When a company goes into liquidation leaving PAYE debts, HMRC can pursue the company directors for the unpaid tax and NIC. They do this by issuing “directions” against named directors under reg 72 of the PAYE regulations 2003 and reg 86 of the Social Security regulations 2001.
If a client is faced with such a direction, we will check whether these three pre-conditions for the direction have all been met:
- The employer did not deduct PAYE
- The failure was wilful and deliberate
- The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax.
For NIC the director has to know that the employer wilfully failed to pay the NIC, rather than just to deduct it.
Where the PAYE debt has arisen because the director’s overdrawn loan account has been discharged by the crediting of salary, the PAYE may have been calculated but not necessarily deducted, as the bookkeeping entries alone do not constitute a deduction of PAYE. This was the conclusion of the judge in the case of S West v HMRC who decided in favour of the taxpayer.
In a similar case: P Marsh & D Price, the directors were found to be personally liable for the PAYE debt as they were aware that the company did not have the funds to pay the PAYE liability. If you need any further advice, please contact our office.
Written by the Tax Advice Network