RESPONSE TO HMRC CONSULTATION DOCUMENT: SECURITY FOR PAYE
AND NICs
1
2
INTRODUCTION
1.1
The AAT is pleased to comment on the issues raised in the HMRC
consultation document on “Security for PAYE and NICs”.
1.2
We have over 48,000 full and fellow members and 73,000 student and
affiliate members worldwide. Of the full and fellow members, there are
over 3,200 Members in Practice who provide accountancy and
taxation services to individuals, not-for-profit organisations and the full
range of business types.
1.3
We are a registered charity whose objects are to advance public
education and promote the study of the practice, theory and
techniques of accountancy and the prevention of crime and promotion
of the sound administration of the law.
1.4
In pursuance of those objects the AAT provides a membership body.
We are participating in this consultation as part of our contribution
towards the public benefit of achieving sound and effective
administration of taxes. We also feel that the issues raised in this
consultation paper will affect our members in practice, their clients and
potentially the UK economy.
1.5
We wish to thank HMRC for the invitation to the consultation meeting
with HMRC at the Treasury Offices on Horse Guards on 13 January
2011, which was attended by the AAT’s Technical Manager.
INTERESTS
2.1
3
We are participating in this consultation as part of our contribution
towards the public benefit of achieving sound administration of the law.
COMMENTS
We would like to comment on the proposals in the consultation document
using the following scenario:
a)
The scenario is that two people (Mr Blue and Mr Red) run a business
ABC limited. ABC Limited becomes insolvent with outstanding debts
to:
 HMRC for VAT
 HMRC for PAYE/NI
 employees for unpaid salaries




b)
c)
customers who have paid for goods and services in advance
other businesses that have supplied goods and services on
credit
financial investors
their bank.
After ABC Limited has been struck off the Companies House register,
Mr Blue and Mr Red decide to start a new venture and set up a new
company called HIJ Limited.
As Mr Blue and Mr Red have a history of starting up new companies
which subsequently become insolvent owing taxes that may never be
recovered, HMRC decides that Mr Blue and Mr Red are what is
commonly known as ‘phoenix traders’.
d)
Quite rightly HMRC is increasingly exasperated by the actions of Mr
Blue and Mr Red and decides to seek two financial securities for VAT
and PAYE/NI from either Mr Blue, Mr Red or HIJ Limited.
e)
The financial security effectively guarantees that if HIJ Limited
becomes insolvent then there will be no outstanding tax, VAT or
PAYE/NI, that is outstanding and payable to HMRC.
f)
HMRC will effectively have secured a position as a ‘preferential
creditor’.
g)
At the consultation meeting on 13 January 2011 HMRC argued that it
would not be a ‘preferential creditor’, and this is strictly true because
at no time will HMRC ever be a creditor to HIJ Limited.
h)
Currently, HMRC already obtains financial securities in respect of
VAT. This consultation is seeking to introduce new legislative powers
to enable HMRC to obtain financial securities in respect of PAYE/NI.
i)
j)
At no time will any other creditor be informed that HMRC holds
financial securities from HIJ Limited. Therefore in the event that HIJ
Limited becomes insolvent all the other honest employees and
creditors will have a smaller share of the funds available for
distribution.
Currently, where HMRC seeks financial securities for VAT it has
advised on its website that it will not disclose the name of the
person(s) and company because of the Data Protection Act. This
means that HMRC is protecting the rights of individuals and their
businesses that are viewed by HMRC as ‘phoenix traders’ and
‘phoenix businesses’ and HMRC is doing this to the detriment of
honest employees and honest business creditors.
3.1
Using the above scenario, the AAT can understand why HMRC is
seeking to obtain a financial security for PAYE/NI from the phoenix
trader(s) and/or the phoenix company (HIJ Limited). However, the lack
of public disclosure makes it appear that HMRC is only interested in
advancing its short term financial interests to the detriment of honest
employees and honest business creditors.
3.2
The lack of public disclosure also means that the deterrent effect on
phoenix traders and phoenix businesses is significantly reduced.
Without this deterrent effect phoenix traders will see insolvency as an
easy way to evade their financial liabilities.
