SPC00706

INCENTIVE PAYMENTS – Online PAYE returns – Whether return required by PAYE regulations – Whether Appellant companies formed for an impermissible purpose – 500 companies formed all with the same director – None had trades or businesses - £1 less 22p tax recorded as directors’ remuneration for each company – Appeal against decision not to make incentive payments – Income Tax (Incentive Payments for Voluntary Electronic Communication of PAYE Returns) Regs 2003 (SI 2003/2494) and SI 2005/826 – Appeals dismissed

THE SPECIAL COMMISSIONERS

	ZXCV LTD, NHKL LTD & OTHERS	Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioner:  SIR STEPHEN OLIVER QC

Sitting in public in London on 2 and 3 July 2008

Christopher Ranson ACA, company secretary of all 500 Appellant companies, for the Appellants 

Diya Sen Gupta, counsel, instructed by the general counsel and solicitor for HMRC, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	The 500 Appellant companies appeal against the refusals by (what is now) HMRC to make incentive payments to each of them.  The 500 companies claim to be each entitled to £250 for 2004/05 in return for filing their PAYE returns electronically and to the same for 2005/06. £85,500 has been claimed as their aggregate entitlement for 2006/07.

2.	The issue is whether, for each of those years, the 500 Appellants are entitled to incentive payments under the Income Tax (Incentive Payments for Voluntary Electronic Communication of PAYE Returns) Regulations, SI 2003/2425 (“the Incentive Payments Regulations”).

The Incentive Payments Scheme

3.	The Incentive Payments Regulations contain the scheme.  Amendments were made by SI 2005/826. 

4.	The Explanatory Note to SI 2003/2494 has the following introduction:

“These Regulations provide for the payment of incentive in respect of the years of assessment 2004-05 to 2008-09 to employers, who are not required to file their end of year return electronically by virtue of the provisions of regulation 46 ZC of the Income Tax (Employments) Regulations 1993, … but do so voluntarily.  

Regulation 3 of the Incentive Payments Regulations states that they applied to persons, being “small employers”, “who deliver, or cause to be delivered, the return and supporting information required under regulation 73 of the PAYE Regulations by an improved method of electronic communications”.  

Regulation 4 provides the rules for determining whether an incentive payment will be made in respect of a particular employer for a year of assessment.  An incentive payment is to be made to an employer who delivers or causes to be delivered a return under the PAYE regulations by an approved method of electronic communications.

SI 2005/826 came into force on 8 April 2005.  This introduces a new regulation 4(2A) and (2B) into SI 2003/2494.  So far as is relevant, these read:

“(2A)	An incentive payment shall not be made where a small employer –

(a)	has been established, 
(b)	employs employees, or
(c)	makes payments of PAYE income (within the meaning of section 683 of ITEPA 2003),

wholly or mainly for an impermissible purpose.

(2B)	For the purpose of paragraph (2A) –

(a)	a small employer is “established” where –
…
(iv)	a company is incorporated under section 1 of the Companies Act 1985 …
…
and is intended the time of incorporation, formation or creation that it should be a small employer.
(b)	a small employer is established for an impermissible purpose if it is established for the purpose of  - 
…
(ii)	obtaining an incentive under these Regulations; or
….”

In this decision the particular regulations of the Incentive Payments Regulations are identified by the letters “IP” (e.g. reg. 4 IP); the particular regulations of the PAYE Regulations are identified by the letters PAYE.  The other relevant provisions are set out in the Appendix to this decision.

Representation

5.	All 500 Appellant companies were represented by Mr Christopher Ranson, their company secretary; he gave evidence.  

Chronological summary of facts

6.	Mr Ranson qualified as a veterinary surgeon in 1986.  He has worked in the UK and abroad.  

7.	On 1 January 2004 Mr Ranson was admitted as a member of the Institute of Chartered Accountants for England and Wales. 

8.	Mr Ranson incorporated the 500 Appellant companies between 13 September 2004 and 4 January 2005.  They were named ZXCV1-100 Ltd and NHKL1-400 Ltd.  

9.	Bank accounts for 22 of the Appellant companies were opened with HSBC and for four with NatWest.  Mr Ranson attempted to open bank accounts for the remaining Appellant companies.  His application to the “Abbey National” was refused in October 2004 apparently because of concerns regarding the money laundering regulations. 

10.	Mrs Monica Alfred-Ranson, Mr Ranson’s wife, has been the sole shareholder in each of the 500 companies.  She has held 1 share of £1 in each company.  Mr Ranson was secretary of all the 500 companies.  The accounts for ZXCV 100 Ltd, signed by Mrs Alfred-Ranson on 1 June 2006, show her as the sole director of that company.  The Abbreviated Financial Statement for the period 24 September 2004 to 30 September 2005 provides no description of the business of that company. I proceed on the basis that the ZXCV 100 Ltd company information is typical of all the 500.  

