In N Gradidge v HMRC [2022] UKFTT 189 (TC) (25 May 2022), the FTT dismissed the appeal against a debt transfer notice (DTN) that had been issued to the taxpayer under ITEPA 2003 s 688A to recover income tax and NICs that should have been deducted and paid to HMRC via PAYE by the managed service company (MSC) of which the taxpayer had been the sole director and shareholder.
The taxpayer was the sole director and shareholder of a company through which he provided training services. His company and these arrangements had been set up by another company, TAL. HMRC concluded that TAL was an MSC provider and the taxpayer’s own company was an MSC. The taxpayer did not dispute this. Consequently, the taxpayer’s company (the MSC) became liable to operate PAYE in respect of income tax and NICs on amounts paid for his services. Since the company had been put into liquidation and its PAYE liability remained unpaid, this tax liability was transferred to the taxpayer (as a former director of the company) under the debt transfer notice (DTN) rules in ITEPA 2003 s 688A. A DTN enables the PAYE debt of an MSC to be transferred to one of a range of specified persons, including a director of the relevant company.
The taxpayer argued that he was not liable for the PAYE amounts as one of the conditions for the DTN to be issued (that he was a director of the company) had not been met. The FTT dismissed his argument that he was not a director of the company. He had been registered as the sole director of the company at Companies House.
The taxpayer also argued that a DTN could not be validly issued to him because even if he was a director of the company, he was not a director of the company at the time the DTN was issued since he had resigned a few months earlier.
The FTT recognised that ITEPA 2003 s 688A is written in the present tense but noted that:
this is not unusual in legislation (at para [24]); and
the decision in another case, RCI Europe [2003] EWHC 2139 (Ch) on the meaning of an employee (rather than a director), provides support for the view that the use of the present tense in ITEPA 2003 s 688A(2) ‘does not preclude the issue of a [DTN] to a former director of the relevant company’—the legislation does not support the contention that a person should escape liability because they have ceased to be a director (at para [26]).
Although the taxpayer was no longer a director of the company when the DTN was issued to him, the FTT decided that ITEPA 2003 s 688A(2) does not require a director to continue to be a director when the DTN is issued. The DTN was correctly issued and therefore upheld by the FTT.
Why it matters: A DTN can be issued to a former director of an MSC with unpaid PAYE liability. There is no requirement for that person to continue to be a director at the time the DTN is issued.
There will be other people in the same (or similar) position as the taxpayer in this case, particularly as HMRC has had some recent successes in applying the MSC legislation. As is clear from HMRC’s decision not to impose penalties on the taxpayer in this case, there is no assertion that the taxpayer was knowingly involved in the arrangements or that he sought a tax benefit. However, the purpose of the legislation is to ensure that those who benefit from this type of arrangement, even without specific intention to do so, should be liable in order to ensure a ‘level playing field’.
In N Gradidge v HMRC [2022] UKFTT 189 (TC) (25 May 2022), the FTT dismissed the appeal against a debt transfer notice (DTN) that had been issued to the taxpayer under ITEPA 2003 s 688A to recover income tax and NICs that should have been deducted and paid to HMRC via PAYE by the managed service company (MSC) of which the taxpayer had been the sole director and shareholder.
The taxpayer was the sole director and shareholder of a company through which he provided training services. His company and these arrangements had been set up by another company, TAL. HMRC concluded that TAL was an MSC provider and the taxpayer’s own company was an MSC. The taxpayer did not dispute this. Consequently, the taxpayer’s company (the MSC) became liable to operate PAYE in respect of income tax and NICs on amounts paid for his services. Since the company had been put into liquidation and its PAYE liability remained unpaid, this tax liability was transferred to the taxpayer (as a former director of the company) under the debt transfer notice (DTN) rules in ITEPA 2003 s 688A. A DTN enables the PAYE debt of an MSC to be transferred to one of a range of specified persons, including a director of the relevant company.
The taxpayer argued that he was not liable for the PAYE amounts as one of the conditions for the DTN to be issued (that he was a director of the company) had not been met. The FTT dismissed his argument that he was not a director of the company. He had been registered as the sole director of the company at Companies House.
The taxpayer also argued that a DTN could not be validly issued to him because even if he was a director of the company, he was not a director of the company at the time the DTN was issued since he had resigned a few months earlier.
The FTT recognised that ITEPA 2003 s 688A is written in the present tense but noted that:
this is not unusual in legislation (at para [24]); and
the decision in another case, RCI Europe [2003] EWHC 2139 (Ch) on the meaning of an employee (rather than a director), provides support for the view that the use of the present tense in ITEPA 2003 s 688A(2) ‘does not preclude the issue of a [DTN] to a former director of the relevant company’—the legislation does not support the contention that a person should escape liability because they have ceased to be a director (at para [26]).
Although the taxpayer was no longer a director of the company when the DTN was issued to him, the FTT decided that ITEPA 2003 s 688A(2) does not require a director to continue to be a director when the DTN is issued. The DTN was correctly issued and therefore upheld by the FTT.
Why it matters: A DTN can be issued to a former director of an MSC with unpaid PAYE liability. There is no requirement for that person to continue to be a director at the time the DTN is issued.
There will be other people in the same (or similar) position as the taxpayer in this case, particularly as HMRC has had some recent successes in applying the MSC legislation. As is clear from HMRC’s decision not to impose penalties on the taxpayer in this case, there is no assertion that the taxpayer was knowingly involved in the arrangements or that he sought a tax benefit. However, the purpose of the legislation is to ensure that those who benefit from this type of arrangement, even without specific intention to do so, should be liable in order to ensure a ‘level playing field’.
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