3.3
Phoenix traders and phoenix businesses should not have the right to
anonymity and it goes against HMRC’s own policy of “Publishing the
names of deliberate defaulters”.
3.4
Currently, HMRC is able to hold financial securities for VAT. In this
respect the explanation on HMRC’s website of using the requirements
of the Data Protection Act to protect the interests of phoenix traders
and phoenix businesses over and above the interests of honest
employees and business creditors would not make sense to the
average person.
3.5
Therefore, the AAT would like to make the following three
recommendations:
Recommendation 1
The AAT would recommend that HMRC creates a separate public
register on the Companies House website containing the names of the
individuals and the respective business names from where HMRC
holds a security for each type of tax:
 Value Added Tax (VAT)
 Pay As You Earn (PAYE) and National Insurance Tax (NI).
If HMRC seeks to hold a security for any other type of tax in the future
then HMRC should create an additional public register on the
Companies House website.
The Tax Securities Registers should be kept by Companies House,
who should have oversight of the Tax Securities Registers to make
sure that HMRC is maintaining the information on the registers by
providing correct and up to date information.
Access to the Tax Securities Registers should be free so that honest
members of the public and honest businesses can readily refer to the
register and protect themselves from the nefarious activities of
phoenix traders and phoenix businesses.
Recommendation 2
Currently, HMRC can already require a financial security for VAT and
the proposal in the consultation is to have the additional power to hold
another security for PAYE and NICs.
This is a duplication of effort and costs for HMRC.
These duplication costs are unnecessary and will inevitably be passed
to taxpayers and businesses.
At the consultation meeting HMRC stated they were completely
different taxes and would have to be administered by different teams.
Please note that we have not argued that this may also be confusing
for the businesses that are required to provide the financial securities,
on the basis that these businesses are controlled by a person (or
persons) who have previously defaulted on their tax liabilities.
The recent Government Spending Review and the cuts to HMRC’s
budget would appear to be at odds with HMRC’s proposal to have
different teams within HMRC looking after different financial securities
for different taxes. This would result in a proliferation of different
legislation which can only lead to an increase in costs to HMRC and
ultimately to British businesses and taxpayers.
The AAT strongly believes that HMRC is a single government
department and that it should only have one security which would
cover all the taxes administered by HMRC. This would have the added
advantage that HMRC would only have to maintain a single Tax
Security Register per recommendation 1 above.
Recommendation 3
The legislation should specifically prohibit HMRC from seeking a
financial security from a business where the proprietors have not
previously operated a business that has become insolvent, leaving
outstanding tax liabilities.
In cases where a business regularly delays or does not settle its tax
liabilities on a timely basis then HMRC can exercise its powers to
wind-up the business. There are press reports that illustrate the
efficiency with which HMRC winds-up defaulting businesses1.
Therefore, it would be inappropriate to give HMRC the powers to seek
financial securities from an existing business where the proprietors
have not previously defaulted, or been given a Fair Warning Notice
(please refer to paragraph 3.28 – 3.30 below).
1
The Guardian, 11 January 2011, “Taxman quickest to wind up firms”
This would give HMRC an unfair advantage over honest employees
and honest creditors as HMRC will, in effect, become a preferential
creditor.
Potential impact on the economy
3.6
In paragraph 1.7 it states that “HMRC estimates that the Exchequer
lost between £600 million to £800 million per year between 2005-06
and 2008-09 in PAYE and NICs debts that had been built up by
employers who then became insolvent.”
3.7
At the consultation meeting HMRC suggested that they would only be
looking for security in extreme circumstances and in very few cases.
3.8
The problem is that the legislation does not specify the extreme
circumstances therefore HMRC could potentially seek security from
the businesses of all the individuals who had previously defaulted,
which could potentially reach £800 million.
3.9
The introduction of these financial securities would create a financial
drive to increase the tax yield and reduce the loss of tax revenues
from businesses becoming insolvent.
3.10
This financial driver would encourage HMRC to maximise the number
of securities that it could obtain.
3.11
This would have an impact on the economy and act as a positive
disincentive to individuals from starting up in business.
3.12
The AAT accepts HMRC’s current sincerity regarding only seeking
financial securities in extreme circumstances. However, in the future
the financial driver may prove to be too much of an incentive.
