A married couple who were directors of a building contractor company which went into liquidation have won a case at the First Tier Tribunal (FTT) against claims by the HMRC that they were liable for payment of PAYE and income tax owed by the company when their business collapsed.
Mr and Mrs Prowse were directors of industrial painting contractor, Supablast Nationwide Ltd, which had contracts with major construction companies.
The company went into liquidation in October 2010 after the financial failure of a scaffolding subcontractor which Supablast had paid in advance of work completed.
At the time of the liquidation, the company had PAYE (income tax and NIC) liabilities, part of which related to amounts paid to the couple. HMRC shifted these liabilities from the company to Mr and Mrs Prowse personally, which they then appealed against in the case, Mr Jan Prowse and Mrs Louise Anne Prowse v. Commissioners for Her Majesty’s Revenue & Customs [2014] UKFTT 491 (TC) TC03617].
The FTT ruled in favour of the Prowses, stating the use of the McVeigh defence by HMRC was not relevant.
Mark Cawthron, CCH tax writer, said: ‘Two important elements of this case, behind the tribunal’s decision in the taxpayers’ favour, would seem to be the evidence of “pre-existing entitlement” to salaries, and of contemporaneous payroll paperwork.
‘Against this, and while recognising there is a distinction between “deduction” and “accounting to HMRC”, one aspect which does not seem to be drawn out by the tribunal, in its judgment, is whether the PAYE tax “not accounted for” ran back all the way to April 2009, and if so why precisely that was, given that the problems with the subcontractor did not apparently emerge until June 2010.’
The FTT heard that whereas previously Mr and Mrs Prowse, as directors, were remunerated by small salaries and large dividends, they expressed concerns over the large lump sum tax bills they faced as a result.
In January 2009 he discussed the decision to move to PAYE through their accountants, Baldwins (Walsall) Ltd, who represented the directors on an individual basis as well as the company.
The company’s payroll was handled by DMW Payrolls, who were instructed by Prowse as to the net amount he and his wife needed each month, from which they computed the gross figures. Standing order payments to the couple’s bank accounts each month did not equate exactly to the payroll figures, but Prowse told the tribunal that it was his understanding that net was credited to a director’s loan account and sums drawn, with the difference settled at the end of the year by dividend.
HMRC’s view of the matter was that the method of cash extraction had remained the same both before and after the change to PAYE in April 2009, claiming that in reality the sums paid to the directors’ bank accounts were gross amounts because no consideration had been given at that time that the amounts would not be covered by voting a year end dividend. HMRC also concluded that a decision had been made to produce retrospective payslips to present to HMRC the false picture that the company had properly and deducted PAYE tax and NIC correctly.
HMRC said that when it looked likely the company would be declared insolvent, so no dividend could be paid, there was a ‘retrospective reconsideration’ to treat the monies extracted as sums ‘net of PAYE’ (to give the directors the benefit of a ‘deduction-at-source’ tax credit). As in the case of McVeigh (R v Inland Revenue Commissioners, ex parte McVeigh (1996) STC 91), HMRC argued, the amounts of money taken bore no relationship to those on the payslips and the onus of proof was Mr and Mrs Prowse, who had failed on to provide the necessary evidence.
The Prowse’s case was that the new salary arrangements had been introduced from April 2009 and were a ‘pre-existing obligation’ of the company. DMW, which was an independent third party, had correctly computed the necessary deductions, produced payslips contemporaneously and produced information for forms P35. Such payslips could not have been produced without the necessary computations on the P11 working sheets. In the normal course of events, the deductions made would have been paid over to HMRC, but the company’s unexpected cash flow difficulties (and subsequent liquidation) prevented that.
The FTT decided that this case was materially different to McVeigh. The salaries were set before the start of the relevant tax years, and before the company encountered financial difficulties, so the tribunal found there was a ‘pre-existing entitlement’ to them. DMW processed those salaries through the payroll, maintaining P11 working sheets and providing monthly payslips. The tribunal was satisfied that the cash drawn by each of P and Mrs P was at least in part the ‘net’ pay – ‘in part’ because of the discrepancy between the net pay and the cash actually drawn.
Mrs Prowse received cash each month which was less than the net pay in her case, whereas her husband received more, although the difference between all the standing orders to the pair and the payroll figures was only around £400 per month. The tribunal decided that since the couple saw their financial affairs as being joint, it judged that neither had received sums from which PAYE had not been deducted, and both appeals were allowed.
The FTT decision is here: http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j7781/TC03617.pdf