11.	Mrs Alfred-Ranson’s 500 directorships caught the eye of HMRC’s Sussex Area Compliance.  They wrote to her on 16 February 2005 noting that she was a director of a large number of companies and that HMRC would like to arrange a meeting with her to talk about those companies.  Mrs Alfred-Ranson replied on 22 February stating that she was under no obligation to submit a “CGSA” return until 14 June 2006.  She says:

“I have no desire to lose any commercial advantage by meeting with you to discuss the incorporation of a few companies.”

HMRC wrote back to her on 25 February asking what she meant by “a commercial advantage” and generally expressing disappointment that she did not think a meeting would be useful.  No response was made to that letter.

12.	When he came to give evidence Mr Ranson said that he had provided the wording of all the letters written by Mrs Alfred-Ranson to HMRC.  

13.	A single sheet of paper for each of the 500 companies was produced in evidence.  At the top left, in handwriting, is the name of the company (e.g. NHKL 6 Ltd).  The printed format is headed “Petty Cash”.  Below that there are three columns.  The left hand column is headed “Cash In” with sub-columns for “Date” and “Amount”.  The centre column is headed “Details”.  The right hand column is headed “Cash Out” with sub-columns for “Date” and “Amount”.  Each column contains handwritten entries.  (The handwriting is in some cases Mr Ranson’s and in others the writing of Mrs Alfred-Ranson).

14.	The “Cash In” column shows two entries.  For 1 March 2005 an amount of £1 is entered as “Cash In”; the “Details” say “Cash received”.  The “Cash Out” column contains an “Amount” of 78p for 6 March 2005: the Details say it is “Director’s remuneration”.  The next “Cash Out” entry is for 6 April 2005: the Amount is 22p.  The details of this are “IR-PAYE”.  Against “Director’s Remuneration” in the “Cash Out” column are the entries 6 March 2005 in the “Date” sub-column and 78p in the “Amount” column.  Against “IR-PAYE” in the Date sub-column is the date 6 April 2005 and 22p in the “Amount” sub-column.

15.	Exactly the same “Details” appear for the 2006 entries.  The date and amount of the “Cash In” are 1 March 2006 and £1 respectively.  The date and the amount of the “Cash Out” are 6 March 2006 (78p) and 24 April 2006 (22p) respectively.

16.	On 6 March 2005 a “P35” for each of the 500 companies was submitted on-line.  

17.	HMRC (Sussex Area Compliance) wrote to Mrs Alfred-Ranson on 19 August 2005 stating that a review of a selection of the 500 companies had shown that P35s for 2004-05 had been submitted on-line and in each case PAYE of 22p had been paid for that year.  The letter asked for details relating to 20 of the 500, i.e. when was the first payment of emoluments made to the employee, when did the company commence trading and what was its trade?  The letter asked for evidence to confirm the payment of emoluments, for a copy of the P11 deduction cards for the employee and for a copy of the employee’s contract of employment.  Mrs Alfred-Ranson wrote back on 30 August drawing Sussex Area Compliance’s attention to the fact that, as a body corporate was a separate legal entity, she would expect them to write each company separately requesting the information.

18.	Mrs Alfred-Ranson wrote to Sussex Area Compliance on 4 October 2005. Her letter says:

“The accounts show the following double entry:

							Dr.		Cr.
	Dr Director’s remuneration			1.00
	Cr PAYE control						0.22
	Cr Director’s current a/c					0.78

	Dr PAYE control				0.22
	Cr Petty cash							0.22
Your PAYE records should be able to confirm this payment in April 2005

Mrs Alfred-Ranson sent a copy of a P11 deduction card showing 22p deducted for the period.”

(The letter did not include any such “accounts”; none was produced as evidence.)

19.	Sussex Area Compliance were not persuaded that the emoluments had been paid to Mrs Alfred-Ranson and that, if paid, they had been paid on 6 March 2005.  Mrs Alfred-Ranson was asked for better evidence in a letter of 1 December 2005.

20.	Next in the chronological sequence of events comes the Australian Veterinary Journal of December 2005. This contains the following advertisement (it is 1½ inches wide and 3 inches long.):

“Psst FANCY
     $600?
Coming to England?

Start locuming before April 2006 using your own UK
limited company and Her Majesty’s Inland Revenue
will give you $600!  Fair dinkum!!

