[2012] UKFTT 428 (TC)
TC02110
Appeal number:
TC/2010/8375
NATIONAL INSURANCE
CONTRIBUTIONS - section 121C Social Security Administration Act 1992 –
personal liability notice – liability of director for company's contributions –
fraud or neglect on the part of a director – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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JOHN PETER SMITH
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE NICHOLAS ALEKSANDER
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CHARLES BAKER
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Sitting in public at Bedford Square , London on 30 April 2012
Len Jacobs, an officer of HM
Revenue and Customs, for the Respondents
The Appellant failed to attend
the hearing and was not represented, but the Tribunal proceeded with the
hearing, being satisfied that reasonable steps had been taken to notify the
Appellant of the hearing and that it was in the interests of justice to
proceed.
© CROWN COPYRIGHT
2012
DECISION
1.
This is the appeal of Mr John Peter Smith against the decision of the HMRC
to issue a personal liability notice in respect of unpaid national insurance
contributions ("NICs") of Wadkin Limited ("Wadkin").
2.
Mr Smith did not attend the hearing and was not represented. On 27
April 2011 the Tribunal wrote to the parties seeking their dates to avoid for
the hearing of this appeal. Mr Smith replied by e-mail on 7 June 2011 (giving
a post office box in Fiji as his address) stating it was unlikely that he would
be able to afford to return to the UK until before next year. On 21 June 2011
the Tribunal issued directions permitting Mr Smith to give evidence by
videolink, but that otherwise the hearing of the appeal would take place in his
absence. Further directions given on 21 June 2011 provided for Mr Smith to
provide written representations along with supporting documents. Notice of the
hearing was sent to Mr Smith on 17 January 2012 both by post to his Fiji address and by e-mail - more than three months before the hearing date. At the
hearing, a videolink was prepared – but Mr Smith had not provided the Tribunal
with connection details for the videolink. As Mr Smith had also not provided
the Tribunal with his telephone number in Fiji, we were unable to have the
clerk telephone him. However, we were told by Mr Jacobs that HMRC had been in
contact with Mr Smith and Mr Smith had provided him with written submissions
which were included in the bundle. He believed that Mr Smith did not intend to
appear at the hearing. In the circumstances, we were satisfied that Mr Smith
had been notified of the hearing and that it was in the interests of justice to
proceed in his absence.
3.
Before us were bundles of documents which included witness statements by
Mr Andrew Pawley, an officer of HMRC, and the written representations (and
accompanying documents) from Mr Smith that he had sent to HMRC. There being no
objection from Mr Smith to Mr Pawley's witness statements, we accepted them in
evidence. Mr Pawley was the HMRC officer responsible for making the decision
to issue the personal liability notice.
Appeal
4.
This is an appeal against a personal liability notice that was issued to
Mr Smith on 15 September 2010 under section 121C(2) of the Social Security
Administration Act 1992 ("the Act"), following a decision under
section 8(1)(h) of the Social Security Contributions (Transfer of Functions
etc.) Act 1999. The personal liability notice states that the amount of
unpaid NICs due from Wadkin was £229,194.14 plus interest of £2,269,14, and
that pursuant to section 121C(3)(a) of the Act, Mr Smith is required to pay
this amount to HMRC.
5.
Section 121D of the Act provides that an individual who is served with a
personal liability notice may appeal to this Tribunal against HMRC's decision
as to the issue and content of the notice. Mr Smith issued a notice of appeal
dated 14 October 2010. The grounds for appeal given in the notice fall under
the following three broad headings:
(1)
that Mr Smith did not accept that he was the sole culpable officer;
(2)
that Wadkin's inability to pay the NICs was not attributable to any fraud
or neglect on the part of Mr Smith; and
(3)
that the decision to issue a personal liability notice was
unreasonable.
6.
Section 121D(4) of the Act provides that on an appeal under section
121D, the burden of proof as to any matter raised by a ground of appeal shall
be on HMRC. For HMRC to succeed in this appeal, they must prove, on the
balance of probabilities, that Wadkin's failure to pay NICs was attributable to
the fraud or neglect of Mr Smith.
