Sarah Wilmott ATT
Readers will note that, as we initially covered in our overview of the Budget, the NIC Employment Allowance faced two changes from 6 April 2016: firstly, the amount of this allowance has increased from £2,000 to £3,000 per annum; and secondly, the availability has been restricted such that it is no longer available where a director is the sole employee of the company.
The restriction for sole employee companies represented an attempt by the Revenue to rule out the incentive for taxpayers to operate via a personal service company to benefit from the NIC savings. However, astute commentators have noted that by simply bringing a second employee into the company – such as a spouse or family member – and paying them a small wage for their activities, the “sole employee” condition would not be met. The more risk averse could of course highlight concerns with regards to the potential application of the general anti-abuse rule to this arrangement, but where the remuneration was commensurate with genuine services provided by this individual it is difficult to see how this could be considered abusive.
However, the ICAEW recently noted that the Revenue’s interpretation of the law in this area differs from the understanding set out above, with a recent Employer Bulletin containing guidance which does not appear to be in accordance with the law. Instead we are informed that: “from 6th April 2016, if you are a limited company where the director is the only employee who is paid earnings above the secondary threshold, you will no longer be eligible to claim the Employment Allowance.”
There is clearly a difference between whether someone is employed, and whether someone is employed and paid earnings above the secondary threshold for NIC purposes. The former is required to ensure that the NIC Employment Allowance is available, whereas, as far as The Employment Allowance (Excluded Companies) Regulations 2016 (SI 2016/344) sets out, the latter is not.
We agree with the ICAEW that the Revenue’s interpretation of these rules is incorrect, and commend their efforts in raising this. However, advisers would be recommend to recognise the writing on the wall – regardless of whether the Revenue’s interpretation is ultimately shown to be incorrect, it is unlikely to be long before the (really quite favourable) drafting of these regulations is amended.
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After a four-year battle through the courts, HMRC has secured a victory against the tax avoidance scheme, Eclipse Film Partners No 35 LLP.
The scheme was promoted by Future Capital Partners, and involved investors contributing millions into a partnership which, together with funding via loans from Barclays, purchased distribution rights into the Disney films “Enchanted” and “Underdog”. Disney granted Eclipse 35 a licence of specified rights to exploit and distribute the films for a period of 20 years. The distribution rights were subsequently sub-leased to another Disney company.
Although the investors plugged millions of pounds of their own money into the partnership, part of the contribution was financed by way of a loan over a 20-year period from ‘Eagle’, a subsidiary of Barclays. The loan required the borrowing member to pay the first 10 years of interest accruing on the loan in advance.
The partners’ argued that this prepayment of interest was deductible against investors’ other income (such as employment income, savings income, dividends, etc.) in the year in which it was paid. Investors effectively claimed around £400,000 worth of sideways loss relief per £173,000 invested.
Eclipse argued that its film scheme was a trading venture, a prerequisite for the loss relief claimed by investors. HMRC’s position was that Eclipse 35 was an investment company and that scheme was specifically structured simply to create a tax loss for investors, therefore, the arrangement amounted to nothing more than tax avoidance. The Supreme Court declined the application to appeal the decision made in the Court of Appeal. This action reaffirmed the Court of Appeal’s view, that Eclipse 35 was never likely to generate “contingent receipts” and therefore was “not commercially trading with a view to making a profit”.
This decision means that the loss relief previously claimed by investors must now be withdrawn. Investors must now pay the additional tax due as a result of the withdrawal of relief, along with late payment interest. In addition, and perhaps of more concern, is the fact that investors are liable for income tax on the income paid by the production company to the partnership under the lease agreement. According to the judgement, the partnership will eventually make a profit of £474.4m which would be taxable on the investors even though they would never physically receive this income (it would instead be used to repay loans). This could leave many in financial ruin.
This decision could have huge implications for other similar schemes. Although each case is decided on its own merits, unless others can differentiate the facts of their case from those of Eclipse 35, it is likely that the courts will come to the same conclusions.
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Bolton Wanderers FC recently managed to avoid being placed under a compulsory liquidation order after settling its overdue tax and VAT bill with HMRC. This case provides a stark reminder of the powers that HMRC has to pursue payment of overdue tax/VAT.
HMRC Debt Management and Banking
HMRC’s systems automatically recognise when a payment has not been made on time. This triggers many automated processes and reminders, but the debt is then transferred to HMRC’s Debt Management and Banking (“DMB”) team for collection.