Locum vet turned accountant can set you up.

Contact Chris at cgrancon@hotmail.com”

21.	Mrs Alfred-Ranson wrote to Sussex Area Compliance on 23 April 2006 sending them a photocopy of the original “Petty Cash Ledger” (for ZXCV1 Ltd) in the same format as is explained in paragraphs 13 and 14 above.  Her letter says – “This clearly shows that a director’s remuneration of 78p was paid on 6 March 2005”.  After some further exchanges HMRC wrote on 19 December 2006 asking Mrs Alfred-Ranson, as regards one sample company in the ZXCV collection and one in the NHKL collection, for bank statements for the period to 31 March 2005 and, if bank accounts were not used, for an identification of the sources of funds used to pay the remuneration and the PAYE.  The letter asked for minutes of meetings at which directors of remuneration had been voted and a description of Mrs Alfred-Ranson’s duties.

22.	Mrs Alfred-Ranson’s response to the request for information in Sussex Area Compliance’s letter of 19 December 2006 referred to above, was contained in a letter of 10 January 2007.  This reads as follows:

“Maybe I am missing the point, but allow me to present the salient features of the case.  I formed a number of companies with the intention of selling them as “Ready to Go” companies complete with bank accounts and PAYE schemes to foreign locum workers within various professions visiting the UK.  Due to Government anti-Money Laundering legislation the process of opening bank accounts for these companies proved to be extremely difficult.  All banks simply refuse to open bank accounts for legitimate UK incorporated companies without providing me with any good reason.  However the rest of the company details I could set up including registering the companies for PAYE schemes. Any future director of the company would need this in place prior to offering services via a corporate route.  Please note that most of the intended locums would be literally that, providing locum services to a large number of clients, it would have no IR35 implications.  Due to IR35 legislation, medical and veterinary practices will only engage locums via personal companies if they were bona fide companies with an existing PAYE scheme in place.  Hence they were set up.  To demonstrate their validity, a small nominal payment was made to myself as the director of these companies on the 6 March 2005.

Since most of these individuals would be filing on-line it seemed only sensible to have this set up as well.  Due to the plethora of requests from HMRC asking companies to consider submitting their end of year declarations on-line I complied with that request, for which I am entitled to the incentive payment promised.”

23.	In relation to the year 2005-06 Sussex Area Compliance wrote another letter on 19 December 2006 reciting that its records showed that Mrs Alfred-Ranson had sent a 2005/06 Employer’s Annual Return on-line for the companies listed in the schedule to the letter (which appear to be most if not all of the 500 Appellant companies).  The letter points out that the companies had, in the opinion of the writer, been established for an impermissible purpose.  

24.	Sussex Area Compliance wrote to Mrs Alfred-Ranson on 21 February 2007, again asking for the information sought in their first letter of 19 December.  On 21 February 2007 Mrs Alfred-Ranson wrote explaining the aim behind the formation of the 500 Appellant companies as being to set up ready-to-go shelf companies with bank accounts and PAYE registrations for sale to Australian locums coming to work in the UK.  It explained how she and her husband, Mr Ranson, had financed the PAYE tax payments to HMRC on 6 March 2005 out of their own resources because none of the 500 Appellant companies had bank accounts.  

25.	A letter from Sussex Area Compliance of 5 March 2007 asked for certain information and Mrs Alfred-Ranson’s replies are as follows:

1.	Request:  Provide company records relating to all trading activities and transactions, to include original cash books.   Answer:  “Since the companies are not trading, no records relating to trading activities exist”.

2.	Request:  For sample memoranda and Articles of association for two companies.  Answer:  “This is a company law matter which bears no relevance to the claim”.

3.	Request: Minutes of company meetings in which director’s remuneration was voted.  Answer:  A company law matter which bears no relevance to the claim.

4.	Request:  Details of your fee structure for same periods.  Answer:  We intended to charge a one-off fee for the purchase of the company and an annual fee for company secretary duties and accounting.

5.	Request:  Details of other adverts placed in addition to the one in the Australian Veterinary Journal of December 2005.  Answer:  We approached two UK veterinary locum agencies to act as introducers for potential clients on a commercial basis.  

6.	…

7.	Request:  Noting that Mr C Ranson had received a query from a Mr McKenna in December 2005 (in answer to the Advertisement), had Mr Ranson received any other such enquiries?  Answer: We do not feel this point is particularly relevant.

26.	From then on, the correspondence shows, Mr Ranson had revealed his presence to HMRC.  He told us that a meeting was held between him and an officer of Sussex Area Compliance on 29 January 2007.  

