Livingstone v Revenue & Customs [2010] UKFTT 56 (TC) (03 February 2010)

DECISION

1. This is an appeal by Leslie Livingstone against a Personal Liability Notice (“PLN”) issued to him by Her Majesty’s Revenue and Customs (“HMRC”) on 6 April 2009 under s121C of the Social Security Administration Act 1992 (“SSA Act 1992”). The PLN was issued in respect of unpaid Class 1 National Insurance Contributions (“NIC”) of £60,428.57 due from Mirekirk One Ltd (“the Company”) from 6 April 2005 to 5 April 2007.

2. The appeal was heard in Riverside House, Edinburgh on 18 January 2010. HMRC was represented by Mr Eugene Walsh, and Mr Livingstone appeared on his own behalf. Mr Andrew Pawley, gave evidence for HMRC and Mr Livingstone also gave evidence.

3. Documents were produced by HMRC and Mr Livingstone comprising correspondence between the parties, documents recording the financial position of the Company over the relevant period, statutory returns, personal information relating to Mr Livingstone, and information relating to Scotmobility Ltd and Mirekirk Two Ltd (formerly 5 Star Storage Ltd) . In the course of the Hearing, Mr Livingstone also produced a copy of the Liquidator’s Abstract of Receipts and Payments.

4. At the commencement of the Hearing, Mr Livingstone was directed to s 121D of the SSA Act 1992 which provides that

“(1) No appeal shall lie in relation to a personal liability notice except as provided by this section.

(2) An individual who is served with a personal liability notice may appeal ………. against the Inland Revenue's decision as to the issue and content of the notice on the ground that

(a) the whole or part of the amount specified under subsection (2)(a) of section 121 C above (or the amount so specified as reduced under subsection (7) of that section) does not represent contributions to which that section applies;

(b) the failure to pay that amount was not attributable to any fraud or neglect on the part of the individual in question;

(d) the opinion formed by the Inland Revenue under subsection (3)(a) or (b) of that section was unreasonable.”

Mr Livingstone confirmed that the grounds of his appeal were limited to ss(2)b. Mr Walsh added that that HMRC were not alleging fraud and that the issue was confined to “neglect”.

Section 121 C (3) states “The sum specified in the personal liability notice under subsection (2)(b)(i) above shall be-

(a) In a case where there is, in the opinion of the Inland Revenue, no other culpable officer, the whole of the specified amount; and (b) …..”

Mr Livingstone agreed that there was no other culpable officer.

5. Subsection 121D(4) of the SSA Act 1992 provides that

“On an appeal under this section, the burden of proof as to any matter raised by a ground of appeal shall be on the Inland Revenue.”

In respect of this, it was agreed that HMRC should lead at the Hearing.

Material Facts

6. The material facts were as follows –

1 The Company was incorporated on 2 November 2001 under the name of JLK International Movers and Storage Ltd and commenced trading on 7 January 2002 as removers and storers for domestic and corporate customers, incorporating the former businesses of Justice of Dundee, Ledingham Removals and Knightpack. The issued share capital of the company was £120,000 comprising £90,000 “A” Ordinary Shares and £30,000 non voting “B” Ordinary Shares. The non-voting “B” ordinary shares did not participate in any distribution of profits of the company unless so decided by the “A” ordinary shareholders.

2 Mr Livingstone is a practising Chartered Accountant. He was appointed as a director on 11 July 2003. Mr A Herbert resigned as a director on or about 20 January 2004, and from that date until the Company went into liquidation on 20 June 2007, Mr Livingstone was the sole director and solely responsible for the day to day management of the Company..

3 During the relevant period, Henryk Sopala and Zoe Linton each held 50% of the “A” Ordinary Shares and Mr Livingstone held all the “B” Ordinary Shares in the Company which he had acquired for £15,000 in 2004.

4 Accounts were prepared for the Company in respect of the year to 31 December 2004. The Accounts showed a profit for the year (after taxation) of £28,780. These Accounts also disclosed a corresponding loss of £25,326 for the preceding year and a loss of £49,406 brought forward from the first year of trading.