Background Facts
7.
On the basis of the evidence before us, we find the background facts to
be as follows.
8.
Wadkin Ultracare Limited ("Ultracare") was incorporated on 12
March 2001 under number 04177852, and was a subsidiary of Wadkin Group Limited,
a company under the control of Mr Smith. Mr Smith was appointed a director on
17 May 2001. It would appear that Ultracare commenced trading at about this
time, as that was also the date on which the representatives of the company
registration agents resigned. In August 2007 the directors sought professional
advice from accountants in relation to the solvency of the company. It was
concluded that the company was insolvent and should be placed into some form of
formal insolvency proceedings, and a company voluntary arrangement was
considered.. However it appears that the consents necessary for a CVA were not
forthcoming, and Ultracare went into administration on 20 September 2007. In
November 2007 the administrators sold its business and assets to TMCD Limited
(a company controlled by Mr Smith). At the date Ultracare went into
administration, it owed £1,015,000 to HMRC in respect of PAYE and NICs.
Ultracare went into creditors’ voluntary liquidation on 11 September 2008.
9.
TMCD Limited ("TMCD") was incorporated on 8 August 2007 under
number 06337154, and commenced trading at the beginning of November 2007 when
it acquired its business and assets from the administrators of Ultracare. Mr
Smith was appointed a director on 7 November 2007. From 21 December 2007 until
24 October 2008, TMCD's name was "Wadkin Limited". In September 2008
the directors sought professional advice from accountants in relation to the
solvency of the company. It was concluded that the company was insolvent and
should be placed into administration. TMCD went into administration on 23
October 2008. Immediately prior to the appointment of the administrators, Mr
Smith indicated that he would be interested in acquiring its business and
assets. The administrators negotiated a sale of the business to Wadkin for
£70,000, of which £40,000 was paid on completion and £30,000 deferred until 23
January 2009. A professional valuation of the business was undertaken, and the
valuers recommended that the offer by Wadkin be accepted. The sale was
completed on 23 October 2008. The TMCD administrators took a debenture over the
chattels sold to Wadkin as security for payment of the deferred consideration.
At the date TMCD went into administration, it owed £229,101.59 to HMRC in
respect of PAYE and NICs. TMCD went into creditors’ voluntary liquidation on
26 March 2009.
10.
Wadkin was incorporated on 15 September 2008 under number 06697317 and
commenced trading on 23 October 2008 on completion of the acquisition of TMCD's
business from its administrators. At all material times there were two
directors, Mr Smith and Mr Derek Sayer. Mr Sayer was appointed as a
non-executive director on behalf of a trust which was one of the major
shareholders in the company, but he did not have any executive role and was not
(for example) a signatory on any of the bank mandates. Since 16 December 2008
Wadkin has not had a company secretary.
11.
When Wadkin was incorporated, because Mr Smith did not have any
financial qualifications and given the financial problems of TMCD, he was
advised to appoint a qualified accountant to manage Wadkin's finance
department. Anthony Simmons was recruited as financial controller through an
employment agency that specialised in financial appointments.
12.
A bank account was opened with Alliance and Leicester Commercial Bank
and a factoring facility was established with Skipton Business Finance. The
only persons who were signatories on the Alliance and Leicester bank mandate
were Mr Smith and Mr Simmons, and both their signatures were required on
cheques. In addition Wadkin had an internet banking facility to allow for
electronic payments (such as payments of wages through BACS). Mr Smith was the
only authorised user of the internet banking facility. Because Mr Smith was
regularly away from the office travelling on business, Mr Smith regularly
signed blank cheques so that payments could be made on time. In addition he
gave details of his internet banking login and password to members of the
finance department. Mr Smith states that "stupid as it may be but I am
sure a lot of businesses practice the same policy". Mr Smith stated that
he was confident that all payments made were cross-checked within Wadkin's
finance department (in particular with one employee whom he had known for ten
years and had no reason to question her loyalty or honesty).