27.	Finally on 1 July 2007 the Solicitors Office of HMRC wrote stating HMRC’s reasons for refusing to make the incentive payments. It was accepted that the SI 2005/826 insertions (the new regulation 4(2A) and (2B)) do not apply to pre-19 March 2005 “PAYE employment income”. Nonetheless, in the absence of any evidence of any payment to Mrs Alfred-Ranson by the companies and of any authorisations of payment to a director, the incentive payments could not be made.

Mr Ranson’s project

28.	So far I have given a chronological summary of the circumstances of the 500 companies.  I turn now to look more generally at Mr Ranson’s project.  The letter of 10 January 2006 to Sussex Area Compliance (see paragraph 22 above) reads as if the project was Mrs Alfred-Ranson’s.  The letter, signed by Mrs Alfred-Ranson, was misleading in view of Mr Ranson’s subsequent acceptance that the project was his. 

29.	Mr Ranson’s plan, he said, was to build up an accounting practice.  500 companies were to be formed as “ready-to-go” shelf companies, each with an existing employer’s PAYE scheme in place and a bank account.  The object was to sell each company to Commonwealth veterinary surgeons and, possibly, to medical personnel; the buyer would use the company as a service company.  Mr Ranson’s further object was to offer an accounting package; the take-up for this was, he said, expected to be one for every four companies sold.  

30.	The cost of forming each company was £31.75.  The company, whose value included the right to the £250 incentive payment, would (Mr Ranson said) be sold for £150.  That meant a profit, per company, of £100 for Mr Ranson.  The locum would buy the company for £150 with £250 in its bank account.  Effectively, as Mr Ranson put it, “HMRC would be paying Commonwealth locums £100 to run their own service company”.  

31.	The project was not documented.  It was first revealed to HMRC on 10 January 2007 in response to their enquiries in their 19 December 2006 letter.  The assessment of the demands of Commonwealth veterinary surgeons had, said Mr Ranson, been based on his own knowledge.  

Mr Kissel invests in the project

32.	Mr Ranson produced a “Witness Statement” from a Mr Neal Kissel of “Trinsun”, a New York business.  That was dated 28 June 2008.  Mr Kissel did not attend to give evidence.  For what it is worth, the statement refers to a meeting with Mr Ranson in August 2004 at which Mr Ranson had said he proposed to set up “ready-to-go” companies with PAYE schemes registered and each credited with an incentive payment from the UK government of £250. The statement goes on to record Mr Kissel being impressed at how cheaply the shelf companies were being formed and he proposed to back the idea and wanted the incorporation of a further 900 companies. The profit on sale of the company after initial investment had been repaid would be split 50:50 between Mr Kissel of the one part and Mr Ranson and Mrs Alfred-Ranson of the other. Apparently Mr Ranson advised that 1,000 companies were too many to handle and they settled on 500.  

33.	Mr Kissel paid £12,700 to Mr Ranson and Mrs Alfred-Ranson’s bank account on 23 September 2004.  That represented 400 times £31.75.  Mr Kissel’s participation was first disclosed to HMRC in Mrs Alfred-Ranson’s letter of 19 March 2007.  Mr Ranson explained that if the present appeal succeeded, Mr Kissel would “get his 50%” after expenses.

The next steps in Mr Ranson’s project

34.	The next relevant event relating to Mr Ranson’s project was as noted above, the Abbey National’s refusal in October 2004 to open bank accounts for most of the Appellant companies.  

35.	At some stage (and probably before 23 April 2006 when the Petty Cash Ledger for ZXCV 1 Ltd was supplied to Sussex Area Compliance, see paragraph 21 above) Mrs Alfred-Ranson with Mr Ranson wrote up the Petty Cash Sheets.

36.	On 1 March 2005, according to the 500 Petty Cash sheets, the “Cash In” column for each Appellant company has an entry of £1, detailed as “cash received”.  No explanation is given as to the source of the “cash” or the reason why it was received.  On 6 March 2005 the “Cash Out” column for each Appellant company has the entry of 78p as “directors’ remuneration”.  

37.	The P35s for each of the 500 Appellant companies were electronically filed.  

38.	On 19 March 2005 SI 2005/826 took effect.

39.	On 6 April 2005 the “Cash Out” columns for each Petty Cash sheet for each company has an entry of 22p as “IR-PAYE”.

40.	Mr Ranson accepted that no cash had come in to the Appellant company in question and no cash had gone out.  Accounting principles, he said, required that the Petty Cash entries represented and should be understood as accruals of credit and debit items.

