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Transfer of Tax Liabilities: A Warning for Directors

What was the background to the case?

In the recent case of HMRC v Stephen West, the Upper Tribunal (“UT”) allowed HMRC’s appeal against the First-tier Tribunal’s (“FTT”) finding that liabilities to unpaid PAYE and NICs could be transferred to a sole director/shareholder.

Astral Telecom Limited (“Astral” or “the Company”) was suffering from financial difficulties and entered liquidation in 2011. Mr West paid himself a substantial salary and the Company was subsequently unable to pay the income tax and NICs arising on that amount.

HMRC sought to transfer these liabilities to Mr West under the Income Tax (Pay As You Earn) Regulations 2003 and the Social Security (Contributions) Regulations 2001 – they argued that Astral had “wilfully failed to deduct” tax and “wilfully failed to pay” NICs.

What did the courts decide?

The FTT decided that Astral had deducted tax in accordance with the PAYE Regulations (evidenced by entries in Astral’s management accounts) and the Company had not wilfully failed to pay NICs.

However, on appeal, the UT set aside the decision of the FTT and decided that Mr West had received the salary in the knowledge that Astral would be unable to pay the tax and NICs due to HMRC.

What are the implications?

Against the backdrop of the recent collapse of Carillion, this case acts as a warning to directors who are seeking to extract value from companies in financial difficulty without making adequate provision for the payment of any tax and NICs due.

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