In Nigel Victor Gradidge v HMRC  UKFTT 189 (TC), the First Tier Tribunal (FTT) dismissed an appeal against a Debt Transfer Notice (DTN) issued by HMRC under section 688A(2), of the Tax Act 2003 Income Tax (Revenues and Pensions) (ITEPA) and the Social Security Contribution (Managed Services Companies) Regulations 2007, transferring a debt from a managed services company (MSC) to a former director of the company .
N19 Training Services Ltd (the Company) was incorporated in August 2011 and was formed to provide the services of Nigel Victor Gradidge to third party agencies. Mr. Gradidge was the sole director and shareholder of the Company and the Company had no employees. The company was established by Think Accounting Ltd (NLP) who also managed the Company’s statutory and financial compliance.
In March 2015, Mr. Gradidge terminated the services of TAL’s successor, New Wave, and appointed Davison & Co as the company’s new accountants. Following inquiries into TAL, HMRC opened an investigation into the company in August 2015.
Following a meeting with Mr Gradidge in December 2015, HMRC concluded that the company was an MSC and that TAL was a service provider of the managed company in relation to the company. In March 2016, HMRC issued Regulation 80 rulings and Section 8 notices of ruling to the Company relating to PAYE income tax and National Insurance contributions from class 1, for the tax years 2011/2012 to 2013/14.
On March 24, 2016, an application was filed to remove the company from the Companies House register. In April 2016, Mr Gradidge resigned as a director of the Company and Davison & Co resigned as company secretary at the same time. In January 2019, the Company was finally dissolved by voluntary deregistration.
HMRC’s determinations and decisions were not appealed by the company, but remained unpaid. In November 2016, HMRC issued a DTN to transfer the Company’s debt to Mr Gradidge. Mr Gradidge then appealed against the DTN and following an internal review in which HMRC upheld its decision, his appeal was referred to the FTT for decision.
The appeal was dismissed.
The FTT held that, although the list of persons to whom a DTN could be served is written in the present tense, Section 688A, ITEPA, permits a DTN to be served on directors who have resigned at the time a DTN is issued. This conclusion followed from the High Court’s decision in RCI Europe vs. Woods  EWHC 2139. Therefore, although Mr Gradidge resigned at the time the DTN was issued, he was a Director at the time liability was incurred by the Company and the DTN was therefore correctly issued by HMRC.
The FTT noted that even if Mr. Gradidge were to be a director of the Company at the time the DTN was served, he would have been considered a director by virtue of being the sole member of the Company because, for current purposes, a member who controls a company is considered a director (article 67, ITEPA).
“the objective of this legislation is clearly to ensure that those who benefit from this type of arrangement, even without a specific intention to do so, are responsible in order to ensure a “level playing field”“.
Under the debt transfer rules, HMRC can recover from certain persons (including directors, office holders and associates of an MSC) amounts which should have been deducted under PAYE by the MSC,s ‘they are irrecoverable from the MSC, serving a DTN on the person concerned. Importantly, it would appear from this decision that it will not be sufficient for these individuals to assert that they did not knowingly participate in the arrangements or that they did not seek a tax benefit. It will be interesting to see if Mr Gradidge seeks to appeal the FTT’s decision to the Upper Tribunal.
The decision can be viewed here.