..... or more commonly in the soap operas you are dealing with, Crown Detriment. In this fifth blog piece on disqualification issues I shall briefly lay out the requirements of a sound allegation centred upon a company's failure to make adequate payments in respect of it's tax liabilities.
There are several forms which such an allegation can take, but the first thing to bear in mind is that the mere existence of Crown debt, or retention of Crown monies, is not a sustainable allegation of misconduct on its own. The preferred allegation, as tried and tested through myriad cases, is framed in terms of the more specific “Trading to the detriment of HMRC”, with the focus being on the unique and particular maltreatment of the crown, an involuntary creditor.
For a strong allegation in these terms you should look to establish:
1) Detrimental treatment of the Crown (i.e. unpaid/overdue liabilities) for a period in excess of 12 months of trading.
2) Continued payments to other parties over the same period i.e. trade and expense liabilities decreasing or remaining stable in comparison. The allegation will also be strengthened if you are able to show continued benefit to the directors through remuneration payments, reduced loan accounts, payments to creditors holding personal guarantees and the like.
3) HMRC the largest creditor at liquidation, or at least having a significant, material liability in comparison to other classes of creditor. If the HMRC debt is based entirely, or primarily, on estimated assessments, you should also look to show that the debt level is realistic by reference to the other records available.
Basically it is a question of avoiding the urge to view the tax position in isolation, and instead considering it in the context of the trading of the company as a whole. Has this company gained a competitive advantage, and thereby a benefit to its directors, through repeatedly failing to pay over monies due to the Crown? Has the business effectively been financed through using tax monies as a source of working capital, enabling the company to continue to trade when it would otherwise have been cash flow insolvent? These are the types of questions you should ask.
Finally, consider whether there is any mitigation provided by dialogue with the tax authorities or (and we all know it happens far too often) abject negligence on their part. Time to pay agreements, if adhered to, will certainly mitigate the misconduct as they suggest a willingness and desire to set the problem straight, however, if your company has a record of repeated agreements being set up with no, or very few, payments being made then this merely illustrates a delaying tactic to prevent enforcement action being taken.
The nature of the business may also be significant here, as for a labour intensive operation HMRC may be the only significant creditor in any event, meaning that it is more pertinent to consider an allegation centred upon general trading whilst insolvent rather than specific detriment to one particular creditor.
As ever, keep the four M's in mind: Misconduct, Motivation, Materiality and Mitigation. The existence of a debt to HMRC is an open door enabling you to explore further, but it doesn't lead directly into the garden of disqualification, there are a few other darkened passages to be illuminated first.
