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.
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.
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).
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.
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.
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  UKFTT0432 (TC04609)
- Gold Nuts Ltd and others  UKFTT 82 (TC04875)
- Gold Nuts Ltd and others  UKFTT 84 (TC05602)
- Budhdeo, Hundal and Mathew  UKFTT 216 (TC7063)
- Hundal  UKFTT 469 (TC06647)
- Mathew  UKFTT 869 (TC06264)
- Mathew  UKFTT 139 (TC04342)