The case of Michael Rangos v HMRC (TC04457) published on 1 June 2015, concerned an appeal against directions made by HMRC for unpaid PAYE on sums of approximately £525,000 paid to Mr Rangos (“MR”) in a capacity of shadow director of two companies. The PAYE was determined under Regulation 80 of the PAYE Regulations on the grounds that tax had not been paid by the employer. The issues which needed to be decided upon were:
- Whether MR was a shadow director and employee of the two companies;
- Did MR receive payments from the company and if so the relevant amounts;
- Did the companies wilfully fail to deduct the tax from the payments;
- Did MR know that the companies had wilfully failed to deduct.
MR worked in the secondary ticket business and was previously a director of “Get me Tickets Ltd” (“GMT”) along with Ms Beale, a university student who mainly answered phone calls. GMT was subsequently wound up following a damaging investigation from the BBC “Watchdog” programme. According to MR, he remained in the ticket tout business albeit as a self-employed ticket broker. Ms Beale, who appeared as a witness for HMRC, painted a different picture. Her evidence, which ultimately the tribunal accepted was that MR suggested a new company “Ticket Tout Limited” (“TT”), with her as a director, along with a friend from university, be formed to carry on the business. He did not want his name on the company paperwork due to the past problems with GMT. Another company “Ticketout Limited” (“TO”) was subsequently formed after TT lost its banking facilities.
The following facts in relation to the companies were also highlighted:
- MR had a final say in what bills were paid;
- MR was responsible for hiring and firing staff;
- While Ms Beale was the sole signatory, MR had access and control over four bank accounts;
- Money received by TT was used to pay GMT’s debts;
- Employees operated out of MR’s flat and used computers there.
Based on these facts and the lack of evidence provided by MR, the tribunal came to the conclusion that MR was very much the driving force behind the two companies and was integral to the business, controlling bank accounts and deciding how it would operate. Accordingly they found he was a shadow director and employee of TT and TO.
MR’s main focus was to argue that he had not received payments from TT or TO. The tribunal found it difficult to reach a conclusion on this point. HMRC’s position was based on evidence from an official receiver and senior examiner who had reviewed the records of both companies and analysed the bank accounts. HMRC believed that MR was liable to tax on 25% of all uncategorised and unknown payments plus cash while MR maintained his income was that shown on his tax return from ticket broking. The tribunal found that none of the evidence presented supported either argument and based their decision on an analysis of the bank account and cash withdrawals which were derived from ticket sales. Ultimately, cash withdrawals plus specific payments, which had been discovered, made on behalf of MR, which had nothing to do with the trades of TT and TO were regarded as income of MR. the tribunal concluded that MR had failed to discharge the burden of proof that was on him to disprove that he had received the payments.
There was no dispute that TT and TO did not deduct tax from the payments deemed to have been made to MR. As the tribunal found that MR was a shadow director and had control of the bank accounts he should have been aware that TT and TO had made payments to him without deduction of tax. Furthermore as a shadow director MR was in a position to decide whether or not TT and TO deducted tax. On that basis the tribunal concluded that on the direction of MR both companies wilfully failed to deduct tax and accordingly he was liable to pay the tax plus interest charged and his appeal was dismissed.
This case highlights the power of HMRC to recover tax from the directors personally on the basis they knew that the company had failed to operate PAYE. Ultimately, a deciding factor in this case was the testimony of a credible witness and this outweighed the story presented, which was largely unsupported, from MR.
If you would like further information in relation to this case please contact the TaxDesk on 0845 4900 509 and ask for Martin Mann.