Nightmare becomes reality

[webberg]

Why is it only an issue where the company has been closed down before the case was resolved?

Company is trading. Director checks their working arrangements, gets reviews etc, and decides that the contract is outside IR35. As a result they pay out the profits as dividends and does not retain very much in the company (let's say it's £50k retained though, which is a nice reserve fund to have).

HMRC come calling, and win their IR35 tribunal and it's a whopper - they win £450k from the company. But the company doesnt' have the money to pay the tax and NI because they genuinely believed that the role was outside IR35. They didn't willfully avoid paying the tax, they had a difference of opinion from HMRC and the tribunal about whether they were inside or outside, but they werent negligent, they did the assessments, they checked regularly, they tried their hardest to avoid all three IR35 tests. But they still lose. The case is resolved and the company is open.

The company is now insolvent because they owe HMRC £450k and only have £50k left because the dividends were paid from the retained profit legally. The company goes bust.

The PAYE regulations only allow for the liability to shift from company to director if there was negligence or they wilfully avoided paying tax and NI. What evidence can HMRC produce to show that this was negligent? What shows that they willfully avoided the tax? The director made all sorts of checks and on the basis of that made a genuine decision that they were outside IR35.

What law can HMRC use to shift the PAYE liability to the individual from the company? Because it's not in the PAYE regulations, so which law do they use to allow this to happen?

The question is not "was tax wilfully avoided"?

The question is "once a PAYE liability is established, has the director tried to walk away knowing that the PAYE was not and would not be paid"?

So I think the test is applied once the liability is established, i.e. end of an enquiry, and not something that is applied from time to time over the course of the working arrangement.

How that differs from West where a claim from HMRC that he was the heart and mind of the company and "knew" that a PAYE liability carried into insolvency would not be paid, I cannot logically fathom for the moment.

[TonyF]

HMRC's argument is West seems to be that he knowingly received payments from the company on which it had wilfully failed to deduct tax.

In my example, the director has knowingly received payments from the company on which it had not deducted tax because the expert advice and guidance was that there was no tax to be deducted. It takes HMRC several years and a tribunal to show that the contract was inside IR35, using all their might and skills of persuasion and legal recourse significantly beyond that of the average contractor. If HMRC need years to make that assumption, and a tribunal, and a lawyer (possibly even a QC), I would think that it wouldn't be beyond the skill of the contractor to show that he non-deduction of tax was not wilful.

Does anyone know of any IR35 cases where the liability has shifted from company to individual and on what basis? Links to the tribunal paperwork would help as well.

[jamesbrown]

So how does that mean that:

Gosh, I think you might be onto something there.

[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.

[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]

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?

[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]

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.

[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]

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).