Reply to: Nightmare becomes reality

[WordIsBond]

Thanks, Chris. That confirms what I thought all along, so it must be true and completely representative of all aspects of reality.

[Maslins]

One wonders if there is a substantive difference between cases where the company is already closed vs cases, like the one cited, where the company was not yet closed when the IR35 case began/was decided.

I'd think HMRC would prevent MVL if a case was started. But will they even open an IR35 case when the company has already closed? Can anyone cite a single example where they've done that?

My anecdotal experience of this from MVL Online:
- we do ask if there are any active enquiries as part of the clearance request...and if there was, well, firstly I'd hope we'd never get involved in the first place if there was...but certainly we wouldn't be able to conclude the liquidation without HMRC's ok they were happy it had been settled to their satisfaction.
- in not too far off 1,000 cases since we started, not once has an HMRC inspection been started after our appointment. Of course that's no guarantee it can't happen...but some people seem to be of the view that putting a company into liquidation would often trigger an investigation on the basis if HMRC don't challenge it then, they never can. We haven't seen any evidence of that.

Theoretically a liquidation that has been completed could be brought back to life by HMRC, but it would be very expensive for them to do so, plus they'd have had to give the ok before the liquidation was complete. Therefore unless some massive new information came to light, I can't realistically see them doing this.

[jamesbrown]

Wrong sockie of wrong former poster but yep there will be a lot of people with no evidence of appropriate due diligence. Equally I suspect most won't know how to handle a tax enquiry and may just pay a demand.

Oops, sorry.

[madame SasGuru]

As nlady mentioned above (IIRC), there will be many that do not conduct this due diligence.

Wrong sockie of wrong former poster but yep there will be a lot of people with no evidence of appropriate due diligence. Equally I suspect most won't know how to handle a tax enquiry and may just pay a demand.

[jamesbrown]

So there is a high hurdle, one that HMRC is seeking to lower, and I predict that we will see this as an area of dispute over the comiing years.

Right, I think we're on the same page, overall, although perhaps not about the significance of the timing (before vs. after a liability is established). I agree that legislation can change, and it will definitely continue to be disputed and new case law established. Also, absent due diligence, I think it would be difficult to show that PAYE had been operated correctly. As nlady mentioned above (IIRC), there will be many that do not conduct this due diligence.

[webberg]

My point is limited to situations in which close companies have a tax debt and rather than be paid, the director/shareholder allows the company to fall into insolvency or perhaps elects for that option.

Where the tax debt is PAYE or a PAYE equivalent, there are several sets of rules that permit HMRC (at least in their minds and Manuals) to seek to move that liability to the director/owner.

There are those in Chapters 7/8/9 (and now 10) of ITEPA which deal with intermediaries.

There are those in Part 7A (and now in the last two Finance Acts) that deal with the DR charge.

There are those in the PAYE Regulations at 72 and 81.

The West case is an example of how HMRC consider the PAYE rules to work. They lost but on grounds that are finely balanced and the UTT hearing (whenever that is, and HMRC will be happy to see continued uncertainty here) may reverse it.

However I am saying that the decision shows that the hurdle for trasnfer is high and focuses on whether an individual knew that PAYE was avoided. That can happen only when you know there is a PAYE liability.

The comments above around the establishing of a PAYE liability are interesting and I would agree with. We are looking here however at what happens once the liability is known.

Here, the usual HMRC practice we see in EBT cases and the like, is to issue a Reg 80, claim it's not been paid and issue a Reg 81.

In other words reg 80 is on the comapny, Refg 81 on the individual.

reg 72 operates in a similar manner.

So there is a high hurdle, one that HMRC is seeking to lower, and I predict that we will see this as an area of dispute over the comiing years.

[WordIsBond]

One wonders if there is a substantive difference between cases where the company is already closed vs cases, like the one cited, where the company was not yet closed when the IR35 case began/was decided.

I'd think HMRC would prevent MVL if a case was started. But will they even open an IR35 case when the company has already closed? Can anyone cite a single example where they've done that?

[jamesbrown]

We engaged Accountax to argue the case on the transfer, and it was won. The transfer failed, as the director had reasonable grounds to believe contracts were outside IR35. He had both contract reviews and personal due diligence to support this.

Interesting, thanks. That's exactly what I thought, although I didn't have any IR35 examples to cite. Obviously, each case is different, and the legislation/case law evolves, but I think this clearly demonstrates that an argument can be won, providing the contractor takes reasonable care to operate PAYE correctly (i.e. has a professional contract review). As I said above, if they cannot show due diligence, it doesn't matter whether the company is open or closed, the director would be in trouble (which probably applies to a significant fraction of those exposed to IR35).

[Jessica@WhiteFieldTax]

There's a good blog post from Whitefield Tax here (https://www.whitefieldtax.co.uk/ir35...-a-individual/) about whether the company liability can be passed on to the individual.

Looking at that, if the director has not been negligent then there is not much chance of HMRC being able to transfer the liability from company to individual. The PAYE regulations have limited scope for shifting the liability and if the director genuinely believes that they are outside IR35 then HMRC would (IMHO only) struggle to show that the company willfully failed to deduct the tax and NI due. If the company did not willfully deduct the tax then it cannot be shifted to the individual tax payer.

If HMRC had won tribunals on this point, you'd think that they would be shouting from the rooftops about how they can do this, but I don't rememebr seeing one ever. Is there an example where the liability has successfully been passed from the company to the individual, and what laws did they use to do that?

