In a recent tribunal case, the First-Tier Tribunal’s Tax Chamber ruled in favour of Michael Burne, former director of Carbon Managed Services Limited, effectively overturning HMRC's claims regarding unpaid PAYE and National Insurance Contributions (NIC) liabilities.
Burne, who faced allegations of wilfully failing to deduct and remit taxes from his income, successfully argued that he was not responsible for the purported failures.
Case Background
The case centred on the tax year 2019-2020, during which Carbon Managed Services Limited, a company providing outsourced legal support services, went into administration. HMRC sought to hold Burne personally liable for PAYE and NIC obligations, claiming he knew of the company’s financial challenges and deliberately failed to meet tax obligations. At the heart of the case was a substantial December payroll amount processed post-administration, for which PAYE and NIC were never remitted.
HMRC’s Position
HMRC argued that Burne’s status as a director and shareholder meant he held comprehensive control over the company’s payroll and finances. They highlighted a substantial increase in his declared income in December 2019, which triggered a liability for PAYE and NIC that the company, now in administration, did not fulfill.
HMRC maintained that Burne knowingly accepted these payments with the understanding that tax liabilities would go unpaid, asserting his actions were deliberate and financially beneficial.
Burne’s Defense
Representing himself, Burne contended that the financial decisions, including payroll submissions, were beyond his control due to the administration process. He argued that an appointed administrator had taken over all fiscal responsibilities, rendering him unable to make payroll decisions or direct financial operations. Burne also stated that he was unaware of the December payroll and subsequent tax liabilities, as the administrator alone held authority at that time.
The Tribunal found substantial evidence supporting Burne's position, emphasizing that the payroll entry in question was likely a bookkeeping measure rather than a genuine payout, as Burne never received the funds.
Tribunal’s Ruling
Judge Ruthven Gemmell and Tribunal Member Leslie Howard ruled that HMRC failed to meet the burden of proof required to establish wilful misconduct by Burne. The Tribunal highlighted the following key points:
Absence of Control Post-Administration: The tribunal accepted Burne’s defense that, after the company entered administration, his ability to manage payroll or authorize payments was nullified.
Evidence of Administrative Error: Payroll entries processed after administration were identified as possible administrative oversights, rather than deliberate actions by Burne. The tribunal determined that these entries did not reflect actual payments to Burne and were recorded solely for bookkeeping.
Lack of Proof of Knowledge or Intent: HMRC’s reliance on assumptions rather than direct evidence weakened their case. The tribunal noted discrepancies in the evidence presented, including a failure to identify who submitted the December payroll, leading them to conclude that Burne did not knowingly authorize or benefit from the payroll transactions in question.
Outcome and Implications
The Tribunal ultimately allowed Burne’s appeal, relieving him of liability for the unpaid PAYE and NIC. This ruling underscores the importance of clear evidence when attempting to transfer corporate tax liabilities to individual directors, especially in cases involving administration. Legal and financial experts suggest this case could set a precedent for directors caught in similar disputes with HMRC regarding tax obligations post-administration.
For HMRC, the ruling may prompt a review of their procedures, particularly concerning the allocation of liabilities to individual directors in complex corporate cases. Burne’s victory signals a potential shift in how courts view administrative responsibilities and personal accountability, especially when third-party administrators assume control.
This tribunal case serves as a critical reminder for directors and company officers to thoroughly document financial transitions and communications with appointed administrators, as such details can play a pivotal role in legal proceedings.