41.	What Mrs Alfred-Ranson thought of her 78p remuneration was not revealed.  She attended the first day of the hearing of the appeal. She did not however give evidence.  According to Mr Ranson – “She would not feel confident”. Moreover, he said, “I’m the one with the accounting knowledge”.  

42.	The 500 x 22ps of PAYE tax (£110) was paid on 6 April 2005 out of the bank account of Mr Ranson and Mrs Alfred-Ranson.  6 March 2005 was the first day of Month 12 on the Employer PAYE payslip booklet.

Mr Ranson’s explanation why 500 incentive payments had to be made

43.	Asked why it was necessary to activate the PAYE system for all 500 Appellant companies in March 2005 and so establish entitlement to incentive payments for all of them, Mr Ranson’s explanation was as follows.  He said that “they” did not want to fall foul of the Advertising Standards Authority; they had to test the system because otherwise they would be “offering companies for sale for £150 with £250 immediately available in the company’s bank account”.  (Mr Ranson gave no details of what Advertising Standards Agency he was referring to and what its rules were.) Further, he said, they had “to get each company worth £250 on the balance sheet in case anti-avoidance legislation came in.”  The “free lunch” presented by the incentive payment system was, Mr Ranson said, “unbelievable”.  

44.	Thirty-three incentive payments were apparently made by HMRC. 26 were made payable to the Appellant companies with bank accounts. Mr Ranson arranged for the rest to be paid to him personally.

Response to Mr Ranson’s advertisement

45.	Mr Ranson then placed the advertisement in the Australian Veterinary Journal for December 2005.  The first response was from a woman (FK) describing herself as an “Aussie vet about to do locum work in the UK”.  Her e-mail says – “I have just seen your ad. … about the $600 from Her Majesty’s Inland Revenue.  I was just wondering how I might go about registering for this.”  In January 2006 NHKL 146 Ltd was sold to FK for £75.  NHKL 146 Ltd was, apparently, one of the companies for which an incentive payment had been made but the money had been used to pay the filing costs for the annual returns relating to the 500 Appellant companies.

46.	Another enquiry about the advertisement was received by Mr Ranson on 2 January 2006.  This did not, I understand, come to anything.  

47.	Of the 500 Appellant companies, one was sold to FK in January 2006.  Three was sold to Mr Ranson’s sister.  (Incentive payments had been made in respect of all four as well as to 29 others, but the money had been spent, as to £7,250, in January 2006 by Mr Ranson and Mrs Alfred-Ranson to defray the costs of filing Companies House returns for all the 500 Appellant companies.)  Twenty companies (ZXCV 2-21) were sold in April 2006 to a Mr JP for £1,600.  That amount was spent by Mr Ranson on the dissolution costs of 474 of the remaining companies.  Mr Ranson accepted that none of the incentive payments made by HMRC had been passed on to the purchasers of any of the companies.

Observations 

48.	It is not in dispute that each Appellant company communicated to HMRC, by an approved method of E-communication, a message purporting to be a return under rule 43 PAYE for all the years of assessment.  

49.	To make good its claim to an incentive payment each Appellant company has to satisfy the Tribunal that it is a person specified in regulation 3(2) IP for the years of assessment.  The company in question therefore has to satisfy the Tribunal that it is a “small employer” within regulation 3(2)(a) IP.  

50.	For the company in question to qualify as a “small employer” (on the specified date) it must satisfy the Tribunal that it is treated as paying PAYE income to 49 or fewer recipients (regulation 1(4) IP): to be treated as paying PAYE income to a particular recipient it must show that it is required by the PAYE Regulations to prepare or maintain a “deductions working sheet” in respect of the recipient: regulation 1(4)(a) IP.  To satisfy the Tribunal that the company in question is required to prepare or maintain a deductions working sheet in respect of the recipient (in this case Mrs Alfred-Ranson), it must show that there are “matters required” by the PAYE regulations to be recorded, being matters in connection with Mrs Alfred-Ranson’s relevant payments and tax: see the definition of deductions working sheet in regulation 2(1) PAYE.

51.	The “relevant payments”, as regards Mrs Alfred-Ranson, are payments within regulation 4(1) PAYE which defines them to be “payments of or on account of net PAYE income” within regulation 3 PAYE.  “PAYE income” is defined for this purpose by section 683(1) of ITEPA as “any PAYE employment income for the year”, i.e. income which consists of “any taxable earnings from an employment in the year (determined in accordance with section 10(2))”.  This leads to section 15 of ITEPA which provides that “taxable earnings” from an employment included general earnings received in a tax year.  General earnings are treated by rule 3 of section 18(1) of ITEPA as received, where the person in question (here Mrs Alfred-Ranson) is a director of the company “and the earnings are from employment with the company”, at whichever is the earliest of:

“(a)	the time when sums on account of the earnings are credited in the 	company’s accounts or records (whether or not there is any restriction 	on the right to withdraw the sum);

(b)	… 

(c)	…”

Only paragraph (a) is relevant in the present circumstances.