13.
Mr Smith states that Mr Simmons was instructed to incorporate two
companies, Wadkin (which was a "service" company with "out"
engineers) and SMC Limited ("SMC") (which was a manufacturing
company), this was because Mr Smith was unsure of the viability of the
manufacturing operations because of the availability of cheap Chinese imports
and the then economic situation. He therefore wanted to ensure that if the
manufacturing operations proved in the end not to be viable, SMC's failure
would not pull down Wadkin's profitable service business. Mr Simmons was
therefore instructed to establish separate ledger and payrolls for the two
companies. Mr Simmons advised Mr Smith that in order to do this, he needed
bespoke accounting software written for the business, and not the "off the
shelf" software used by TMCD, and that he knew an individual who could
write this software at the same cost as the licence fee charged by the company
that provided the accounting software for TMCD (who would charge Wadkin a new
licence fee for the use of their software). The board of Wadkin approved Mr
Simmons' recommendation. One consequence of this decision was that the former
software supplier terminated its licence. Therefore until the new accounting
software became available, Wadkin was unable to prepare management accounts.
Mr Simmons promised the board that he would produce management accounts by
December, and in the meantime key information would be provided to the board.
14.
In December 2008 Mr Simmons requested leave of absence as he had to
deal with some issues that had come about as a result of his previous
employment in Jamaica. When Mr Simmons returned, he was asked to make sure
that management accounts would be available – but blame was placed with the
software developer for failing to produce the accounting software system. This
situation continued into February 2009 when Mr Simmons was given a deadline to
produce management accounts by the end of the month. Mr Simmons then told Mr
Smith that the court proceedings in Jamaica had not concluded, and he would
need to return. Mr Simmons stated that he was days away from producing
management accounts, and that these could be completed remotely whilst he was
away. However Mr Simmons never produced any management accounts, and his
employment was terminated by letter dated 3 April 2009.
15.
Ms Sharon Raey was then engaged as financial accountant, but on a
part-time basis as she had a young child. There is no evidence that Mr Simmons
was replaced on the bank mandate, and from April 2009, it would appear (and we
find) that Mr Smith was the sole signatory on the bank account (as well as
continuing to be the sole authorised user of the internet banking facility).
16.
Mr Smith says in his statement that he only learned in March 2009
(following the preparation of "flash" accounts by Ms Raey) that nil
returns for PAYE and NICs had been submitted by SMC for the periods up until
December 2008, on the basis that SMC had made no supplies and had not made any
payments to employees. Although the personnel records apparently reflected the
split in the employees between SMC and Wadkin, Mr Simmons had recorded in the
financial ledgers that all payments had been made by Wadkin. Although
purchases of materials were being made in the name of SMC, all payments were
settled by Wadkin. Therefore no personnel were paid by SMC and no VATable
transactions were concluded by SMC, allowing Mr Simmons to file nil PAYE and
VAT returns for SMC. Wadkin had made no returns for either PAYE/NICs or VAT,
even though it had paid employees, paid suppliers and invoiced customers.
17.
In his statement to the tribunal, Mr Smith says that he instructed Ms
Raey produce a set of accounts for the board and to contact HMRC to discuss the
implications and report back to the board. Management accounts for the period
to March 2009 were produced to the Wadkin's board at its meeting on 2 June
2009. The board minutes run to nine pages, including the following minute:
"HMRC - Sharon [Ms Raey] opened discussions in
this respect. Tony Simmons had submitted a nil return for the period up until
the end of December 2008. Sharon calculates that for the period 1 November
2008 through 5 April 2009 the outstanding debt is £217,000 – this figure
includes the October 2008 payroll liability. Sharon is set to pay £28,000 on
the due date and is liaising with HMRC. There is currently £85,000 in VAT
undeclared.
Derek Sayers wonders what the response from HMRC
will be pointing out that Wadkin has used the Revenue to fund its losses twice
before. Peter Smith commented that this was not done intentionally and no one
could have anticipated the market. Derek highlighted that Wadkin has to take
the initiative with the Revenue which it was acknowledged is what Sharon has done.
