be the legislation in force at the time the 'discovery' is made and not that prevailing at the time of the alleged offence - there was a lot of chat about this at the time and to be honest my memory may be failing me. However, at risk of agreeing with Justin, I think the judge was wrong on this point.

Thanks (0)
Replying to Wilson Philips:
avatar
By thehaggis
05th Jul 2020 22:21

You are right. The assessments were made in 2017. I presumed that they were made before then because that was the provision quoted by the Judge. But it wouldn't be the first time HMRC included a copy of the wrong version of the law in their bundle.
Its quite strange because the burden of proof is on HMRC to show that the assessments were correctly made and the Judge doesn't really make any finding on that at all.

Thanks (0)
avatar
By Justin Bryant
06th Jul 2020 09:30

Yes; even if I'm wrong (and WP is right that this DA transitional rule point catches people out as it can take a wet towel round your head sometimes to work out the right time limits) you'd think the judge would have explicitly addressed such a basic & important point in his judgment for the avoidance of any doubt etc. Poor show. Then again, assuming I'm right (and I confess I'm too lazy to check the point - I'm right at least re SDLT DAs I think) this is an easy appeal isn't it?

Thanks (0)
avatar
By farrcorfe
06th Jul 2020 10:12

For wilful failure read fraud. Concerning the first two named persons does anyone notice a pattern here especially going back over the cases where fraud by any other name is concerned?

Thanks (0)
Replying to farrcorfe:
avatar
By Justin Bryant
06th Jul 2020 11:12

Eh? As far as I could tell there was no finding of fraud/deliberate misconduct, merely negligence. Recklessness would probably have been sufficient, but again there was no finding of that as far as I could tell. That said, the judgment is unnecessarily confusing about that overall per my above comments.

Again, assuming I'm right on the above point I note the taxpayer was represented by counsel, so possibly poor show from him too (if I'm right).

Thanks (0)
Replying to Justin Bryant:
avatar
By farrcorfe
06th Jul 2020 15:23

The charge of wilful failure is so much easier to stick as fraud is so difficult to pursue even though it is quite obviously what they were up to. Just goes to show that a complete and utter shake-up of the way companies are allowed to trade nowadays is long overdue and that their oversight is woefully inadequate. Am I being too subtle in saying that certain indicators in directors' profiles are red flags? Proper investigation into past commercial and personal profiles/background should be the order of the day.

Thanks (0)
avatar
By Andy Reeves
06th Jul 2020 10:56

Why are these people not in jail?

Thanks (1)
Psycho
By Wilson Philips
06th Jul 2020 11:05

With apologies to the judge (and to thehaggis), it seems that he was in fact correct (assuming that his finding of negligence is accepted):

Section 36(1A)(b) and (c) of TMA 1970 (fraudulent and negligent conduct) shall not apply where the year of assessment is 2008–09 or earlier, except where the assessment on the person (“P”) is for the purposes of making good to the Crown a loss of tax attributable to P’s negligent conduct or the negligent conduct of a person acting on P’s behalf.

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
06th Jul 2020 12:14

Yes. I was thinking that as long as the taxpayer had been professionally advised (by someone who was not themselves negligent) then the taxpayer is OK, but here he was not and so wasn't. I did have my doubts & was too lazy to check, but the judge could at least have been clearer about all that as I said. Although re SDLT the link below is not qualified re negligence:
https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch51580

Again, odd. Unless SDLT is the same as IT/CGT per the link below:
https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch51540

[Edit] Actually, having now checked this, WP is correct re negligence per this case:
https://library.croneri.co.uk/cch_uk/btc/2018-tc-06767

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
06th Jul 2020 12:22

Time for that cold wet towel. CH51540 seems to be in direct oppostion to the SI (the former saying that the new time limits apply regardless of the year of assessment, the latter suggesting that the old legislation still applies in respect of negligent behaviour).

Thanks (0)
Replying to Wilson Philips:
avatar
By thehaggis
07th Jul 2020 12:26

Watch that you are not confusing the time limits for failure to notify (as in the Lo case) and time limits where there had been no FTN.
They needed the negligence transitional provision for FTN so that the change did not bring into charge an event that was previously time barred.

Thanks (0)
avatar
By Mr J Andrews
08th Jul 2020 09:58

Fraud, wilful failure , neglect.........whatever.
Why pretend these upstanding gentlemen did everything to comply with what every other business should be doing. Their 'History' has a stench and speaks for itself .
Finding in favour of HMRC by the FTT in all matters makes joyous reading. Just a shame these wasters couldn't be penalised more.

Thanks (0)