In Simrajsar Ltd & Achilles Products Ltd v HMRC [2024] TC09363 the First Tier Tribunal (FTT) found that payments made to directors were not genuine termination payments and were not covered by the £30,000 tax free exemption. 
The companies Simrajsar Ltd (SL) and Achilles Products Ltd (APL) submitted joint appeals against PAYE Regulation 80 Determinations and section 8 social security notices which had been raised by HMRC in relation to payments made for compensation of loss of office payments.
- SL and APL were part of a larger group, ‘Redbox Group’ under investigation by HMRC. Redbox Group Ltd were a business linked to the promotion of tax arrangements. Enquiries had been opened into SL and APL during the larger investigation.
- Termination payments made to five directors were identified by HMRC.
- HMRC raised regulation 80 determinations and section 8 social security notices in relation to unpaid PAYE and NIC on the payments for four tax years.
- In some of the cases, two of the later years, fell outside the four-year limit for raising determinations but inside the 6-year limit which allows HMRC to collect the tax if carelessness can be determined.
- None of the directors had a contract of employment or a termination settlement agreement and other than two highlighted payments, the directors received no remuneration for any of the years they acted as director.
- On resignation of employment, each director was issued with a payment of £30,000 for ‘compensation of loss of office’.
- No payments were declared on any of the five directors’ self-assessment returns.
SL and APL argued that all payments made were genuine termination payments that fell within s403 ITEPA which provides an exemption for the first £30,000 of any termination payments.
The companies also claimed the six-year period was irrelevant and therefore the determinations for these particular years were out of time.
HMRC argued:
- S403 did not apply, the payments were payments for past work that constituted an ‘emolument of employment’ within s62 ITEPA. Payments under s62 cannot make use of the £30,000 exemption.
- No contracts of employment existed to highlight the circumstances around any potential termination payments.
- There were no termination agreements detailing why the payments were being made or how the sum of £30,000 had been calculated in each case.
- The payments were for past work and could not be termination payments.
- The Real Time Information (RTI) submissions were not accurate and therefore carelessness has occurred meaning the determinations were not out of time.
The tribunal stated that when ‘loss of office’ payments are made, you would usually expect to see some form of termination agreement outlining how any damages were calculated, there was no such record in this case.
The Tribunal also found:
- The directors all resigned voluntarily, there was no requirement to pay compensation for the loss of office.
- There was no issue with the companies maximising tax savings by using the full £30,000 exemption but there was no real rationale provided to clarify why this figure had been arrived at.
- The burden of proof was on SL and APL to prove the payments were not earnings and they were unable to do this.
- The payments could not properly be ‘described as compensation for loss of office’.
- That the payments were ‘gratuitous lump sums paid in recognition of the past service of the respective director’ and were taxable therefore as earnings.
- One of the directors was a chartered tax advisor and the business of Redbox Group Ltd was tax related, internal advice could have been sought on the matter but there is no evidence it was. The tribunal found that the companies had therefore been careless.
The appeals were dismissed.
Useful guides on this topic
Recovery of PAYE: Regulation 80 and 72 Assessments for PAYE
When can HMRC assess an employer or an employee for unpaid Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs)? What is a regulation 80 determination? What is a regulation 72 determination? Who is assessed and what are the conditions?
Termination, Redundancy and Leaving Payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?
Real Time Information
Our subscribers guide on all things RTI related.
Client Briefing: How to Avoid Penalties for Carelessness
Client briefing: how do you avoid penalties for carelessness when preparing your tax return?
Client Guide: Reasonable Care and Tax Penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?
External link
Simrajsar Ltd & Achilles Products Ltd v HMRC [2024] TC09363