During the meeting Sharon was contacted by the
Inland Revenue who requested a cash flow and some other paperwork. They have
requested a telephone call on 9th June, and have asked that Sharon gives a
progress report and a payment schedule."
18.
The minutes also refer to several other overdue debts – including an employment
agency, a landlord, Coalville Council, Lombard and Standard Life for employee
pension payments. It is stated in the minutes that the trading forecast
indicated sufficient cash for day-to-day obligations, but insufficient to
satisfy the large outstanding creditors. It is clear that the company was
insolvent, being unable to meet all of its liabilities as they fell due. The
minutes of subsequent board meetings included in the evidence before use show
that, notwithstanding Wadkin’s financial position, the directors allowed it to
continue to trade for a further six months, somehow meeting its immediate
day-to-day obligations, and hoping that HMRC would agree to an instalment
arrangement for its outstanding tax liabilities (which were steadily increasing,
as it had made only one part payment towards these (see paragraph 20 below).
19.
Ultimately, Skipton Business Finance froze Wadkin’s invoice discounting
facilities, and Wadkin ceased trading. The company went into creditors’
voluntary liquidation on 12 January 2010. The statement of affairs shows that
the amount owing to HMRC in respect of PAYE and NICs as at that date was
£449,803.
20.
In the period from when Wadkin commenced trading in October 2008, until
it went into liquidation, although it deducted PAYE and NICs from payments of
wages made to its employees, it only made one payment in respect of PAYE and
NICs to HMRC, being £15,204.11 on 6 July 2009. In spite of the apparent
precision of this payment, it did not correspond to any of the monthly liabilities.
Indeed, it was only a little over one-half of a typical month’s liability.
21.
Following Wadkin's liquidation, Mr Pawley opened an enquiry into
Wadkin's PAYE and NICs compliance. On the basis of Wadkin's payroll records,
Mr Pawley determined that £114,949.15 was owed by Wadkin in respect of unpaid
NICs for the tax year 2008/09 and £114,244.99 was owed in respect of 2009/10.
On 15 September 2010 a personal liability notice was issued under Section
121C(2) Social Security Administration Act 1992 requiring Mr Smith to pay
£229,194.14 in respect of unpaid Class 1 National Insurance Contributions due
from Wadkin plus interest of £2,269,14. On 14 October 2010, Mr Smith appealed
against the decision to issue the Notice.
22.
We note that the personal liability notice is expressed on its face to
be for NICs arising in the period from 6 April 2008 to 5 December 2009, which
includes a period prior to Wadkin commencing to trade. However we were assured
by Mr Pawley that the date reflected the date on which the 2008/09 tax year
commenced, and the underlying calculations (which were not in dispute) had been
based on the payroll records of the company over the period during which it had
traded.
The Law
23.
Section 121C(1) and (2) of the Act, provide as follows
(1) This section applies to contributions which a
body corporate is liable to pay, where—
(a) the body
corporate has failed to pay the contributions at or within the time prescribed
for the purpose; and
(b) the failure
appears to the Inland Revenue 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 of the body corporate (“culpable officers”).
(2) The Inland Revenue may issue and serve on any
culpable officer a notice (a “personal liability notice”)—
(a) specifying the
amount of the contributions to which this section applies (“the specified
amount”);
(b) requiring the
officer to pay to the Secretary of State—
(i) a specified sum
in respect of that amount; and
(ii) specified
interest on that sum; and
(c) where that sum
is given by paragraph (b) of subsection (3) below, specifying the proportion
applied by the Inland Revenue for the purposes of that paragraph.
24.
"Officer" is defined in sub-section (9) as follow:
“officer”, in relation
to a body corporate, means—
(a) any director,
manager, secretary or other similar officer of the body corporate, or any
person purporting to act as such; and
(b) in a case where
the affairs of the body corporate are managed by its members, any member of the
body corporate exercising functions of management with respect to it or
purporting to do so;
25.