5 The Company ceased trading on or about January 2007 when the whole assets of the Company were sold. The name of the Company was changed on 9 January 2007. No formal Accounts were prepared in respect of the period from 1 January 2005 until 20 June 2007.

6 Mr Livingstone was aware of the obligation to account to HMRC on a monthly basis for NIC and within the Company, he was solely responsible for ensuring that NIC was paid each month.

7 The Company made a monthly payment of NIC on 20 July 2005. Therafter, PAYE tax and NIC continued to be deducted from employee wages and net wages were paid. Nevertheless the Company made no further payment of PAYE tax and NIC prior to liquidation. A cheque which included NIC of £1,977.99 was sent on 19 April 2006, but was dishonoured. The P35 for 2005/2006 which should have been submitted by 19 May 2006, was not lodged until after the Company went into liquidation. The outstanding NIC due by the Company for the fiscal years 2005/2006 and 2006/2007 was £60,428.57.

8 Over the relevant period, the Company had an overdraft limit of £60,000, and from time to time, payments were dishonoured.

9 HMRC sent letters to the Company on the 11 May 2006, 15 May 2006 and 1 June 2006 requesting payment of the PAYE Tax and NIC due. On 17 August 2006 HMRC sent a letter warning of possible proceedings against the Company in respect of underpayments; and on 26 September 2006 a writ was served on the Company in respect of the PAYE debts. At no time did Mr Livingstone make any approach to HMRC, either by letter or telephone, to discuss the accumulating arrears of NIC.

10 Negotiations took place for the sale of the assets of the Company and on 8 January 2007, a sum of £94,010.25 was credited to the bank account of the Company representing the net proceeds of sale of these assets. This payment liquidated the overdraft which had stood at £56,784.46. At this point the bank cancelled the Company’s overdraft facility enabling it to release all security given by the shareholders including Mr Livingstone’s personal guarantee for £20,000.

11 After liquidating the overdraft, the remaining funds were insufficient to meet the sums due to all the creditors of the Company. Nevertheless, Mr Livingstone continued to intromit with the funds of the Company. In particular, he made payment to himself of sums totalling £8,374.67. other payments included £8,000 to 5 Star Storage Ltd, a company in which Mr Livingstone was also a director, £10,869 to John Mason Ltd, £3,709 to Clark & Rose and £2,538 to Kinnes Shipping.

12 Mr Livingstone failed to apply any of the sale proceeds towards the amounts owing to HMRC.

13 On 12 November 2007, HMRC opened a PLN enquiry into the Company and after correspondence with Mr Livingstone, a PLN was issued to Mr Livingstone on 6 April 2009.

14 An appeal against the PLN was made by Mr Livingstone on 15 April 2009.

Submissions

7. Reference was made to the following authorities - Peter Inzani v HMRC Commissioners SpC529 and Blyth v Birmingham Waterworks (1856) 11Exch 781.

8. It was contended for HMRC as follows –

The legislation under which a Personal Liability Notice can be raised, namely s121C(1)(a) and (1)(b) of the SSA Act 1992 requires there to have been;

· a failure to pay the contributions due;

· evidence that the failure was attributable to the fraud or neglect of one or more individuals;

· evidence that the individual was an officer of the company at the time of the failure

It was not in dispute that there had been a failure to pay the contributions amounting to £60,428.57 and that Mr Livingstone was an officer of the Company.

9. In the period from 21 July 2005 to the sale of the Company in January 2007, a period of over 17 months, the Company continued to make deductions from employee wages but failed to pay over to HMRC any of the PAYE Tax and NIC.

10. Mr Livingstone was the sole director at this time. He was fully aware of the statutory obligations of the Company in respect of paying over the PAYE Tax and NIC to HMRC by the 19th of each month. For the period in question Mr Livingstone was personally responsible for making the decision to withhold the payment the PAYE Tax and NIC.

11. During the period from at least early 2006 to the sale of the Company assets in January 2007, Mr Livingstone was operating a stated policy where, "creditors were only paid when they applied sufficient pressure that there was no alternative but to settle an amount due to them to allow the company to continue to trade". No PAYE Tax or NIC was being paid to HMRC over this period and the Company was accordingly trading to the detriment of the Crown.

