Introduction »

What a wind up

There seems to be a common misconception that businesses which do not pay over their PAYE and National Insurance Contributions (NIC) can just wind up and leave these taxes unpaid but this is not quite true. There have been rules in place for many years which in broad terms allow HMRC to:

• pursue an individual personally where tax and NIC has not been deducted from their earnings and
• pursue a culpable officer of a company for all outstanding Class 1 NIC.

The big change over recent years is that HMRC are actually using these powers, whereas for many years they had been very lax.

In simple terms, HMRC should not generally pursue an individual employee for underpaid tax deductions and NIC unless there is evidence that the individual misled the employer or knew that the employer had deliberately failed to deduct the relevant tax. Rather, they should first consider whether the employer has operated PAYE with reasonable care.

However, information in a recent case appeared to indicate that HMRC do not always follow this course of action. The taxpayer concerned was working at three jobs in parallel. In respect of one job, the taxpayer stated that his employer always paid in cash less the tax and never provided payslips, despite the taxpayer’s requests. When HMRC concluded that the taxpayer had underpaid tax for two years of £2,300, they pursued him personally.

The Tribunal made the point that to the extent that the tax shortfall arose from this employment, he should be protected from an assessment for the underpaid tax because he did not receive his wages 'knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments'.

Directors and personal liability

There have also been a number of recent cases where former directors have been pursued for outstanding NIC. A recent case considered a company which, throughout the period of trading, made no payments of PAYE or NIC to HMRC although the records showed that Class 1 NIC was deducted from employees’ wages and that net wages were paid to employees. As a result HMRC used their statutory powers and assessed the directors personally on £40,306 each!

One particular director appealed on the basis that the failure to pay was not attributable to any fraud or neglect on her part but the Tribunal found that she and fellow directors were aware of the obligation to account for NICs and PAYE and failed to do so:

‘We found as a fact that as a director of the company, and indeed Head of Finance, the appellant had a statutory duty to ensure that the company met its obligations and that her failure to do so was negligent.’

If you and/or your business are having any difficulties paying monies over to HMRC, it is far better to negotiate with them before real problems occur. If we can be of any help to you in this area, please do get in touch.

Introduction »