Under section 121D(4) of the Act, the burden of proof as to any matter
raised by a ground of appeal is on HMRC.
26.
For HMRC to succeed in this appeal, they must prove, on the balance of
probabilities, that:
(1)
Wadkin's failure to pay NICs was attributable to the fraud or neglect of
Mr Smith; and
(2)
Mr Smith was the sole culpable officer.
27.
Neither "fraud" nor "neglect" are defined for the
purposes of the Act. As to the meaning of neglect, we were referred by HMRC to
the decision of Alderson B in Blyth v Birmingham Waterworks Co
(1856) 11 Exch 781 at 786, where he says
"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 be 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."
28.
The tax tribunals have in many decisions drawn attention to the problems
of applying a very old decision relating to the tort of negligence to modern
tax statutes. In general the tribunals have taken the view that negligence
(and neglect) in the context of tax statutes means to act in an imprudent or
unreasonable manner. In other words this is an "objective" test,
comparing the actions of the particular individual with the actions that would
be taken by a reasonable and prudent individual in similar circumstances. Thus
an individual would be negligent even if they acted innocently, but their
actions fell short of those of a reasonable and prudent person
29.
This approach was questioned in relation to the use of
"neglect" in s121C in the recent decision of the First Tier Tribunal
in O'Rourke v HMRC [2011] UKFTT 839, in which the Tribunal held (as a
preliminary issue) that for HMRC had to prove mens rea on the part of
the individual for the purposes of s121C. In other words "neglect"
has in this context a subjective meaning – and HMRC must prove that the
taxpayer acted with knowledge (or – adopting the criminal standard – recklessly).
O'Rourke is a decision of the First Tier Tribunal and is therefore not
binding upon us, and we understand that it is under appeal to the Upper
Tribunal. However we have given that decision close consideration, and are
persuaded that for the purposes of s121C, in order for HMRC to prove
"neglect", they must show that Mr Smith acted with knowledge (or
recklessly – not caring whether his behaviour was that of a reasonable and
prudent officer).
30.
For the purposes of s121C, "officers" includes not only the
statutory officers of the company (namely the directors and company secretary
(if there is one), but also "managers" and "similar
officers". Wadkin was not managed by its members, and therefore we do not
need to consider whether any of its shareholders exercised management
functions.
31.
The provision has to be construed ejusdem generis, and therefore
the meaning of "manager" or "similar officer" has to be
taken in context. Thus for a person to be a "manager" or
"similar officer", they must have responsibilities and duties akin to
those of a director. As authority we were referred to the decision of the Court
of Appeal in Re B Johnson & Co Builders Ltd [1955] Ch 634 in which
we were told that it was said:
A manager would be, in ordinary talk, a person who
has the management of the whole affairs of the company; not an agent who is to
do a particular thing, or a servant who is to obey orders, but a person who is
entrusted with power to transact the whole of the affairs of the company.
32.
In fact this is a quotation from the decision of the High Court in
another case altogether (Gibson v Barton (1875) LR 10 QB 329).
33.
Notwithstanding this error in citation, we agree with HMRC's submission
that a manager for the purposes of s121C is someone who has broad responsibilities
for the management of the affairs of the company as a whole. The term
"manager" appears as part of similar expressions in various other
statutory contexts. In Gibson v Barton (1875) LR 10 QB 329, the court
was concerned with s27 of the Companies Act 1862:
… every Director and Manager of the Company who
shall knowingly and wilfully authorize or permit such Default [in not
forwarding an annual list of members] shall incur the like Penalty.
Blackburn J said (at 336):
In what sense are the words “director” and “manager”
used in that section? When the section says “director”, it is plain enough a
director is a director, but the words are “and manager.” We have to say who is
to be considered a manager. A manager would be, in ordinary talk, a person who has
the management of the whole affairs of the company; not an agent who is to do a
particular thing, or a servant who is to obey orders, but a person who is
intrusted with power to transact the whole of the affairs of the company.
34.