12. Over the period from 20 July 2005, Mr Livingstone did not contact HMRC to discuss matters, despite the fact that from May 2006 HMRC had been chasing payment, and that on 26 September 2006, Court proceedings had been taken against the Company.

13. Mr Livingstone acted negligently in failing to ensure that the Company met its statutory obligation to pay over the NIC being deducted from employee wages during this period from 21 July 2005 to January 2007. In effect, Mr Livingstone used the PAYE Tax and NIC deductions due and payable to HMRC to fund the Company activities, in clear breach of the statutory requirement to pay these deductions to HMRC by the 19^th day of each month. The Company thereby attempted to retain a veneer of solvency through the non-payment of fiduciary taxes; and it was submitted that a prudent and reasonable person would not have conduct business in such manner.

14. As negotiations dragged on and the price continued to fall there must clearly have been a point when Mr Livingstone should have been aware that the sale proceeds could not possibly meet all the Company liabilities. At that point, a reasonable person would have sought to enter into a payment arrangement with HMRC; or immediately ceased trading; or appointed an administrator; or a liquidator - thus preventing further creditor liabilities which the Company had no prospect or ever repaying. The decision to continue to trade the Company during the period of the sale negotiations, and withhold all payments of PAYE Tax and NIC demonstrated a degree of negligence on Mr Livingstone’s part in making decisions which clearly and significantly increased the Company’s liabilities to HMRC.

15. There was no evidence of any genuine intention to use any of the sale proceeds towards the PAYE Tax and NIC due by the Company. Instead, the sale proceeds were instead used in part to clear the Bank of Scotland Overdraft on the Company bank account, an overdraft that was part secured by a £20,000 personal guarantee from Mr Livingstone, and by making payments of totally £8,374.67 to himself.

16. Mr Livingstone’s statement in Appendix II to his Notice of Appeal dated 9 June 2009 that he was operating a policy where, "creditors were only paid when they applied sufficient pressure that there was no alternative but to settle an amount due to them to allow the company to continue to trade" illustrates a clear, conscious and deliberate decision being made by the Company, and by Mr Livingstone who had sole responsibility for such matters, to withhold the PAYE Tax and NIC deductions due to HMRC, and in effect to use these funds to continue trading and pay other trade creditors.

17. The evidence points to Mr Livingstone acting negligently in failing to ensure that the Company met its statutory obligation to pay NIC, clearly being deducted from employee wages, to HMRC. The actions of Mr Livingstone in the period from 6 April 2005 to liquidation were not those of a reasonable and prudent person, and as such were negligent.

18. It was contended by Mr Livingstone –

He was originally asked, in 2003, by the shareholders of the company to assist Alex Herbert, the then director of the company as Mr Herbert had indicated to the shareholders that he was struggling to cope with his duties and the financial management of the Company. Initially Mr Livingstone’s involvement was restricted to meetings with the director, and reviewing and advising on a number of financial matters such as finance, insurance, credit control and similar. This continued for fully a year and during that period he received no payment for his services, although it had always been intended that he would be paid.

19. The position changed in 2004 when Mr Herbert indicated that he was intending to emigrate to Australia and wanted to resign as a director. The position of director was then offered to the two other senior members of staff, Stuart Milne and Alex Baird, who had been partners in the business before it became a limited company in January 2002. Both declined saying that it was their intention to retire shortly. The shareholders then approached Mr Livingstone, saying that there was no one else to take it on. Mr Livingstone explained that he knew nothing about the removal business; but he was persuaded to take on the role as director as there was a senior surveyor who would take over as general manager and be responsible for the day to day management. Mr Livingstone explained that he reluctantly accepted office as director (on 11 July 2003) on the basis that it was to be only a part time involvement, and that he would be paid for the work which he had carried out over the preceding year.

20. The business had previously been a low turnover, high gross profit operation, but the market was changing with a lot of "van and a man" operations which were cutting prices and the Company was not competing. Major changes were introduced to try to increase business and also to reduce overheads. Mr Livingstone negotiated a contract with Dundee Council to undertake work for them with the aim to changing the Company into a “high turnover but lower margin operation” to try to cover the crippling costs of providing storage accommodation. Prices were re-aligned with other operators and the Company started to pick up additional work. Indeed, the accounts for the year to December 2004 showed a profit.