Except that is only an issue where the company has been closed down before the case was resolved. As far as I know that has never arisen, and if there were a case in progress you couldn't close the company anyway

Sorry, late to this.

We had a case of exactly those circumstances in the early years of IR35, say 2001/2 ish.

Client had ceased contracting and was in process of closing company down, when HMRC made an IR35 assessment on company arising out of Employer Compliance Review.

All that was left cash wise in the company was enough for final years CT payment - in this instance there was no CGT distribution happening.

The PAYE/NI Assessment was about double the CT/cash in company, so HMRC went after the the director - I can’t remember, I’d imagine they served winding up order on the company.

We engaged Accountax to argue the case on the transfer, and it was won. The transfer failed, as the director had reasonable grounds to believe contracts were outside IR35. He had both contract reviews and personal due diligence to support this.

[jamesbrown]

No he's saying I believe that a director (perhaps "controlling person" is a better term) who walks away from a legitimate corporate tax debt in any manner remains liable for that debt. The fact that he is also the putative "employee" is irrelevant; the former is being prosecuted, not the latter.

But, just to muddy the waters further, wearing either the director's hat or the worker's hat, both are at fault; the former by debt transfer, the latter for not accepting that paying the correct personal taxation is your liability.

And the net result is a difference without distinction.

Again, "walks away".

What is the legal definition of "walks away" and "in any manner" that you're employing here?

Putting that aside, are we to infer from your assertions that the corporate veil does not exist, under any circumstances, for a close company (although you don't use this term)? In other words, that the barriers for a transfer of debt by acting improperly (e.g. trading while insolvent) simply do not exist for a close company, because a debt is always transferred to a director when they "walk away" and "in any manner". Or are you making a special argument for HMRC as creditor to an indebted close company?

I await clarification, but your argument seems terribly confused and without any foundation in law, i.e. pure fantasy.

Beyond that, let's ask webberg to speak for themselves.

[malvolio]

Reading between a lot of lines, you seem to be agreeing that transfer of a PAYE debt is a high bar, but that it becomes simpler once a director is shown to be “walking away” from a debt at the point it has been established. This seems like an odd argument, but I think you need to define “walking away” more clearly. Is your argument that a transfer of liability is less likely if the director does not seek to close the company, regardless of whether they attempt to satisfy the debt? That seems like an odd argument to me. Where’s the case law, or is this simply your opinion on where it could go?

No he's saying I believe that a director (perhaps "controlling person" is a better term) who walks away from a legitimate corporate tax debt in any manner remains liable for that debt. The fact that he is also the putative "employee" is irrelevant; the former is being prosecuted, not the latter.

But, just to muddy the waters further, wearing either the director's hat or the worker's hat, both are at fault; the former by debt transfer, the latter for not accepting that paying the correct personal taxation is your liability.

And the net result is a difference without distinction.

[jamesbrown]

Not only are HMRC showing activity here to prevent striking off and notifying liquidators of liability to the detriment of other creditors, but they are moving against owner/directors.

[snip]

then you KNOW that liquidating rather than paying the PAYE is a "wilful" act

Reading between a lot of lines, you seem to be agreeing that transfer of a PAYE debt is a high bar, but that it becomes simpler once a director is shown to be “walking away” from a debt at the point it has been established. This seems like an odd argument, but I think you need to define “walking away” more clearly. Is your argument that a transfer of liability is less likely if the director does not seek to close the company, regardless of whether they attempt to satisfy the debt? That seems like an odd argument to me. Where’s the case law, or is this simply your opinion on where it could go?

[webberg]

Agreed on the phoenixing. Couple of ant avoidance rules in 2016 sought to "correct" that position.

The core question on whether it is possible for an employer PAYE (or PAYE equivalent) liability to be transferred to the owner/director of the business, is to be considered separately.

As has been mentioned, where the liability arises outside of the disguised remuneration rules in Part 7A - which have their own transfer rules - the liability can be moved only if the terms in Reg 72 or Reg 81 are met.

These discusses whether the employee KNEW that the employer would not pay the PAYE.

That is a very different test from whether a liability "arose" (and there are demonstrations above on how difficult a question that is) and should not be confused.

If PAYE was not deducted at he time payments were made, but are later found to be due, and a Reg 80 determiantion is issued, then walking away from the employer if it is your company (owner/director) becomes difficult. Not only are HMRC showing activity here to prevent striking off and notifying liquidators of liability to the detriment of other creditors, but they are moving against owner/directors.

That move is based on the sort of argument seen in West, i.e. if you are the heart and mind of the company, then you KNOW that liquidating rather than paying the PAYE is a "wilful" act, and ties in with the general tax policy on close companies which is to see them as extensions of the individual.

It's going to be an interesting few years, especially if the Casandra's are correct and we see thousands of PSCs going to the wall.

[jamesbrown]

Since 1999, people have been mooting phoenixing their ltd. cos as a way of getting around IR35.

Ships in the night.

I'm not talking about pheonixing, I'm talking about the circumstances necessary to transfer a PAYE/NICs debt from a company to an individual. Pheonixing is a complete red herring in this context. If the individual knowingly declared an inside IR35 contract as being outside and, hence, failed to operate PAYE correctly, or they did not undertake necessary due diligence to know whether they were operating PAYE correctly on behalf of TheirCo, they're screwed either way - company open or closed.

I'm not sure why this point is so incredibly difficult to understand. Transfer of liability is one thing. Company open or closed is another.

[jamesbrown]

So how does that mean that:

Gosh, I think you might be onto something there.