Nigel Victor Gradidge v The Commissioners for HMRC

This is an appeal against a debt transfer notice (DTN) in respect of a debt of £31,024.15 relating to income tax and Class 1 National Insurance Contributions, issued on 10 November 2016 and transferring the debt from N19 Training Services Limited (the Company) to the appellant (Mr Gradidge), a former director of the Company. The debt transfer notice was issued under s688A(2) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the Social Security Contributions (Managed Service Companies) Regulations 2007 (SSC MSC Regs 2007).

The Company was incorporated on 12 August 2011 and was set up in order to provide Mr Gradidge’s services to third party agencies. Mr Gradidge’s evidence, which was not disputed, was that this structure had been required by agencies in order for them to provide him with work after he had been made redundant by his employer.

Mr Gradidge was the sole director and shareholder, and the Company had no employees. The Company was set up by Think Accounting Limited (TAL) who also undertook statutory and financial compliance management for the Company. Mr Gradidge had been given TAL’s details by a third party.

Mr Gradidge terminated the services of TAL’s successor (New Wave) and appointed Davison & Co as the new accountants to the Company on 1 March 2015. On 19 March 2015, the registered address for the Company was changed to Mr Gradidge’s home address.

Following enquiries into TAL, HMRC opened enquiries into the Company in August 2015.

Following a meeting with Mr Gradidge in December 2015 HMRC concluded, and it was not disputed, that the Company was a Managed Service Company, and that TAL was a Managed Company Service Provider in connection with the Company. Regulation 80 determinations and s8 decision notices were issued to the Company on 4 March 2016 in respect of PAYE income tax and Class 1 National Insurance Contributions for the 2011-2012 to 2013-14 tax years. No penalties were imposed as HMRC concluded that the behaviour which led to the notices and determinations arose as a result of a mistake despite reasonable care.

On 24 March 2016 an application was made to strike the Company off the register at Companies House. On 12 April 2016, Mr Gradidge resigned as a director of the Company; his advisers, Davison & Co, also resigned as company secretary on that date. The Company was eventually dissolved by voluntary strike off on 29 January 2019.

The determinations and notices were not appealed by the Company but were not paid. On 10 November 2016, HMRC issued the DTN which is the subject of this appeal. Mr Gradidge appealed to HMRC in respect of the DTN on 17 November 2016. Following a review, Mr Gradidge appealed to this tribunal on 7 February 2017.

s688A ITEPA 2003 provides, as relevant:

Paragraph 97C of the Income Tax (Pay As You Earn) Regulations 2003 (the PAYE Regulations 2003) provides, as relevant at the time the notice was issued:

s67 ITEPA 2003 defines a director as follows, as relevant:

s112 Companies Act 2006 provides that:

The general background to this appeal was not in dispute, nor was the validity of the determinations and notices in dispute.

For Mr Gradidge, it was contended that the requirements of the legislation were not met as he was not a director at the time that the DTN was issued. He also contended that he had never been a real director of the Company as he considered that TAL had controlled the Company and he had not played any active role in the management of the Company whilst they were involved. It was submitted for Mr Graddige that TAL had made all of the arrangements without his knowledge or signature, and that he had no idea what a shareholder or director was, and thought of himself only as a worker. It was contended that he had tried to go to TAL’s offices and was told that he was not allowed to.

In the hearing, Mr Gradidge gave evidence as follows.

It was submitted that the fact that Mr Gradidge was shown as a director on Companies House records did not mean that he had been a director of the Company in reality. It was contended that TAL had completed the registration using his details. Further, Companies House did not run checks on the names of directors and Mr Gradidge’s representative stated that he knew of fictitious names being used for directors of other companies.

HMRC submitted that Mr Gradidge chose to set up the Company and engage TAL. He had been paid via dividends and received non-employee-allowable expenses, which provided him with a tax benefit. HMRC also contended that it was not relevant that Mr Gradidge had resigned, as he had been a director of the Company at the time that the relevant debt accrued. Even if he had chosen not to control the company, he had still been appointed as a director. HMRC also contended that he should be regarded as a shadow director of the company following his resignation as there were no other directors appointed.

The purpose of the legislation was, it was contended, to allow for recovery of relevant debts from a person who was a director at the time that the relevant income tax and National Insurance Contributions should have been deducted and accounted for under PAYE. HMRC submitted that s688A ITEPA should therefore be regarded as applying to the period in which the debt accrued, and that the present tense used in the legislation should be regarded as stylistic. Relevant events for an annual tax such as income tax should be regarded as those in the relevant tax year. Further, the purpose of the legislation is to transfer the debt to persons who knew or should have known that PAYE should have been deducted; it was submitted that it was not appropriate to interpret the legislation as applying to persons who were not involved with the company at the time the debt accrued but enabling those involved to escape liability.

It was also contended that the decision in RCI Europe [2003] EWHC 2139 (Ch) had concluded, in the context of National Insurance Contributions, that the word ‘is’, in another area of statute, was stylistic and that the definition was not temporal.

It was agreed that the dispute was as to whether Mr Gradidge had ever been a ‘real’ director of the Company and, if so, whether s688A(2) allows a debt to be transferred to a former director of the Company.

It is not disputed that Mr Gradidge was appointed as a director and registered as such at Companies’ House. Although it was suggested that this was something that was done without his knowledge or permission, and possibly that the circumstances should be regarded as TAL (or a person associated with them) being the director under an assumed name, I consider that the evidence put to the Tribunal is such that it is more likely that Mr Gradidge simply did not pay particular attention to the arrangements that were put in place. This is because it was clear that he knew that the arrangements involved his being paid via a limited company, as his evidence was that he had made enquiries of HMRC as to whether this was permitted. Mr Gradidge agreed that he had completed various forms at the time, which he recalled as being “something to do with giving them permission to deal with tax and stuff like that” and also that he thought TAL would “deal with it all”.

