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purple sunset | accountingweb | Directors and RTI

Taxpayer’s RTI ignorance goes down badly


At the end of the day, a taxpayer’s interpretation of the legislation relating to their company’s Real Time Information requirements was found to be lacking.

5th Sep 2023
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Purple Sunset Limited was incorporated in 2013 and provided management consultancy services. It had a single shareholder/director, John McDonald.

McDonald received income from Purple Sunset and this was included on his personal tax return within the employment pages. His advisor, Mike Kerridge, provided accountancy services to Purple Sunset, as well as preparing the corporation and personal tax returns for Purple Sunset and McDonald.

Crucially, Kerridge did not provide McDonald with any payroll services, although McDonald believed that a third party had been approached in the past.

Missing returns

In December 2018, HMRC carried out a compliance visit and assessed the company for unpaid National Insurance contributions of £31,084.44 (or possibly £37,785.44, depending on whether you look at [2] or [13]!). This related to the four years to 2017/18 and the company accepted the payment was due and did not appeal.

HMRC also issued penalties of £3,300 under Finance Act 2009 Schedule 55 paragraph 6C in respect of the unsubmitted Real Time Information (RTI) returns for three of the years in question. Following a review by HMRC, Purple Sunset made an appeal to the first tier tribunal (FTT).

Requirement to complete

McDonald, via Kerridge, believed that the company was not required to submit RTI returns and so the penalties should be cancelled. Kerridge argued that McDonald’s income was derived from him being a director and the burden of proof fell on HMRC to prove that he was an employee. He was confident they would not be able to do this, as McDonald did not have a separate contract of employment with the company.

HMRC dutifully provided references to the RTI requirements in the PAYE Regulations 2003. Regulation 2 states  “employment” (and by extension “employee” and “employer”) takes the same meaning as for ITEPA 2003 sections 4 and 5. In short these state, among other things, that references to employment apply equally to “holders of an office” for these purposes. Section 5 also defines an office as a position that exists independently of its holder and may be filled by successive persons.

A director, HMRC argued, is therefore clearly an office holder, which for these purposes means they are an employee. An RTI submission is required on or before a payment is made to an employee. This did not happen in Purple Sunset’s case and so the penalties were correctly issued.

Misunderstood legislation

The FTT agreed with HMRC’s logic. McDonald was an office holder and the legislation cited by HMRC equated this to being an employee for RTI purposes. RTI submissions are required for all employees, but no such submissions were made by Purple Sunset. The penalties were therefore correct.

Kerridge was asked whether he agreed that McDonald’s income had been correctly reported on the employment pages as employment income, to which he replied it “had to be returned somewhere”.

Reasonable excuse

Although Kerridge had focused his arguments exclusively on his interpretation of the legislation, HMRC had made reference to reasonable excuses in their submission, if only to state no such excuses existed. For the sake of completeness, the FTT decided to consider this point further.

There were two potential reasonable excuses as the FTT saw it, either that McDonald had relied on Kerridge or that he had been ignorant of the RTI rules altogether.

Reliance on others

The FTT noted that it is rare for a reliance on others to be treated as a reasonable excuse, unless the taxpayer can also demonstrate that they otherwise took reasonable care.

However in this case it was moot regardless, as it was clear from McDonald’s statements that at no point had he asked Kerridge for his advice or assistance regarding the submission of RTI returns for the company. 

Ignorance of the law

As the saying goes, “ignorantia juris non excusat” or to you and me, “ignorance of the law is no excuse”. However, as established in Perrin vs HMRC, the FTT does have some discretion as to whether a taxpayer’s lack of knowledge on a topic or requirement amounts to a reasonable excuse.

In McDonald’s case, he had seemingly done no research, nor taken any advice regarding his RTI obligations. The FTT found that the relevant rules and requirements were sufficiently clear and easy to find on the HMRC website, therefore his lack of awareness was not reasonable.

Easy win

Having agreed with HMRC, and further having been unable to attribute a reasonable excuse to McDonald’s actions, the FTT dismissed the appeal in full.

HMRC appears to have submitted a thorough and comprehensive case to the FTT, while Kerridge seemingly relied on a single argument based on an incorrect reading of the legislation. All in all, an easy win for HMRC.

Replies (12)

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By Hugo Fair
05th Sep 2023 18:11

One of the very few occasions in which I hope that HMRC's costs *were* awarded against the taxpayer!

Mind you, when your adviser is of the calibre that thinks “it had to be returned somewhere” is a suitable response to the question 'whether he agreed that McDonald’s income had been correctly reported on the employment pages as employment income?' ... you might have a smidgen of sympathy for the taxpayer.

But the real moral - as always - is that you shouldn't open an incorporated company without carrying out even the minimal research that you'd consider slight if it was a prelude to buying a car!

Thanks (9)
John Hextall
By John Hextall
06th Sep 2023 10:04

The clue as to whether or not he was an employee was the completion of the employment pages...

Is it safest to assume Directors are always employees?

Thanks (1)
By Ben Alligin
06th Sep 2023 10:24

Perrin v HMRC, I must have missed that episode. Was poor old Reggie still on his way down or finally rising to the top?

Thanks (1)
By norstar
06th Sep 2023 10:48

The accountant in question appears to be FCA qualified. The argument made is a strange one to me, given that the taxpayer would be losing NI credits etc by not putting in RTI returns and it's seems obvious to me that if you include employment income pages on a tax return and presumably salary costs in accounts where there's no payroll submissions, that's the sort of thing that prompts HMRC scrutiny anyway. A strange fight to pick if you don't have to. Maybe the client refused to open a scheme for whatever reason. Odd.

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Replying to norstar:
By Husbandofstinky
06th Sep 2023 12:59

norstar wrote:



Thanks (0)
By Rgab1947
06th Sep 2023 11:10

Why was the income not recorded as dividends on the return instead of employment income?

No P60 then no employment income. All dividends then.

Thanks (1)
By Tom 7000
06th Sep 2023 11:36

Is that the sound of No dividends and a huge tax bill?

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Replying to Tom 7000:
By Hugo Fair
06th Sep 2023 12:26

... as opposed to "the sound of the men, Working on the chain gang"?

Thanks (1)
By Postingcomments
06th Sep 2023 12:56

Usually in cases as daft as this, you look up the accountant and they are of an age where they should have been able to retire years ago.

This guy is less than 50 - and appears to have failed to submit RTI returns starting from about 10 years ago.

He's like Mozart - doing everything dead young - including messing up the basics.

Thanks (0)
Replying to Postingcomments:
By Moo
07th Sep 2023 08:34

Seems to be more than one Mike Kerridge around. I'm looking at a guy on ICAEW list of members with admission date 09/04/1975 and a search on LinkedIn shows an elderly chap in the same town who worked on property taxes for a bank for years. I'm thinking that this chap may have gone into practice as his retirement job.

Thanks (1)
Replying to Moo:
By Postingcomments
07th Sep 2023 10:38

Ah, yes, my apologies to Mike of 1975.
Looking up KCMJ LLP, that Mike Kerridge was born in 1948. 1948! Now that is old. You certainly have to be questioning your life if you are still doing basic accounts and payroll work (or not as the case was!) at that age.

So it is another case of another week, another elderly accountant being hauled up before the beak for incompetence.

So glad I'll be retiring well before then. The flipside is that I'm not known down the local BMW showroom, but I can live with that.

Thanks (1)
By gillybean04
06th Sep 2023 13:49

Sadly the judgement doesn't mention how the payments were categorised in the company accounts and whether that category had been deducted for tax purposes.

Thanks (2)