As part of his monthly newsletter for Field Court Tax Chambers, Peter Vaines highlights just how Draconian are HMRC’s new powers to demand securities – powers HMRC is currently seeking to extend to Corporation Tax and CIS. So Draconian, in fact, that even HMRC seems embarrassed to use them as the law requires?
I mentioned some time ago that the power of HMRC to require security for PAYE and NIC is truly awesome. The principle is fair enough and we have seen it in the context of VAT for many years. Under VAT Act 1994 Sch 11 (4), HMRC are entitled to seek security from the taxpayer if they think it is necessary for the protection of the Revenue, for example if he has failed to comply with his VAT obligations or HMRC have reason to believe that he might fail to do so. It is really serious because it is a criminal offence to continue to make taxable supplies if you have not provided the security demanded by HMRC.
Of course, if a person is unable to pay his current VAT bill, he is hardly going to be able to pay a security representing a few months’ VAT liabilities in advance. So to avoid criminal liability, he must cease to trade.
New Rules for PAYE
The rules for security for PAYE are more recent – and are much worse. Regulation 97N of the PAYE Regulations provides that where an officer of HMRC considers it necessary for the protection of the Revenue, he may require the company, or the directors, to provide security for payment of the PAYE in the future. The failure to provide security is a strict liability criminal offence and ceasing to trade offers no defence.
Fortunately (and unlike the position for VAT), there is a right of appeal against a security notice for PAYE and NIC. The Tribunal is entitled to form its own view and to confirm, set aside, or vary a security notice.
These issues were considered in detail last year in the case of D-Media Communications Limited v HMRC TC 5183 where the Tribunal suggested that hardship should be a factor in the decision of HMRC to require security. They said that for HMRC to determine the amount of the security without regard to the ability to pay, is inconsistent with the legislation. If the taxpayer cannot pay, and HMRC know they cannot pay, for HMRC to require the taxpayer to provide security which they would inevitably fail to do and be criminally liable, can do nothing to protect the Revenue and cannot have been the purpose of Parliament in making these regulations.
Another case has arisen recently which seems to justify the requirement for security: Crays Support Services Ltd v HMRC TC 6456. However it contains some curious elements.
Liquidation No Barrier
Mr Holt was the director of a company which provided management services to other businesses under his control. He was previously a director of other companies which had failed, owing substantial amounts of tax. HMRC considered there was a risk that the company would not pay its PAYE. So they issued a notice to Mr Holt personally to provide security for an estimated four months PAYE, explaining that it was a criminal offence not to give security when required to do so. Mr Holt appealed against the notice for security claiming among other things that if required to provide the security, the company would be forced into liquidation.
The judge observed that the legislation is concerned with the protection of the Revenue and there is no requirement for this to be balanced against enabling the company to continue to trade. In any event, the notice for the provision of security was not directed at the company but to Mr Holt personally and there was no evidence that he was unable to meet this obligation. Tax and NIC had been deducted from the employees and it was not paid over to HMRC. Indeed, the company had defaulted on its PAYE payment for the 7 months ended February 2018.
Under the circumstances, one can understand why HMRC took the view that the Revenue needed to be protected and that robust steps were required to ensure that the PAYE would not again go unpaid. It is no surprise that Mr Holt’s appeal against the notice for security was dismissed by the Tribunal. However, parts of the judgment are a bit puzzling.
Law and Practice
It was suggested by HMRC in the Notice of Requirement for security that the criminal liability only arose if the security was not paid and the company carried on trading. However, the legislation does not provide any defence to the criminal charge by ceasing to trade – and this was made clear in the judgment in D-Media. The criminal offence is committed by failing to pay the security – and whether or not the company carries on trading has nothing to do with it.
It was also said in Crays Support Services Ltd that the fine for failing to provide the security was £5,000. However, the Tribunal in D-Media had analysed the position very carefully and explained that the £5,000 limit does not apply to these provisions, and that the offence is punishable by a fine of unlimited amount.
Although we would all welcome the views expressed in Crays Support Services Ltd as they are much more reasonable than the severe position explained in D-Media, it does look like the position set out in D-Media is right. It is tempting to suggest that HMRC should make it clear that their approach in Crays Support Services Ltd is their practice in this area – but that is obviously impossible. HMRC cannot reasonably be asked not to apply the law just because it is harsh. A court decision confirming their approach, or a change in the law, might be a good idea.