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Director ordered to pay £232k in NIC and interest

HCL Equipment Contracts Limited’s liability to pay class 1 NIC on employees’ earnings was transformed into a personal liability of the director when the company went into administration.

6th Nov 2020
Tax Writer
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HCL EQUIPMENT CONTRACTS LTD: Quarrying of ornamental and building stone, limestone, gypsum, chalk and slate and Renting and leasing of agricultural machinery and equipment
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David J Unwin was a director at HCL Equipment Contracts Limited (HCL). The company’s accounts for the year ended 31 December 2011 shoed an average of 55 employees and a tax creditor headed “taxes and social security costs” of £699 per week, which solely related to unpaid PAYE and NIC.

In 2010/11, the workers had been paid net of PAYE and NIC, but HCL had made no payments of PAYE or NIC to HMRC. The company had also filed a nil employer return (form P35) for that year.

Employees or agency workers?

Unwin argued that HCL had transferred its employees to a related party, Caledonian Mining Ltd (CML) and that CML had also provided agency staff for particular projects. As a result, any liability for employee deductions was that of CML.

Unwin also stated that the employment figures in the company’s accounts included agency staff, and asserted that the tax creditor related to VAT, not NIC.

Money circle 

Unwin’s evidence included two letters between CML and HCL stating that CML had taken on all of the payroll responsibilities for HCL from 1 March 2010, and had charged an administration fee of £1,000 per month to do so.

HCL was placed into administration in 2014. The administrator provided a bank statement, which showed payments made from HCL to CML in February and March 2011 for amounts related to PAYE and NIC. However, for each payment made, the same day CML paid back almost the same amount to HCL, with the difference seemingly representing an administration fee charged by CML.

Unwin argued that the payment back from CML related to equipment sold, but as he did not have access to HCL’s records (all documents were with the administrator) he was unable to substantiate the transaction.

The law

Under SSAA 1992, s 121C, HMRC may issue a personal liability notice (PLN) to company officers that specifies the amount of NIC that they are to personally pay to HMRC, if the following conditions are met:

  • the company has failed to pay NIC due; and
  • the failure appears to be attributable to fraud or neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers (eg directors) of the company 

HMRC found no evidence of employees having been transferred to CML, and concluded that PAYE and NIC responsibilities remained with HCL.

HMRC determined that Unwin was an officer of HCL throughout 2010/11, and the failure to pay was due to Unwin’s negligence. By Unwin’s own confirmation, he was responsible for the strategic and financial matters of the company.

In 2018, HMRC issued Unwin a PLN to the tune of £232,942.95, comprising: £213,822 class 1 NIC plus £19,120.95 interest, in respect of unpaid NIC owed by HCL for 2010/11.

Unwin appealed against the PLN (TC07837).

Same story, different companies

The FTT also considered the fact that Unwin had been subject to an insolvency service investigation into a different company; Wrekin Construction Company Limited.

As part of that investigation in 2013, Unwin admitted that in 2008 he caused Wrekin to enter into an arrangement with a connected company (Britannia Management Services Limited) for them to ostensibly administer and pay Wrekin’s payroll and to pay all sums due to HMRC in respect of PAYE/NIC. This was done in an effort to pass the responsibility for payment of Wrekin’s PAYE/NIC liability to BMS. 

However, Unwin intended that there would be a default in the payment of Wrekin’s liability to HMRC for PAYE/NIC and that the monies due to HMRC would instead be utilised amongst other companies of which Unwin was a director.

As a result of that investigation, Unwin was disqualified from acting as a company director for 10 years.

FTT findings

The fact that £213,822 of NIC was outstanding to HMRC was not in dispute. Rather, the FTT had to decide whether the liability fell to HCL or CML.

The FTT determined that the NIC liability belonged to HCL. It did not accept the suggestion that HCL’s tax creditor somehow related to VAT; the creditor could only relate to PAYE and NIC, as no corporation tax was due by the company, nor was there evidence of a VAT or CIS debt for the period.

Further, the FTT found that the disclosure in HCL’s accounts of the number and costs of employees was exactly what it stated; there was no gloss to be added in relation to purported agency staff.

The FTT also found Unwin to be an unreliable witness. Originally, he told the FTT that the only document relating to the alleged transfer of employees was the February 2010 letter between CML and HCL. However, during the hearing, he claimed there had been a full TUPE consultation process and a formal contract prepared by solicitors, but he could not give any particular details or documentary evidence.

As to Unwin’s previous dealings with Wrekin, the FTT noted that if substituting HCL for Wrekin and CML for BMS, the same thing had happened, but in this case, almost all the payment to CML was immediately paid back to HCL.

The PLN was found to have been correctly made in the assessed amount on Unwin. He was the officer fully responsible for the financial affairs of HCL at the time, and he had neglected to ensure HCL complied with its statutory duties.

The appeal was dismissed.

Comment

HMRC became aware of HCL’s failings as a result of an investigation into CML. HMRC suspected false invoices had been issued to generate fraudulent VAT repayments, with one of the companies implicated being HCL.

Replies (4)

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By Mr J Andrews
09th Nov 2020 10:39

Definitely an UN WIN case here and always good to read of HMRC coming up with the goods where wasters are involved.
But just the back NIC plus interest ? Law breaking under different circumstances would command a term at Her Majesty's pleasure.

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Replying to Mr J Andrews:
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By rbw
09th Nov 2020 13:21

I'm no lawyer but the sentencing guidelines for theft assuming high culpability ("Breach of a high degree of trust or responsibility") and category 1 (above £100,000) have "Starting point 3 years 6 months’ custody". And I'd hope to see a confiscation order on top of that.

I'd like to see more. Perhaps the IoD et al should put in "victim statements" on the harm such people do to the case for limited liability.

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By cfield
09th Nov 2020 11:08

Couldn't give details? No documentary evidence? Sounds like he's been advising Trump.

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By Ian McTernan CTA
09th Nov 2020 11:42

Excellent result for HMRC, it's just a shame it takes them so long to uncover issues like this.

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