Private Client Briefing For April 2018

Speed read

In West, an employee was made liable for PAYE/NICs instead of the employer. In Ackroyd, a BBC/personal service company arrangement was treated as one of employment for income tax purposes under IR35. HMRC continued its run of defeats for filing penalties in Jackson. HMRC has issued further guidance on the deemed domicile rules for cleansing mixed funds, and it has also on published new guidance on the IHT DOTAS rules. Consultations have been launched on extending entrepreneurs' relief; countering avoidance by profit fragmentation; and the tax treatment of charities.

West: liquidated employer's PAYE liability transferred to employee

In HMRC v S West [2018] UKUT 100 (TCC), the Upper Tribunal (UT) allowed HMRC's appeal to transfer an employer's PAYE liability to an employee.

Mr West was an employee, the sole director and shareholder of Astral Telecom Limited. He received a salary in 2011 that was designed to extinguish his outstanding director's loan account before the company entered voluntary liquidation. Mr West signed the company's liquidation accounts and his own personal tax returns, each of which made reference to the liabilities for PAYE and NICs. Following its liquidation, the company was unable to pay its outstanding PAYE and NICs liabilities for 2011/12 and some earlier tax years.

HMRC sought to transfer the company's liabilities to Mr West, on the basis that he received the salary knowing that the company had wilfully failed to deduct tax and pay NICs, as per Income Tax (Pay As You Earn) Regulations, SI 2003/2682, reg 72 and Social Security (Contributions) Regulations, SI 2001/1004/, treg 86(1)(a)(ii) respectively.

The First-tier Tribunal (FTT) by casting vote determined that through various book keeping and accounting entries, the company had not wilfully failed to deduct the tax nor wilfully failed to pay NICs, which under R v HMRC ex parte McVeigh [1996] STC 91 was a pre-condition for the regulations to apply. The FTT therefore held that the company's PAYE and NICs liability did not transfer to Mr West.

The UT disagreed, holding that despite the accounting records, there had been no deduction of tax or NICs. As Mr West was the sole director of the company, his intentions and awareness were ascribed to the company and Mr West knew that no payment of tax could or would ever be made by the company. The company had therefore wilfully failed to deduct the tax and NICs. The regulations applied and the company's tax liabilities were passed on to Mr West accordingly.

Why it matters

There is perhaps cause for concern over the judgment, as it appears to use the regulations as a way of protecting a company's...