21. Mr Milne and Mr Baird retired and then the general manager took a suspected heart attack on the premises and subsequently resigned. Mr Livingstone was left on his own. Although a new senior supervisor was appointed, more and more decisions were being left to Mr Livingstone. In an attempt to keep the Company going, Mr Livingstone reluctantly agreed to put up a bank guarantee for £20,000 to inject further funds to see the Company through what was hoped to be a short term cash flow problem. Mr Livingstone hoped that by keeping the Company trading, it would be possible to turn it round, make profits and that everyone would get paid.

22. One of the changes was a move of premises to a lower rental cost shed which was classed as a “semi-permanent structure”. Mr Livingstone was assured that such premises were not liable to Rates. However, in early 2006, the Council changed their mind and issued rates demands for £40,000.

23. Mr Livingstone found it very difficult to generate additional work for the Company to meet the overheads. Responsibility for making / withholding all payments rested with Mr Livingstone. There were numerous times when Mr Livingstone had to make the decision to pay a trade creditor in order to keep the Company operating. The Company's principal suppliers were for shipping, vehicle fuel and repairs, insurances and packaging materials. Unless these were paid the Company could not trade. Other creditors were rarely paid. Mr Livingstone was aware of the obligations to pay PAYE and NIC. He knew that these payments were not being made. At times, he sought to make payments to account towards VAT and had hoped to do so with PAYE but there was never sufficient funds to enter in to an arrangement that was sustainable. Mr Livingstone stated that it was never his intention not to make payment of PAYE / NIC, he was under a lot of pressure, but he was hopeful of an increase in work and he therefore believed that it was better to try to keep the Company trading. Management accounts were not prepared from mid 2005.

24. In early 2006, Mr Livingstone recognised that there was no way the Company could continue. However there was an approach from a rival local company who wanted to buy the business. Mr Livingstone knew that the purchasers would not buy the Company but he was hopeful that the sale of the assets would allow the Company to at least make a substantial payment to all creditors including the Crown. He believed that it was preferable to keep the Company trading, maintain the Company’s goodwill, and give the impression that it was trading normally with the view of maximising the sale proceeds and ultimately the amount which would be available to pay creditors. However negotiations dragged on for many months during which the price dropped and the losses continued. Nevertheless, Mr Livingstone made a decision to persevere with the sale as this would keep the staff in employment and allow Mr Livingstone an exit. His doctor was very concerned at his health through the stress of it all, as Mr Livingstone had previously had a stress breakdown in 1993. Mr Livingstone believed that if the sale had proceeded in the summer of 2005, the amount available to the creditors would have been some £50,000 higher than that eventually realised.

25. When the sale proceeds were received, Mr Livingstone was advised that the overdraft facility had been cancelled. He did not request that this was done. The payments which he took were in respect of arrears of wages, and a balance due to him from petty cash. He claimed that these payments did not in any way re-imburse him for the many payments he had personally made to creditors to keep the Company trading. The major payments he made to creditors were

· John Mason Ltd, Liverpool, to pay for the shipment of customers’ effects which they were refusing to ship until they had been paid.

· 5 Star Storage Ltd, to make a token payment to them for storage containers included in the sale. The true value of these containers was in excess of £20,000.

· Clark & Rose, payment for a customer's furniture and effects which were on a Clark & Rose van in France and which they were refusing to deliver until payment was received.

· Kinnes Shipping, again to release customers’ goods being held at ports.

· Newtyle Commercials, to release a vehicle being held by a repairer pending settlement of repair costs.

26. At the time of the sale Mr Livingstone anticipated that further monies would become available from money due from debtors and stocks, but the purchasers raised additional claims for holiday pay and contras for which they held on to money they had collected and had been calculated as due to the Company. In these circumstances, Mr Livingstone found himself unable to make any payments to the Crown.

27. Mr Livingstone stated that it had never been his intention to defraud or neglect, and he claimed that all his actings had been reasonable.