The rival contentions

52.	The claim for incentive payments, as regards each Appellant company, is presented as follows:

•	the company in question was a small employer because it was required to prepare and maintain a deductions working sheet in respect of Mrs Alfred-Ranson;
•	the company in question was required to prepare and maintain such a development working sheet because the PAYE regulations required the 78ps and the 22ps for each year to be recorded as relevant payments and tax and 
•	the 78ps were relevant payments for the years of assessment because they were earnings from Mrs Alfred-Ranson’s employment with the company in question which had been credited in that year to her in the accounts or records of that company.

53.	HMRC dispute claims of all the companies on three grounds.

54.	First, they say that there is no evidence to support the claim of the company in question, which had no bank account and was not trading, that it had made any payment, whether actually made or credited to her, to Mrs Alfred-Ranson for any of the years of assessment.  The company in question must, say HMRC, prove its claim.  

55.	Second, they say that, even if such payments had in fact been made, they were not emoluments from employment with the company in question.  For that reason the company in question did not qualify as a small employer because at the relevant date it had not been required to complete or maintain deductions working sheets.  In this connection they say that there is no evidence of anyone actually performing employment duties nor evidence that any such persons were entitled to receive remuneration.  There was no reason to pay PAYE income to Mrs Alfred-Ranson for being or acting as an employee. 

56.	HMRC rely for their third ground of objection on the insertions made to the Incentive Payments Regulations by SI 2005/826. I shall deal separately with this objection.  

Conclusions

57.	The primary issue, as already noted, is whether the Appellant company in question has satisfied the Tribunal that it is required by the PAYE Regulations to prepare or maintain a deductions working sheet in respect of Mrs Alfred-Ranson.  Only then can it be treated as a “small employer” for purposes of the definition in regulation 1(4) IP.  

58.	The only documentary evidence that Mrs Alfred-Ranson was paid or credited with remuneration on 6 March 2005 and on 6 March 2006 is the Petty Cash sheet for the particular company.  For both years of assessment this reads, in respect of £1, “Cash In” detailed as “Cash received”.  For both years this reads, in respect of 78p, “Cash Out” detailed as “Director’s remuneration”.  I have already noted in paragraph 40 above Mr Ranson’s acceptance that no cash had in fact come in or gone out.  The entries, he said, represented accruals of debits and credits.  The “cash out” of 78p director’s remuneration should be read as earnings credited to Mrs Alfred-Ranson: she was, he said at the hearing, treated as a lone creditor by the company in question.

59.	I am not satisfied that any of the Appellant companies paid Mrs Alfred-Ranson the “cash out” amounts.  Nor am I satisfied from the Petty Cash sheets that they record Mrs Alfred-Ranson having been credited with the “cash out” amount as a loan creditor or at all.  Nothing was ever paid out to Mrs Alfred-Ranson because the company in question had no money with which to make any payment.  The expression “cash out”, taken alone, is inconsistent with Mr Ranson’s assertion that Mrs Alfred-Ranson had been made a loan creditor in relation to the so-called director’s remuneration.  (In this connection I mention that the explanations given to HMRC in correspondence, see for example paragraphs 21 and 22 above, said the 78ps had been “paid” to Mrs Alfred-Ranson: the “loan creditor” explanation was not advanced by Mr Ranson until the present hearing.)

60.	Despite Mr Ranson’s status as a chartered accountant (England and Wales) I cannot accept his assertion that the entries in the Petty Cash sheets established that, for each of the 500 companies, the application of the “accruals basis” of accounting has meant that Mrs Alfred-Ranson became a loan creditor in respect of the 78ps.  She, as director, might have been able to explain that that was the position.  She, after all, wrote up most of the entries in the Petty Cash sheets.  But there was no evidence from her.

61.	Nor is there any evidence as to when the Petty Cash sheets were compiled.  Evidence from Mrs Alfred-Ranson, as compiler of most of those sheets, might have been relevant in determining when and in what circumstances the Petty Cash sheets had been compiled.  I cannot therefore make any finding of fact as to the date when the Petty Cash sheets were compiled.  I am not however satisfied that they were compiled by any relevant date, e.g. by 19 March 2005 (see below for the relevance of this date), by 6 April 2005 or by 6 April 2006. It will be recalled in this connection that Mrs Alfred-Ranson wrote on 4 October 2005 informing Sussex Area Compliance how “the accounts” showed a “double entry”.  See paragraph 18 above.  What were these accounts and, if they existed, why were they not produced in evidence?

