Acting as director lands accountant in troubleby
An accountant who agreed to act as a director of his client’s company, found himself facing criminal charges when the company failed to pay the taxes it owed.
Charles Horder was a qualified accountant and formerly a partner in a firm. In 2016 he left the partnership due to stress and depression caused by working under pressure and began to work as a sole practitioner.
He was introduced to new client Yakub Yousuf who asked him to establish a company, Quadragina Ltd, and to act as shareholder and unpaid director of it. The company would carry on Yousuf’s business of brand creation and management in the cosmetics industry. The first tier tribunal (FTT) would conclude that Yousuf was a “shadow director” of Quadragina, while Horder’s own barrister described his client as a “patsy”, for reasons which will soon become apparent.
The company’s expenditure included substantial salaries and reimbursed expenses for Yousuf and as many as six employees, together with rent. As time went on, the expenses were increasingly unvouched. Turnover, brought in by Yousuf, was sufficient to cover this expenditure, but not always sufficient to cover the PAYE and national insurance contribution (NIC) liabilities.
Work in progress
Yousuf constantly reassured Horder that the company had substantial work in progress which he was in the process of collecting, so that the company would shortly have the funds to pay the tax.
Horder trusted Yousuf and continued paying rent, salaries and expenses. He also made VAT, PAYE and NIC returns on behalf of the company and drew up its accounts.
At the end of 2017 the company’s £95,485 of creditors were almost entirely made up of PAYE/NICs and VAT. The last payment of PAYE/NIC was on 26 May 2016, although RTI returns continued to be made until February 2018, by which time the monthly liability was £9,284.
In February 2018 HMRC issued a Notice of Requirement (NOR) jointly and severally to the company and Horder, calling for £78,593.47 to be paid to HMRC by 8 April 2018 as security towards future compliance with PAYE/NIC obligations.
It was not paid by then, nor by the extended due date of 27 May, despite HMRC reminders that failure to comply could result in criminal prosecution.
On the hook
Another company controlled by Yousuf extended some instalments of an interest-free and unsecured “loan” to Quadragina, which enabled Horder to pay £49,001 to HMRC between 1 June and 3 September.
From what could be established by the FTT, this “loan” seems to have been made simply to keep Horder on the hook so that he would continue to allow Quadragina to carry on trading. Despite his faith in Yousuf being by now rather tarnished, Horder did so, up to at least 21 September.
By 23 November, HMRC’s patience had run out. The Crown Prosecution Service raised criminal charges against both the company and Horder.
On 25 March 2019, Quadragina appealed to the FTT against the NOR – more than 10
months late, and on 18 June 2019 Horder appealed on his own behalf – more than 14 months late.
Reasons for delay
The FTT (Judge Barbara Mosedale) considered two separate matters:
- whether it would be appropriate to admit so late an appeal, and
- if so, would the appeal be successful, leading to a dismissal or reduction in the NOR.
In considering the first point, the FTT made use of our old friend the Martland test, which is a three-stage process.
- Was the delay serious or significant?
- Was the reason for the delay sufficient to justify it?
- The third step, if the first two steps have not yielded a clear answer, is to consider all the circumstances of the case, including the effect on both parties of granting or refusing permission (known in legalese as “prejudice”).
The 14-month delay was both serious and significant, and Horder’s suggested reasons for the delay were unconvincing.
Medical evidence confirmed that he suffered from periods of anxiety, but they were clearly not totally incapacitating. During the period of delay, he had been capable of filing the company’s real-time information (RTI) returns, drawing up its accounts, signing the May 2018 loan agreement and making a significant number of payments for the company. “Most significantly, throughout the period concerned, Mr Horder has run his own business as a sole trader accountant.”
Horder also argued that he was naïve in such matters and had not realised that he needed advice. Had he sought advice, he would have been advised to appeal. The judge was “unable to accept that Mr Horder was unaware of the gravity of the NORs. All the letters sent by HMRC carried a warning about the risk of criminal conviction. They came with many pages of explanation. All the letters told him to contact HMRC if the recipient did not agree with the decision.”
All of which leads us to stage three.
Leave to appeal
If the FTT refused leave to appeal, “it seemed very likely that Mr Horder would be [criminally] convicted – a serious matter for Mr Horder. From HMRC’s perspective, such a conviction would reinforce HMRC’s position that taxpayers must comply with NORs or make timely appeals.”
On the other hand, admitting Horder’s appeal would almost certainly result in his not being convicted: admitting the late appeal (even if the substantive judgment went against Horder) would reset the statutory time limit for payment, which would “have the effect of meaning that no [criminal] offence has been or will be committed at least until 30 days after the determination of the appeal.”
Furthermore, as the company was by this stage insolvent and no longer trading, it could well be argued that HMRC no longer required a security for future payments of PAYE. “Allowing leave to appeal seems very likely to result in a decision that it is no longer appropriate for any security to be required. In other words, it is very likely the appeal would succeed.”
That simple analysis might suggest that the balance of prejudice suggested allowing the appeal. However, Judge Mosedale could see countervailing arguments:
- “Time limits for appeals with NORs are particularly important because NORs are there to protect revenues… to prevent companies continuing to trade without paying over the tax they collect on HMRC’s behalf.”
- The company did continue to trade and payments were still being made to its staff, which suggests strongly that the revenue risk was still increasing.
- “Mr Yousuf operated the company in a manner that left it unable to pay the tax liabilities arising out of its trading… It seems the money received by the company was, at Mr Yousuf’s choice, spent entirely on rent, wages and expenses so that none was left to pay HMRC.”
- “While permission to appeal late is probably the difference between being convicted and not being convicted, permitting a late appeal would endorse the appellants’ decision not to challenge the NOR, nor to fully comply with it, but to continue to trade with HMRC at risk.”
The FTT refused to admit the late appeals, and Horder sought leave to appeal to the upper tribunal. In part two of this saga we shall see how he fared there.