Reasons

28. The subject matter of this Appeal was the PLN issued to Mr Livingstone by HMRC on 6 April 2009 under the provisions of s121C of the SSA Act 1992. The effect of the PLN was to impose a personal liability on Mr Livingstone for the amount of outstanding NIC of £60,428.57 due by the Company in respect of the period from 6 April 2005 to 5 April 2007.

29. The Tribunal heard the evidence of Mr Pawley, the investigating officer for HMRC, and Mr Livingstone himself. The Material Facts, as set out in paragraph 6 above were not in dispute and are based on the evidence of Mr Pawley and Mr Livingstone, as supported by the documents which were produced. Mr Livingstone also provided much background information which was not capable of verification from the productions, and this information is included in the record of Mr Livingstone’s submissions at paragraphs 18 to 27.

30. Section121D of the SSA Act 1992, contains the appeal provisions and these are set out in paragraph 4 above. Mr Livingstone limited his grounds of appeal to ss (2)b, namely that “the failure to pay that amount was not attributable to any fraud or neglect on the part of the individual in question”. This paragraph reflects the specific condition for the issue of a PLN as set out in s121C 1(b) of the SSA Act 1992. The other specific conditions in that section were that the particular body corporate had failed to pay the NIC within the time prescribed; and that the individual in question (Mr Livingstone) was an officer of the body corporate. Mr Livingstone did not seek to challenge either of these further conditions, or that he was the only culpable officer.

31. Reverting to s121C 1(b), Mr Walsh confirmed at the outset of the Hearing that there was no question of “fraud”. In the course of his evidence, Mr Pawley explained that when the legislation bringing in PLNs came before Parliament in 1999, there was considerable opposition to the measure, and the then Government Minister gave an assurance that in order to achieve a degree of uniformity, all the work relating to PLNs was to be centralised in one Department; and that a PLN was not to be issued unless the senior officer in that Department was satisfied that there had been at least serious neglect. Nevertheless, the word “serious” does not appear in either s121C or 121D, and the question before this Tribunal is therefore whether there had been “neglect” on the part of Mr Livingstone.

32. As pointed out in paragraph 5 above, s121D(4) declares that “on an appeal under this section, the burden of proof as to any matter raised by a ground of appeal shall be on the Inland Revenue.” It is therefore appropriate to consider HMRC’s case in order to ascertain whether they have discharged the the initial onus of proof.

33. What is “neglect” ? Mr Walsh directed the Tribunal’s attention to a Special Commissioner’s decision Inzani v HMRC Commissioners and an early case of Blyth v Birmingham Waterworks Co, where as to the meaning of “negligence” it is stated –

“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might have been liable for negligence, if, unintentionally, they omitted to do that which a reasonable person would have done, or did that which a person taking reasonable precautions would not have done.”

In the context of Inzani v HMRC Commissioners (which also related to the issue of a PLN) it was considered that the meaning of the “neglect” and “negligence” were identical. Mr Livingstone did not seek to challenge these observations; indeed he also sought to apply the “reasonable” test.

34. What is to be expected of a “reasonable man” in the context of NIC ? Every employer, and that includes a limited company, has a statutory duty to deduct PAYE and NIC where appropriate from the wages of every employee and to make a remittance to HMRC not later than the 19^th day of each month. That duty extends to a director who may be administering a company. Disregarding the one occasion that a cheque was returned because of insufficient funds, there were seventeen successive months in which there was a failure to make such a remittance.

35. Mr Livingstone accepted, both in prior correspondence and in his evidence to the Tribunal, that he was aware that these payments were not being made; and that the responsibility for making or withholding payments rested with him. At no time did Mr Livingstone approach HMRC with a view to coming to an arrangement. It was also significant that when funds did become available from the sale of the business, he still made no payment to HMRC but intromitted with these funds in a manner which in part was beneficial to him personally.

36. The Tribunal accepts the observation in Inzani v HMRC Commissioners that the standard of proof is the “balance of probabilities”. Applying this test, the Tribunal is of the opinion that HMRC have discharged the initial onus which is placed upon them by s121D(4).

37. In his grounds of appeal, Mr Livingstone set out that

“The reason that further payments were not made was that HMRC did not exert pressure on the Company to make payments. If pressure had been applied then either further payments would have been made or the Company would have had to cease trading.

In these circumstances I do not believe that I acted negligently.