In the case of Registrar of Restrictive Trading Agreements v W H
Smith & Son Ltd [1969] 1 WLR 1460 (not cited to us) the statutory
provision in question was s15(3) of the Restrictive Trade Practices Act 1956:
'Where notice under section fourteen of this Act has
been given to a body corporate, an order may be made under this section for the
attendance and examination of any director, manager, secretary or other officer
of that body corporate …
35.
In giving the leading judgment of the Court of Appeal Lord Denning MR
cited with approval the passage from Blackburn J's judgment in Gibson v
Barton (mentioned above) and a passage from Jenkins LJ's judgment in Re
B Johnson & Co (Builders) Ltd [1955] Ch 634 at 661 and continued as
follows:
That is the meaning of the word “manager” in the
Companies Acts and we should apply it here also. The word “manager” means a
person who is managing the affairs of the company as a whole. The word
“officer” has a similar connotation … the only relevant “officer” here is an
officer who is a “manager”. In this context it means a person who is managing
in a governing role the affairs of the company itself.
36.
There are many other decisions of the courts with similar effect. Where
the term "manager" is used in association with the terms
"officer" or "director" (as in this case), it takes its
meaning from the context, and refers to an individual who has responsibility
for the management of the whole of the affairs of the company.
Analysis
37.
Mr Smith's defence is that he acted in a reasonable and prudent manner.
He says he was concerned to ensure that Wadkin's finances were properly
managed, and used a reputable recruitment agency to engage a financial
controller at the outset. However the financial controller proved to be
incompetent. As soon as the incompetence came to light, the financial
controller was dismissed. The fact that the company was unable to produce
management accounts (because its bespoke software was not ready) exacerbated
the situation. Mr Smith submits that he was unaware of the fact that Wadkin
had not met its obligations to pay PAYE and NICs until March 2009. At that
point efforts were made to turn around the finances of the company, and to
negotiate an instalment agreement with HMRC. He argues that these are the
actions of a reasonable and prudent director.
38.
We find Mr Smith's explanations implausible and do not believe them.
39.
In the period from the commencement of Wadkin's trade until it ceased
trading, it only made one instalment payment of NICs and PAYE. Mr Smith was at
all material times a signatory on Wadkin's bank account and the terms of the
bank mandate required his signature on all cheques. He was also the only
authorised user of the company's internet banking facility. He would therefore
have signed all cheques for wages (or authorised their payment through the
internet facility). He would therefore also have been aware of the fact that
no payments (bar one) had been made to HMRC in respect of NICs and PAYE in
respect of those wage payments. Given that he had been a director of both TMCD
and Ultracare (both of which had gone into administration owing substantial
amounts by way of PAYE and NICs), Mr Smith would have known of the requirement
that employers must account monthly for PAYE and NICs, and should have been
particularly alert to ensuring that Wadkin made its monthly tax payments.
40.
We also find it implausible that Mr Smith was unaware that SMC had not
paid its staff, its suppliers or its other creditors. Under the bank mandate,
all cheques would have to have been signed by Mr Smith, and Mr Smith was the
only authorised user of the internet banking facility. He would therefore have
been aware that he had not signed any cheques (or authorised internet payments)
on behalf of SMC.
41.
Mr Smith's counter-argument is that because he left signed blank cheques
(and gave his internet password to the accounts staff), he would not
necessarily have been aware that payments had not being made. If this was in
fact the case, we find these actions to be of themselves reckless. It is
standard banking practice to require the board of directors to approve the
terms of the bank mandate and internet banking facility. By signing blank
cheques, and disclosing his internet password, Mr Smith would be acting
contrary to the instructions of the board. In any event, this behaviour is of
itself reckless and contrary to all prudent and sensible financial controls,
and puts the finances of the company at risk.
42.
We also consider that the decision of Wadkin not to install an
off-the-shelf accounting package was imprudent. Commissioning a bespoke
accounting system is inevitably a time-consuming process, and given the history
of this business (which had been insolvent twice previously), close and careful
financial management from the start was clearly required. TMCD had used a
Sage accounting system. Sage Financial Controller is a popular and well-known
accounting package familiar to many bookkeepers. It is well able to account
for multiple companies and allow multiple users to work at the same time.