Following a series of reminders, a DMB officer will telephone the taxpayer or their agent to establish the reasons for the delay in payment. A Time to Pay arrangement (“TTP”) could be agreed at this stage. However, any instalment agreement must be realistic, as failure to make TTP payments may lead to enforcement action, including liquidation or bankruptcy applications. In recent months, HMRC has become increasingly reluctant to agree a TTP arrangement where a taxpayer has had one previously.
Normally, HMRC has 4 years in which to issue protective assessments or determinations to recover tax that might be payable. This can be extended to 6 years if the tax has not been paid due to careless behaviour and to 20 years where tax has not been paid due to deliberate behaviour or there has been a failure to comply with obligations (e.g. failure to notify chargeability to tax).
The recovery of National Insurance Contributions are slightly different. HMRC is restricted by s.37 Limitation Act 1980 such that there is a six year time limit to recover NICs and the related penalties.
If HMRC does not make protective assessments within these specified time limits, then it is barred from recovering tax/NIC that may ultimately be found due and payable (unless it can argue that the discovery provisions apply).
A Winding Up Petition
Any creditor can issue a company with a Winding Up Petition if it is owed more than £750. From the date of the petition, the company has 7 days to take action before it is advertised with the Gazette. Once advertised, stakeholders such as banks will be alerted of the situation. During this time, the following action can be taken:
- Pay the outstanding debt;
- Dispute the debt if there are grounds to argue that it is not payable. Strong evidence would be required to counter a creditor’s argument;
- Agree an adjournment of proceedings to provide the business with more time to organise its affairs;
- If the business appears to be viable, a Company Voluntary Arrangement (“CVA”) could be negotiated. This offers the creditor the chance to recover its debt over a longer period of time;
- Seek an injunction to either postpone or prohibit the petition being advertised in the Gazette. This would prevent other creditors becoming aware of the situation, an important point as the banks keep track of these adverts and would freeze all company accounts; or
- Voluntarily place the company into Administration. Company assets would be sold by an appointed administrator to cover some or all of the debt.
If no action is taken within the 7 day deadline, the court will issue a winding up order.
At this point the liquidator must also investigate the actions of company directors in relation to how the business was run. In some cases, HMRC does have the power to recover unpaid tax/NICs from directors or employees. Although the requirement to engage these powers varies depending upon the tax at stake, the main criteria is that there has been some sort of negligence or deliberate failure to properly operate or deduct tax/NIC.
HMRC’s Powers for Direct Collection
Pay As You Earn (“PAYE”)
HMRC has the power to transfer PAYE debts of a company to a director (or employee) where the company is unable to pay, and: –
- It is clear that an employee or director has received payments knowing that the employer had wilfully failed to deduct the correct amount of PAYE from their earnings; and
- The prospects of recovery from the employee or director are good.
The PAYE regulations usually apply to directors who have an element of control over the finances of the company, but they can apply to any employee who has some influence in payroll or financial matters.
National Insurance Contributions (“NIC”)
HMRC can pursue NICs (employer and employee) directly from a director via Personal Liability Notices (PLNs) under s.121C Social Security Administration Act 1992 where it believes NIC has not been paid by a company due to either fraud or neglect by an Officer of the company, including:
- Improper use of Director’s Loan Accounts to pay directors when the company is failing to meet its obligations elsewhere due to a lack of funds;
- Deliberate and regular non-payment of PAYE and NIC on salaries when it was known these payments were due.
Corporation Tax (“CT”)
In the event that the Company is unable to make good any CT due, HMRC could look to the former directors/shareholders to recover these amounts. HMRC may use the following company law provisions to require that a payment be made into the assets of an insolvent company:
- Whether there have been ‘unlawful dividends’ (i.e. if a company makes a distribution when there were no profits available for the purpose, in which case the shareholders (but not employees or directors) will be liable to repay the dividends);
- Whether the company directors are guilty of ‘unlawful trading’. This could be applied to directors if they allowed the company to continue to trade after a reasonable director would have realised that there were PAYE, NIC and/or CT liabilities which the company could not pay. In which case, the court can order the director to make such contributions to the company’s assets as the court thinks proper;
- Whether the company officers are guilty of ‘fraudulent trading’ in which case the court may declare that any persons knowingly involved are liable to make such contributions to the company’s assets as the court thinks proper.
Our skilled team of tax investigations experts have a great deal of experience in managing client relationships with HMRC. We also have strong relationships with licenced insolvency practitioners with whom we work with on a regular basis. If you or your client would benefit from having a discussion with one of our specialist tax advisors, please get in touch via email or call us on 01204 559 914 to arrange a no obligation consultation, free of charge.