I do however believe that if HMRC had availed themselves of the remedies available to them, particularly under Section 60(1) of the Taxes Management Act 1970 to

1. Quantify the amount of the liability due to them, and

2 Apply appropriate pressure on the Company to ensure that payments were made at the appropriate times, or as soon afterwards, then the liability would not have grown to the amounts involved.”

The Tribunal does not accept any such alleged failure by HMRC can constitute grounds for excusing a director from his duty to pay NIC on a regular basis, even when a company is in financial difficulty. In any event, the Tribunal has noted that HMRC did communicate with the Company on a number of occasions and indeed took Court proceedings.

38. Mr Livingstone also set out in his grounds of appeal, that

“The main aim of all the actions taken was to try to keep the Company trading during a period of change in the hope that the various steps which had been taken to increase activity and reduce overheads would return the Company to profitability and allow all the creditors to be paid.

To this end, to maximise the cash available to the business, creditors were only paid when they applied sufficient pressure that there was no alternative but to settle an amount due to them to allow the Company to continue to trade.”

That statement creates the impression that there was an orderly programme for managing the limited resources of the Company. However, the bank statements which were produced show a succession of cheques being returned due to lack of funds. Mr Livingstone acknowledged that no management accounts were prepared after about mid 2005, and no Profit and Loss Account or Balance Sheet was exhibited for any period after 1 January 2005. Mr Livingstone claimed that from about this time, he was endeavouring to sell the business, but it seems inconceivable that meaningful negotiations could have been carried on without supporting Accounts. Without such Accounts, there can be little credence for Mr Livingstone’s claim that he expected the sale proceeds to cover most of the outstanding debts of the Company. Indeed it is significant that the Liquidator’s Abstract of Receipts and Payments, which Mr Livingstone produced in the course of the Hearing, showed a total of £220,983 due to unsecured creditors. Mr Livingstone also claimed in his grounds of appeal that “at no time was a conscious decision taken not to pay HMRC as is evidenced by the fact that PAYE was paid in April 2006 (the cheque that was dishonoured) while payments of VAT were made in August and September 2006.” However the P35 for 2005/2006 which should have been submitted by 19 May 2006, was not lodged until after the Company went into liquidation. Mr Livingstone must have been aware that the Company’s liability for NIC was increasing on average by more than £2,500 each month. Indeed, when the proceeds of sale of the business were received, Mr Livingstone ought to have been aware that the Company was then hopelessly insolvent. When asked why he had not then put the Company into liquidation at that time, he replied that the “A” ordinary shareholders would not have agreed. This background reinforces the conclusion that Mr Livingstone was negligent in the financial management of the Company and in particular in relation to the ongoing and increasing NIC liability.

39. In all the circumstances, the Tribunal finds it established that there was a failure on the part of the Company to pay NIC of £60,428.57 for the period 6 April 2005 to 5 April 2007 and that the failure was attributable to the neglect of Mr Livingstone. The Tribunal accordingly refuses his appeal against the PLN issued on 6 April 2009.

40. It should be added that Mr Livingstone was critical of HMRC for referring specifically to his professional qualification of chartered accountant, and that for two years to 31 March 2005, he had been a director of a company, Scotmobility Ltd. That company had gone into liquidation on 10 June 2005, leaving PAYE and NIC debts of £81,111 in respect of the years in which Mr Livingstone had been a director, although it was noted that he was not a signatory to that company’s Bank account. There is no doubt that a director who has a professional qualification as an accountant, should be particularly aware of the obligations of an employer in relation to NIC. The position with Scotmobility Ltd was in contrast to another group of companies in which Mr Livingstone had been a director, where the PAYE and NIC payments had always been up to date – again demonstrating that Mr Livingstone should have been alert to the responsibility for making these payments on a regular basis. Nevertheless, Mr Livingstone’s professional qualification and his previous record as a director of other companies were not matters which were critical to the present decision.

MR JOHN M BARTON, WS

TRIBUNAL JUDGE

RELEASE DATE: 3 February 2010

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Livingstone v Revenue & Customs [2010] UKFTT 56 (TC) (03 February 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00369.html Cite as: [2010] UKFTT 56 (TC)