Directors have individually and collectively a duty to acquire and maintain
sufficient knowledge of the business to be able to discharge their duties (see
the judgment of Woolf MR in Re Westmid Packing Services [1998] 2 All ER 124 at 130), this includes ensuring that the company has proper financial
reporting systems in place). From the board minutes, it is not clear whether
Wadkin’s bespoke accounting system ever became fully operational. Thus it
operated from commencing trading for a period of many months without adequate
financial reporting systems. Allowing a company to operate without any adequate
financial reporting systems for this length of time (particularly since it was
known at the outset that the business's finances would be precarious) is
reckless.
43.
We find the comments made by Mr Sayer at the board meeting of 2 June
2009 to be most telling. Although Mr Smith dismisses Mr Sayer's comments, the
truth is that Wadkin subsidised its precarious financial position by not
meeting its obligations to HMRC. The bank statements included in the bundles
show that Wadkin was receiving payments under its factoring facility, and was
making payments of wages (after deductions) and to other creditors. The
evidence is that Wadkin used the PAYE and NICs withheld from wages to fund its
business, despite its duty to account for these deductions to HMRC monthly –
giving the business the veneer of solvency, when in fact it was insolvent. In
this context, we note that Mr Smith had been a director of two predecessor
"phoenix" companies to Wadkin – both of which had become insolvent
owing substantial amounts to HMRC in respect of PAYE and NICs. We also note
that in the document bundle, there are references to Mr Smith seeking advice in
order to undertake a further "phoenix" operation, with a view to him
incorporating yet another company to buy Wadkin's assets free from liabilities
to HMRC and other creditors. The fact that Wadkin is a successor to two
"phoenix" companies (and Mr Smith was a major shareholder and
director in both such companies), and that Mr Smith was contemplating yet a
further "phoenix" transaction indicates that Mr Smith was financially
well aware of the possibility that he could structure his business affairs to
allow him to continue in business through successive companies, whilst leaving
behind liabilities owing to HMRC. Furthermore, Mr Smith would have been well
aware from his previous dealings with insolvency practitioners that he (as a
director) was obliged to take account of the interests of creditors. We were
not provided with company minutes before 2 June 2009. Nevertheless, from the
references in the 2 June 2009 minutes to long-standing issues, it is clear that
the company had been insolvent for quite some time. We do not believe that Mr
Smith was ignorant of the company’s position and his failure to take account of
the interests of creditors showed a deliberate disregard of his obligations.
44.
Although the board was told by Mr Smith that Wadkin was seeking to
negotiate a "time to pay" arrangement with HMRC, in fact there is no
evidence that Wadkin made any attempt to contact HMRC before 2 June 2009. In
the whole time that Wadkin traded, it only once made a part payment towards its
monthly PAYE and NICs payments.
45.
We were informed by HMRC that the Insolvency Service is currently
pursuing disqualification proceedings against Mr Smith (and is in the process
of seeking leave of the court to serve process on Mr Smith abroad). However as
these proceedings have not concluded, we have not taken them into account in
reaching our decision.
46.
We note Mr Smith's submission that he discharged his responsibility to
manage Wadkin's finances by engaging a financial controller. Although
companies regularly delegate the operation of their payroll to accounting staff
(or external payroll bureaux), the responsibility for managing the company so
that it meets its obligations cannot be delegated, and remains with the
directors. We were referred by HMRC to the case of Secretary of State for
Trade and Industry v Gray [1995] BCLC 276. In its judgment, the court
refers with approval to a statement made by Sir Richard Scott when
disqualifying a director:
Overall responsibility is not delegable, All that is
delegable is the discharge of a particular function.
47.