62.	I conclude that the entries in the Petty Cash sheets signify nothing.  No money came in to the company in question and none went out.  No accruals of debit and credit items were recorded by those entries; no one is recorded as creditor in relation to the £1 entered for each year as cash in and Mrs Alfred-Ranson never got anything in any form from any of the 500 Appellant companies.  The Petty Cash sheets were compiled as an attempt to conjure up a movement of money when none existed.  It follows therefore that there were, as regards each Appellant company, no amounts that the PAYE Regulations required to be entered in their development working sheets.  That conclusion is reinforced by the further feature, which is that I am not satisfied that Mrs Alfred-Ranson had any earnings from any employments with any of the 500 Appellant companies.  She was a director, but that did not make the 78ps, spread over the 500 companies, emoluments of hers (even if they had been paid or credited to her).  Her handwriting appears on most of the Petty Cash sheets and, at some stage which must have been well after 19 March 2005, she put her signature to the statements filed with Companies House.  The reality however is that any tasks she performed were carried out, not for any particular Appellant company, but to advance Mr Ranson’s project.  The 78ps were book entries designed to generate the 500 companies’ claims for incentive payments, not to reward Mrs Alfred-Ranson.  Had she been called to give evidence there would have been an opportunity to test her involvement as director of each of the 500 Appellant companies.  Without that evidence none of those companies has satisfied me that Mrs Alfred-Ranson earned anything by way of emoluments.  

63.	Looking at the scenario overall, none of the companies was “required by the PAYE Regulations” to complete or maintain deductions working sheets: see the words of regulation 1(4)(a) IP.  Instead, it was Mr Ranson’s project that artificially and voluntarily created a state of affairs designed to engage the requirement for each of the 500 Appellant companies to maintain deductions working sheets.

64.	For those reasons I have concluded that none of the 500 Appellant companies has made out its claim for incentive payments for any of the years.  That determines all the appeals by all the companies.  All their claims are therefore dismissed.

65.	For completeness I now turn to HMRC’s third ground for refusing the incentive payments claims.  This is that the “payments” to Mrs Alfred-Ranson were made wholly or mainly for an “impermissible purpose”.  

66.	SI 2005/826 (19 March 2005) is set out, so far as is relevant, in paragraph 4 above.  The new regulation 4(2A) and 4(2B) inserted into SI 2003/2494 states that an incentive payment shall not be made where the small employer in question “has been established … or makes payments of PAYE income … wholly or mainly for an impermissible purpose.”  “Impermissible purpose is defined only in relation to the situation where a small employer has been “established”; there will be an impermissible purpose where it has been “established for the purposes of obtaining an incentive …”.  The makers of SI 2005/826 chose not to define “impermissible purpose” where the small employer makes payments of a PAYE income.  As I construe the provision, the sense of “impermissible purpose” must be drawn from its definition in relation to the establishment of the small employer.  

67.	Miss Diya Sen Gupta for HMRC referred me to the decision of the ECJ in Elmsland-Starke GmbH (C-110/99).  The effect of that case was to deny a relief given by Community rules where the claim was based on an “abuse”.  A test was presented by the Court to determine whether such abuse existed, consisting, first, of “a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved” and, second, of a “subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it”.

68.	It is arguable that the makers of SI 2005/826, by omitting a definition or explanation of “impermissible purpose” in relation to “payments of PAYE income”, were consciously anticipating the abuse principle as applying to abusive claims for incentive payments.  I do not need to go that far.  Taken on its own, the expression “impermissible purpose” connotes some purpose which is alien to the evident purpose behind the Incentive Payments Regulations. They are concerned with existing employers who, as the law stood, were not required to file their year end returns electronically but chose to do so voluntarily.  The Regulations, with and without the insertions made in 2005, are not concerned with situations created to enable the likes of Messrs Ranson and Kissel to help themselves to free lunches.  

69.	Finally with regard to HMRC’s third ground for objection, Mr Ranson contended, in relation to all 500 Appellant companies, that the £1 amounts, said to have been remuneration of Mrs Alfred-Ranson, had been intended to test the validity of the PAYE scheme.  His explanation was that he had had to do this before advertising in the Australian Veterinary Journal (see paragraph 20 above) so as not to “fall foul of the Advertising Standards Authority” (to use his words).  I find Mr Ranson’s explanation unconvincing.  He was not at the time (December 2005) advertising 500 companies.  He did not have to sell companies that had failed to receive incentive payments.  In fact, even when incentive payments were received they were not left with the successful companies; they were used for other purposes such as to pay Companies House filing fees.  Moreover, even if testing the validity of the PAYE schemes had been appropriate or necessary, why test them in 2004-05 and then repeat the tests in 2005-06 and again in 2006-07?  

