High Court underscores importance of considering tax and insolvency law together

In this case (18 pages / 391 KB), HMRC, having previously secured the appointment of a provisional liquidator, sought to obtain a winding-up petition against Payroll & Pension Services (PPS Umbrella Company) Ltd (PPS), alleging substantial National Insurance contributions (NICs) debt.

PPS is an umbrella company which engaged workers that were, through agencies, supplied to work in the NHS. HMRC considered that PPS had been perpetrating a fraud by failing to account for PAYE and NICs on these arrangements, mainly through treating the workers, inappropriately, as self-employed. Although PAYE was also relevant, HMRC’s petition was based only on unpaid employer NICs.

HMRC primarily argued that the workers were in fact employees and that employer NICs should have been paid in respect of their employment income by PPS. This is what had led HMRC to apply for the appointment of provisional liquidators without notice to PPS.

PPS, and its director David-Ajibola Olabode, contested HMRC’s claims, objecting to the petition for winding up and applying for the liquidator to be discharged. The main argument was that there was a remaining dispute about whether there was a tax debt due. PPS argued that the workers were not employees and that the payments in question did not fall under the NICs obligations.

The court dismissed HMRC’s petition for winding up. The decision was made on the grounds that HMRC had failed to show that there is no genuine dispute as to whether PPS in fact engaged the workers as employees. This was despite evidence that fraud had been perpetrated on HMRC, but with uncertainty as to who perpetrated that fraud: PPS, the workers, the agencies or some combination of them.

Insolvency law expert Gemma Kaplan of Pinsent Masons said: “This case has a number of very interesting strands to it. What is most surprising is that despite the court being satisfied that HMRC has four sources of evidence of a fraud in which the company was involved, that alone was not sufficient to demonstrate that an undisputed debt was due to HMRC and therefore that a winding-up order should have been made.”

While the High Court did not need to decide whether the workers were employees, it decided that the specimen contract supplied was not a contract of employment and HMRC would have an uphill battle to displace its clear words. It highlighted that any arguments that the contract provided was a sham would require evidence and cross-examination. Together these factors weighed against granting a winding up petition.

Another factor that encouraged the court to exercise its discretion not to grant the petition was a matter of access to justice for PPS and its director in being able to have an opportunity to challenge the NICs decision at the First-tier Tribunal (FTT). HMRC had issued a decision notice charging approximately £7.3m of employer NICs shortly after its without notice application for appointment of a provisional liquidator. The company director wanted to challenge that decision notice in the FTT but the provisional liquidator, after legal advice, declined to pursue an appeal. The director attempted to lodge an appeal directly, but the FTT decided that he did not have standing to do so because of the appointment of the provisional liquidator.

Un-appealed decisions are treated as conclusive for the purposes of enforcement proceedings in court, as per section 117A of the Social Security Administration Act 1992.

Ian Robotham, tax law expert at Pinsent Masons, said: “This, in effect, left PPS in a catch 22 situation as, by the time provisional liquidators could be discharged, it would be out of time to appeal and therefore unable to challenge the purported tax debt. HMRC has said it will not object to a late appeal in that scenario, but that doesn’t resolve the s117A deemed conclusiveness.”

Two days before the hearing, HMRC added a secondary argument that even if PPS was not the employer, it might be the deemed employer. The judge considered that HMRC faced two hurdles in order for this second argument to work for HMRC. The first hurdle was procedural – whether HMRC had actually made a decision on this basis – and the second was substantive – whether certain conditions for PPS to be a deemed employer had necessarily been met. The court found that HMRC had failed to get over both.

Further, HMRC argued that these hurdles could be overcome by amending its petition to be based on a contingent debt, but HMRC failed on these grounds also.

“HMRC sought to amend the petition in an attempt to overcome the deficiencies and arguments relied on by the director and instead pursue a contingent debt based on NICs.  However, the judge objected given that such an amendment was not merely ‘technical’ but involved a fundamental shift in the nature of HMRC’s case and alleged a new fraud, which the company ought to have a right to reply to,” said Kaplan.

“As PPS did in this case, taxpayers should consider protecting their position, taking advice both from contentious tax practitioners on the merits of appealing HMRC’s decisions, and insolvency practitioners on the merits of opposing a winding-up petition,” said Robotham.

HMRC has until the middle of August to issue an application for permission to appeal to the Court of Appeal.