Thus the fact that Wadkin's board had delegated the day-to-day operation
of certain finance functions to Mr Simmons (and, after his dismissal, to other
accounting staff) does not lessen the responsibility of the directors. They
are required to supervise the operation of the accounting functions, and ensure
that they are properly undertaken. The fact that Mr Simmons may have turned
out to have been incompetent is no excuse – the responsibility for ensuring
that Wadkin was properly managed – including monitoring the company’s cash flow
and its ability to meet its obligations as they fell due (including instalments
of PAYE and NICs) remains with the directors.
48.
The only directors of Wadkin since it commenced trading were Mr Smith
and Mr Sayer. Wadkin had a company secretary for an initial period, but it has
not been suggested by any party that the company secretary had any involvement
in the running of Wadkin.
49.
Mr Smith was at all material times an officer of Wadkin. We find that
he carried out his functions as a director in knowledge of the consequences,
and in particular without regard to the obligation of the company to account
each month for PAYE and NICs. We find that the failure of the company to
account for NICs was due to his deliberate decisions, and that this amounts to
neglect for the purposes of s121C. We therefore find that Mr Smith is a
culpable officer for the purposes of s121C.
50.
In a written statement made to HMRC, Mr Smith said that Mr Sayer was a
"non-executive director with no responsibilities within the company, his appointment
was made in agreement with a private trust that had invested in the company and
therefore he was there purely in an advisory capacity". Although this
Tribunal does not agree with Mr Smith's analysis of the responsibilities of a
non-executive director, Mr Sayer appears to have had very limited (if any)
involvement with the day-to-day operation of the company. In particular he was
not a signatory on the bank account, and was not authorised to operate the
internet banking facility. The minutes we have seen report that he was against
the company retaining PAYE and NICs that it had withheld from wages. The
evidence before us is not sufficient to demonstrate that Mr Sayer was negligent
for the purposes of s121C, and therefore we find that he is not a culpable
officer.
51.
We also find that Mr Simmons is not a culpable officer. He was not a
director. We also find that he was not a "manager" or "similar
officer" as he was not entrusted with the management of the whole of the
affairs of the company, but was responsible only for the discharge of certain
finance functions.
Conclusions
52.
We have found that that:
(1)
Wadkin's failure to pay NICs was attributable to the fraud or neglect of
Mr Smith for the purposes of s121C; and
(2)
Mr Smith was the sole culpable officer of Wadkin.
53.
We therefore dismiss the appeal.
54.
For completeness (as it was given by Mr Smith as a ground of appeal) we
would add that we find that HMRC did not act unreasonably in deciding to issue
the personal liability notice to Mr Smith. In particular, (although not
relevant to our decision), we consider that HMRC acted within the terms of the
assurances given by the minister to Parliament in the House of Lords debate on
30 March 1998
55.
This document contains full findings of fact and reasons for the decision.
Any party dissatisfied with this decision has a right to apply for permission
to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier
Tribunal) (Tax Chamber) Rules 2009. The application must be received by this
Tribunal not later than 56 days after this decision is sent to that party. The
parties are referred to “Guidance to accompany a Decision from the First-tier
Tribunal (Tax Chamber)” which accompanies and forms part of this decision
notice.
NICHOLAS ALEKSANDER
TRIBUNAL JUDGE
RELEASE DATE: 28 June 2012
Authorities referred to in argument but not mentioned in
this decision
Leslie Livingstone v HMRC
[2010] UKFTT 56 (TC)
Peter Inzani v HMRC [2006]
STC (SCD) 279
Wellington v Reynolds
(1962) 40 TC 209
Nunn v Gray [1997] STC
(SCD) 175
Hancock v Inland Revenue
Commissioners [1999] STC (SCD) 287
Kennerley v HMRC [2007]
STC (SCD) 188
In re H and others [1996] AC 563
In re City Equitable Fire
Assurance Co Ltd [1925] 1 Ch 407
Re Barings plc and others (No
5) [1999] 1 BCLC 433
Roberts and Martin v HMRC
[2011] UKFTT 268 (TC)
Roberts v HMRC [2012] UKFTT 308 (TC)