70.	For those reasons I conclude, so far as is relevant, that Regulation 4(2A) IP applies to disqualify entitlement to incentive payments in relation to amounts credited while SI 2005/826 was in force.

71.	I dismiss the appeals of all 500 Appellant companies.

SIR STEPHEN OLIVER QC
SPECIAL COMMISSIONER

RELEASED: 20 August 2008

SC 3221/2007

APPENDIX

Relevant Legislation  not set out in Paragraph 4 above

(i)	The Income Tax (Incentive Payments for Voluntary Electronic 	Communication of PAYE Returns) Regulations 2003 SI 2003/2425 came into 	force on 20 October 2003.

(ii)	Regulation 4 provides:

(1)	The Board shall make an incentive payment in the amount prescribed 	in paragraph (3) to a person specified in regulation 3(2) for the year of 	assessment in question, if – 

(a)	He delivers, or causes to be delivered, a return under 	regulation 43 of the PAYE Regulations for that year of 	assessment by an approved method of electronic 	communications:
	…

(2)	The amounts prescribed are those shown in Table 1 for the relevant 	year of assessment.

	Table 1 Amounts of incentive payment

Year of assessment	Amount of incentive payment	
2004-05	£250	
2005-06	£250	
…	…	

	(a)	...

(3)	Where an officer of the Board considers that a person, who has 	claimed to be entitled to an incentive under these Regulations –
		(a)	does not satisfy one or more of the requirements of 				these Regulation or the directions made under them, …

the officer shall give notice to that person that the conditions are not met or, where the incentive payment has already been authorised or made, notice withdrawing the incentive payment”.

(iii)	Regulation 1 provides:

	(2)	…

“the specified date” means, in relation to a year of assessment, such date in the immediately preceding year of assessment as is announced annually by means of a direction given by the Board not later than 30th November of that preceding year;
‘PAYE Regulations’ means the Income Tax (Employments Regulations 1993” …

(4)	In these Regulations “a small employer” is a person treated as 	paying 	PAYE income to 49 or fewer recipients at the specified 	date.

A person is treated as paying PAYE income to a recipient at the specified date if at that date – 
(a)	he is required by the PAYE Regulations [or by 	Regulation 6(6) of the Working Tax Credit 	(Payment by Employers) Regulations 2002] to 	prepare or maintain a deductions working sheet 	in respect of the recipient; and
(b)	he has not delivered, sent or transmitted to the 	inspector a statement 	required by regulation 23 	of the PAYE Regulations for the recipient.

(iv)	Regulation 3 provides:

(1)	These Regulations apply to the persons specified in paragraph (2) who 	deliver, or cause to be delivered, the return and supporting 	information required under regulation 43 of the PAYE Regulations by 	an approved method of electronic communications if – 
(a)	the return and that information are delivered in respect 	of a year of assessment specified in paragraph (3); and
(b)	the return satisfied the conditions mentioned in 	regulation 4(1)(b).

(2)	The persons specified in this paragraph are those who – 
(a)	Are small employers on the specified date; or
(b)	Not being small employers on that date, are treated as 	making payments of PAYE income for the first time 	after that date.

(v)	The 2003 Regulations were amended by the Income Tax (Incentive Payments for Voluntary Electronic Communication of PAYE Returns) (Amendment) Regulations 2005 SI 2005/826 with effect from 18 March 2005.  The Explanatory Note provides:

“2.1	This instrument amends the regulations that provide financial 	incentives for electronic filing of returns by small employers to insert a 	provision to counter artificial arrangements designed to exploit the 	incentive provisions …

3.1	The amendments made … will come into force in fewer than 21 days.  	The 21 day rule is being breached because these amendments counter	 exploitation of the incentives provisions by artificial arrangements.  	The amendments will draw attention to this loophole and to have left it 	open for a further 21 days would have given other people scope to 	exploit it.

4.1	Small employers may currently make their end of year tax returns on 	paper or on-line.  Regulations were made in September 2003 which 	offer financial incentives, over five years, to small employers to file 	their returns on-line.

4.2	These amendments insert provisions to counter artificial arrangements 	designed to unfairly exploit the incentives …”

(vi)	The relevant amendment was the insertion of paragraphs 2A and 2B in Regulation 4: see paragraph 4 of the Decision.