HMRC got fundamental details incorrect in a bankruptcy ruling and nearly ruined the life of an innocent payroll clerk. The overriding lesson is to get the facts right and keep copies of correspondence to provide a defence.
The case of Debra Elizabeth Adjei vs HM Revenue and Customs and the Insolvency service was a ruling in two parts:
Was HMRC correct in issuing a bankruptcy petition to Debra Elizabeth Adjei in the first instance (ruling 22 March 2023)?
Who is liable for any costs (ruling 21 April 2023, handed down at the end of June 2023)?
Part 1 is extraordinarily painful reading for anyone that worries about attention to detail, research and professionalism. Having endured part 1, part 2 is much easier to swallow, though the whole story is one with some basic takeaways for us all.
Was HMRC correct in issuing a bankruptcy petition?
HMRC presented Ms Adjei with a bankruptcy petition in February 2020 in the sum of over £100,000 partly as a result of their records showing she was an employer and a partner of the firm. Late filing penalties were also issued on the basis she had a liability to complete a self assessment tax return (which she did not).
Adjei presented evidence to HMRC that she was neither an employer nor a partner but was an employee employed under a contract of employment. Her role involved making payments of PAYE to HMRC and, possibly, these had not been paid as a result of her being on secondment away from her workplace.
HMRC, however, maintained she was an employer and a partner and, as such, was liable for the PAYE underpayments. Although, this was according to the Revenue’s own records, which could not be supported by evidence or justified.
Wisely, Adjei collated information to corroborate the facts including a copy of the partnership deed, her contract of employment and her P60s.
An appeal against the fines and penalties was filed in July 2021, acknowledged by HMRC in October who advised that the appeal could only be heard in the first tier tax tribunal. This was incorrect advice.
Towards the end of 2021 and throughout much of 2022, HMRC and Adjei were in correspondence, with significant events taking place:
Trustees in bankruptcy were appointed
The appeal was ‘returned’ by the FTT, even though HMRC had advised this was where it should be heard
A staff change at HMRC resulted in them claiming to be unaware of such an appeal
HMRC’s debt management department failed to provide copies of the original demands/decision letters relating to the £100,000+ fine that was now at the bankruptcy stage (for Adjei who was an employee and NOT an employer or partner)
HMRC’s solicitors advised it was Adjei’s responsibility to obtain the demands/decision letters from HMRC and not theirs. This was described in the ruling as “unhelpful”
Application after application was submitted to HMRC but only the late filing penalties were addressed, which did not form the largest part of the perceived debt
A final admission by HMRC that Adjei was not an employer or partner, but then there was the imposition of liability to the High Income Child Benefit Charge (HICBC) for tax years 2014-2017 (even though the employee did not earn enough to have the HICBC imposed)
There are many further references to events, communication and non-communication, far exceeding the purpose of this article.
What is pertinent is the judge’s use of words to describe HMRC’s handling of events such as “muddled”, “disingenuous” and “statements that were simply untrue” and “unreliable”.
Readers may not be surprised that HMRC relied on information that was scanned into their systems, disregarding the fact that some information had not been scanned. HMRC accepted this was “flawed” and the judge agreed their system was “undoubtedly flawed”.
In short, the judge dismissed the bankruptcy petition case, as it was not due!
Who is liable for any costs
This part is far less excruciatingly-painful and is embarrassing reading for HMRC. Adjei was not held to be totally blameless, partly because she did not take professional advice soon enough and partly because she did not provide evidence at an earlier stage.
She had to meet her own costs, but HMRC not only had to meet their costs but also the costs of the Official Receiver and the costs incurred as a result of the bankruptcy petition (which was never due).
The moral of the story
Even though the judge ruled HMRC had been at fault and reliant on flawed systems, it is, perhaps, strange they said the starting point for accuracy should have been with the Revenue and not Adjei. We know such a comment is not going to change reality and HMRC will always believe it is right.
So, on the assumption they are acting compliantly in the first place, the only thing employers and individuals can do is to put themselves in a defensive position, ie, defending themselves against possible HMRC action in the future.
That is not the position we should have to find ourselves in, nor is it one we want to be in. However, it‘s all about retaining documents together with timely and accurate communication. As Adjei found to her cost, it's also about recognising when professional advice is needed.
This is an uncomfortable read that will not change HMRC – but employers can learn from it.
Author: Ian Holloway