Owner-managed and family businesses (among others) often fail. Unfortunately, the business owner’s problems do not necessarily end there.
For example, an owner-managed company may have owed HM Revenue and Customs (HMRC) substantial amounts of PAYE income tax and National Insurance contributions (NIC) when it ceased trading and was liquidated. Those company liabilities may relate to remuneration paid to its owners. HMRC can pursue the individuals for the unpaid tax, broadly if there has been a failure to deduct PAYE, and HMRC considers that the company wilfully failed to make the deductions from relevant payments to them (SI 2003/2682, reg 72). A similar provision applies for NIC purposes in respect of the individual’s primary contributions, if there is a wilful failure to pay by the company (SI 2001/1004, reg 86).
Whether the company owner(s) are liable for the unpaid PAYE and NIC of the business under the above rules will depend on the particular facts and circumstances.
For example, in Marsh & Anor v Revenue and Customs  UKFTT 539 (TC), two individuals were directors and equal shareholders of a trading company. The company eventually experienced cashflow problems. Historically, the individuals received small amounts by way of salary from the company. Most of their income was received in dividends. However, for the tax year 2010/11, the director shareholders increased their salaries. The company had outstanding income tax and NIC, most of which related to the director shareholders. In April 2011, the company went into administration. HMRC sought to transfer the liabilities to the individuals.
The First-tier Tribunal noted that the individuals drew substantial salaries when the company’s profits could not support them. It was clear to the tribunal that the company was already in financial difficulties when the director shareholders decided to take salaries instead of dividends. The failure to make deductions from their salaries was held to be wilful, and the tribunal concluded that the director shareholders were personally liable to pay the relevant tax and NIC.
By contrast, in West v Revenue and Customs  UKFTT 536 (TC), the appellant was the sole director and shareholder of a trading company. For a number of years, the appellant drew money from the company as director’s loans. However, the director’s loans remained outstanding and increased over a number of years. Following advice from an insolvency practitioner, the appellant’s accountant was instructed to prepare accounts showing an amount of director’s remuneration which, after deducting PAYE and NIC, would be sufficient to offset the drawings on the director’s loan account. Subsequently, a resolution was passed for the winding up of the company. PAYE and NIC liabilities were still outstanding. HMRC sought to formally transfer the liabilities from the company to the appellant, on the basis that he received payments from the company knowing that it had wilfully failed to deduct sufficient tax.
The tribunal judge noted that the PAYE obligations fell on the employer, and this basic rule was set aside only in limited circumstances: (1) The employer did not deduct PAYE; (2) The failure was wilful and deliberate; and (3) The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax. HMRC had to show that all three circumstances were present. On the first condition, the tribunal judge found that tax was deducted from the remuneration provided by the company to the appellant; the total amount of PAYE and NIC liabilities was shown in the company’s records. Thus the first condition was not satisfied. As all three conditions must be fulfilled, there was no basis for transferring the company’s PAYE liability to the appellant. Furthermore, the tribunal judge found, on the facts and evidence, that the company’s failure to pay the NIC liability was not wilful or deliberate. The appellant’s appeal was allowed.
The decision in West begs the question whether it leaves the door open for company owners to pay themselves large amounts of remuneration, and allow the company to be liquidated owing substantial PAYE and NIC liabilities. In West, the tribunal panel reached different decisions (but the tribunal judge had the casting vote). The other tribunal member expressed concerns on this point. The tribunal judge commented: “Although I have concerns as to the consequences of allowing Mr West’s appeal, I do not consider that the legislation in its current state is sufficient to deal with the problems to which [the disagreeing tribunal member] refers.” A change in the law therefore seems a distinct possibility.
The above article was first published by Business Tax Insider (December 2016) (www.taxinsider.co.uk).