3.13
HMRC has to consider putting in safeguards to prevent the
requirement for short-term financial securities from having a
detrimental effect on the economy in the medium and long term. One
safeguard could be to establish a definition of what is meant by
“extreme circumstance” or develop an appropriate test for
differentiating whether or not a particular case satisfies the test of
being an “extreme circumstance”.
Which people should HMRC be seeking security from?
3.14
The draft Statutory Instrument refers to “Persons from whom security
can be required”. The list of persons includes director, company
secretary and any other similar officer.
3.15
HMRC may wish to consider including in this list:
 shadow director
 non-executive director
 partner

trustee.
Employed members of the AAT
3.16
Many AAT members act as company secretary in an employed
capacity. The AAT would like to think that the vast majority of AAT
members are honest and would therefore not be caught by this
legislation.
3.17
On the other hand the small minority who may not be so scrupulous
should be caught by the legislation.
3.18
The legislation does not appear to differentiate between the honest
and the not so scrupulous.
3.19
The AAT would like to see the legislation clarified so that HMRC staff
are empowered and able to differentiate between the “honest” and the
“not be so scrupulous”.
Licensed members of the AAT
3.20
The AAT also has licensed Members in Practice (MIPs) who act as
company secretary for businesses where the MIP invoices the
companies for the services he or she provides.
3.21
In these cases the MIPs are more remote from the respective
businesses and it is even more unlikely that MIPs are party to the
unscrupulous conduct of directors controlling the business.
3.22
The legislation does not take account of this scenario and therefore
does not differentiate between the honest and the not so scrupulous
company secretary who is not an employee of the business.
Safeguards and soft targets
3.23
The legislation appears to be subjective and leaves far too much to the
discretion of HMRC staff in the determination of whom should be
required to provide a financial security to HMRC.
3.24
The legislation needs to be more objective, which will give greater
consistency to how the legislation is applied by HMRC staff.
Legal requirements for how the financial security should be shown in the
annual accounts of private limited companies and public limited companies
3.25
It would be natural for a phoenix trader or phoenix company to want to
cover up their nefarious past. In the accounts a phoenix company
could simply show the financial security as a fixed asset in its Balance
Sheet. Clearly, in the event the company becomes insolvent the
crystallising event would result in this “fixed asset” becoming an
expense in the Profit & Loss Account. This is clearly a nonsense which
we have used to highlight the problem.
3.26
Therefore, the AAT believe that the Companies Acts should be
amended so that the financial securities should be shown
appropriately in the annual accounts of private limited companies and
public limited companies that are submitted to Companies House.
3.27
Similarly, the company should be required to disclose the financial
security on all of its corporate stationery.
Fair warning being given to the phoenix traders
3.28
We believe that when a business becomes insolvent it is at this time
that HMRC should advise the partner or director that in the event that
they start up a new business then they will be required to provide
HMRC with a financial security.
3.29
Using the scenario above, it would be appropriate for HMRC to warn
Mr Blue and Mr Red that they will be required to provide HMRC with a
financial security when ABC Limited becomes insolvent. At this point in
time a Fair Warning Notice should be served upon Mr Blue and Mr
Red.
3.30
It would be unfair for HMRC to advise Mr Blue and Mr Red that they
will be required to provide HMRC with a financial security after they
have set up HIJ Limited. Because if Mr Blue and Mr Red had been
given fair warning then they may not have set up HIJ Limited.
Care and support employers
3.31
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In paragraph 97O (d) of the Statutory Instrument it refers to “care and
support employers”. The Statutory Instrument does not mention where
we could find regulation 206(4) so it was difficult for us to check which
organisations this clause is intending to exclude. If this clause includes
organisations such as care homes for example then we would
comment that personal experience suggests that this type of
organisation does not merit specific exclusion from these provisions.
CONCLUSIONS
4.1
The AAT appreciates that HMRC is seeking to protect its interests.
However it is of concern that HMRC has inadvertently done so, in the
case of VAT, to the detriment of the interests of honest employees and
honest business creditors.
4.2
The legislation must be tightened so that it can differentiate between
honest and dishonest members of the AAT who are acting as
company secretary for a limited company that becomes insolvent
leaving outstanding tax liabilities.