I note the submissions that Mr Gradidge was not a director because he was “not allowed” to manage the company, but I consider it is clear from his evidence that he did not attempt to exercise any control until he realised that there was a problem with TAL and its successor. I also note that when this happened, he was able to appoint alternative advisers as accountants for the company and also to appoint them as the company secretary. It was contended that TAL’s successor had demanded fees when this happened, but it is clear that Mr Gradidge was not prevented by them from acting as director of the company.

Accordingly, I do not consider that the submissions that Mr Gradidge was prevented from acting as a director and that as such he should be regarded as not having been a director of the Company are not made out.

s688A(1) and (2) is written in the present tense. This is not unusual in legislation. It states (in summary) that a relevant debt can be transferred to one of a range of specified persons, including a director of the relevant company.

Having reviewed the evidence and submissions, I consider that the approach taken in RCI Europe, referred to by HMRC, applies equally to ITEPA 2003 as it did to the Social Security Contributions and Benefits Act 1992 which was the subject of that decision. In particular, s688A(2) is also a “definition section with no specific temporal requirements” and the definitions “are categories of” person, as noted in RCI Europe at [356.

Although RCI Europe was referring to the definition of an employee, rather than a director, the decision noted particularly that the legislation overall did not support the contention that a person should escape liability simply because they had ceased to be an employee. I consider that s688A(2) should be interpreted in the same way, being a definition section and defining categories of person rather than specifying particular periods of time. I consider that the use of the present tense in s688A(2) does not preclude the issue of a debt transfer notice to a former director of the relevant company.

I therefore find that there is no temporal aspect to s688A(2), requiring a director to have been in office at the date of the issue of the notice and, as I have found that Mr Gradidge was a director of the Company, the DTN was therefore correctly issued and is upheld.

However, even if the language of s688A(2) should be regarded as being temporal in nature, I note that “director” is defined in s688A by reference to the definition in s67 ITEPA 2003. That definition states, inter alia, that a director is a member of the company where the company is managed by the members themselves.

At the date of the debt transfer notice, Mr Gradidge was the sole member of the Company and there was no director or other officer appointed. He was, therefore, the only person who had standing to make decisions regarding the Company. Accordingly, I find that the Company was managed by its sole member and therefore that Mr Gradidge was a director of the Company for the purposes of s688A at the time that the DTN was served.

Accordingly, even if it were the case that s688A(2) should be regarded as having a temporal requirement, Mr Gradidge remained a director for the purposes of s688A at the time that the DTN was issued and so the DTN was correctly issued and is upheld.

Finally, I note that the DTN stated that Mr Gradidge was “a person within Section 688A(2)(a)” ITEPA 2003. The DTN does not state which of the three categories of person set out in that section specifically applies: “director or other office-holder, or an associate”.

An “associate” is defined in s688A by reference to the definition in s68I ITEPA 2003, as a “person connected with the company” A person is connected with a company where that person controls the company (s718 ITEPA 2003 and s993 Income Tax Act 2007) and, as sole shareholder, Mr Gradidge controlled the Company and was therefore an associate of the Company at the time that the DTN was issued.

Although I asked the parties for their comments on this aspect of s688A(2)(a), there were no specific submissions made as to its application. As I have concluded that Mr Gradidge was liable as a director, this is included for information as it was referred to in the hearing.

As this point was argued briefly, I note that it was also submitted that the DTN was incorrectly issued and that, to be valid, HMRC should have issued the debt transfer notice on the basis of s688A(2)(c), as Mr Gradidge had been actively involved in the provision of the relevant services rather than under the provisions relating to directors. Given my findings above, and the provisions of paragraph 97C of the PAYE Regulations, I conclude that this submission is not made out. The PAYE Regulations are clear that a notice under s688A(2)(c) cannot be issued unless HMRC consider that it is impracticable to recover from a director (or another relevant person).

The grounds of appeal appear to include an appeal against the amount of the DTN, on the basis that HMRC had not taken into account expenses which had been properly incurred by Mr Gradidge and reimbursed by the Company. This was briefly mentioned in the hearing, in a statement on behalf of Mr Gradidge that the expenses had been properly incurred and that the DTN was “not correct on that basis”. No outline of case was provided on behalf of Mr Gradidge.

As no further information or detail was provided, I consider that this ground of appeal was not made out. Further, it appears from the legislation that any appeal as to the amount of the debt should have been made by the Company, rather than Mr Gradidge.

I note that it was submitted that Mr Gradidge was a victim of others, that he had no choice but to use this structure as it was required by those who would provide him with work, and that he had no idea what was going on. Mr Gradidge was therefore “looking for fairness” from the Tribunal.

As is clear from HMRC’s decision not to impose penalties, there is no assertion that Mr Gradidge was knowingly involved in the arrangements or that he sought a tax benefit. However, the purpose of this legislation is clearly to ensure that those who benefit from this type of arrangement, even without specific intention to do so, should be liable in order to ensure a ‘level playing field’. I note that this Tribunal does not have any inherent supervisory jurisdiction and there was no submission that the legislation provided any such jurisdiction that was applicable in this case.

For the reasons set out above, I find that the DTN was correctly issued and should be upheld in full. The appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.