HMRC has narrowly lost a First Tier Tribunal (FTT) case, in which the tax authority tried to make an employee pay outstanding PAYE liability on a bonus paid just before the company went into liquidation. And the case could have important consequences for some owner managers.

Unless it is appealed by HMRC, the tribunal could mean that more small business owner managers that are about to go into liquidation could make payments to themselves without paying all the tax liability to the crown.

Stephen West v HMRC saw Stephen West, who was the sole director and shareholder of a telecoms company, dodge the PAYE liability on an offset company loan that was repaid to him by way of salary.

Regulation 72 of the PAYE regulations allows the liability for unpaid PAYE to be transferred from the employer to the employee where the employer has “wilfully and deliberately” failed to deduct PAYE from the employee.

The case in brief

• Sole director of Astral Telecom Ltd, Stephen West, advised to put the company into liquidation in 2011
• There were insufficient profits available to repay an overdrawn director’s loan by dividend so Mr West was advised to repay the amount in salary
• His accountant processed his payroll and made accounting entries to offset the loan account. The PAYE/NIC liability was included in the management accounts.
• The company was unable to settle with HMRC so HMRC sought to transfer the liability to Mr West through regulation 72 of the Income Tax Regulations 2003

The verdict

The tribunal panel, made up of Sandi O’Neil and Judge John Clark, ruled by a casting vote that these conditions had not been met.

Ms O’Neil wanted to dismiss Mr West’s case. She concluded that West was the company’s ‘controlling mind’ and his knowledge was the company’s knowledge. She suggested that he had created obligations which the company knew it could not meet, and had wilfully failed to discharge those obligations in the knowledge of the taxpayer.

Judge Clark disagreed with this position. After looking over the books, he concluded that the employer had deducted PAYE from the employee and therefore one of the necessary preconditions to the operation of regulation 72 was not fulfilled.

Judge Clark decided in favour of the appellant Stephen West and because he had the casting vote on the tribunal, West ultimately won this case.

This decision may enable more owner managers on the verge of liquidation to pay themselves bonuses at the expense of creditors like HMRC. However, given the significance of the tribunal, and the dissenting view of Ms O’Neil, it is likely that this result will be challenged.

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