Mea culpa?

06 December 2012

In an interesting development that should be welcomed by company directors in particular, the First-tier Tribunal held in O'Rorke v HMRC [2011] UKFTT 839 that a subjective test of neglect applies...

…when determining whether a company's failure to pay National Insurance Contributions ('NICs') can be attributed to neglect on the part of an officer (and thus render him or her personally liable to pay the unpaid NICs).

The Tribunal was considering the correct interpretation of sections 121C and 121D of the Social Security Administration Act 1992 ('the Act'), and in particular the following passages which specify when an officer of a company can be held personally liable for a failure to pay NICs:

  • Section 121C(1)(b): the failure appears to the Inland Revenue to be attributable to fraud or neglect on the part of one or more individuals who, at the time of the fraud or neglect, were officers on the body corporate ('culpable officer').
  • Section 121C(2): The Inland Revenue may issue and serve on any culpable officer a notice ("a personal liability notice")…

Mr O'Rorke argued that a subjective test should apply to determine whether there had been any "neglect", and therefore his state of mind and/or mental capacity could be taken into account. HMRC contended that the test is similar to that found in the tort of negligence i.e. 'what would a reasonable person have done in this situation?'. His mental capacity would therefore be irrelevant.

There were several factors which led the Tribunal to favour the subjective test.

Firstly, sections 121C and 121D of the Act form part of a code which is almost exclusively concerned with criminal proceedings and penalties against defaulters. In criminal proceedings there is a presumption that mens rea (a guilty mind) is an essential ingredient of a criminal offence unless Parliament expressly states otherwise.

Secondly, the purpose of the provisions are penal. Although the liability for NICs is based on the amounts unpaid, the purpose of transferring that liability to the officer of the company is punitive.

Thirdly, it is significant that the word neglect is used alongside the term 'culpable'. The Oxford English Dictionary defines culpable as 'guilty, criminal, deserving of punishment or condemnation'. The draftsman of the Act could have referred to 'the accountable officers' or the 'officers responsible', but instead refers to the 'culpable officers'.

Fourthly, the relevant provisions of the Act are classified as criminal under European human rights law. Using the so called Engel criteria established by human rights case law, despite the fact the proceedings are classified as civil (hence it was the Tribunal deciding this case, not the Magistrates' or Crown Court) the provisions were clearly punitive in nature and the potential penalties are severe (indeed HMRC confirmed that these provisions are only relied upon by HMRC when the amounts involved are significant).

At first glance, the Tribunal's decision might appear to be a departure from the approach previously adopted in other cases (for example, Inzani v R & C Commissioners 1996 SPD 529, Roberts & Martin v R & C Commissioners [2011] UKFTT 268, Livingstone v R & C Commissioners [2010] UKFTT 56) However, as is made clear in this decision, in those cases the objective meaning of 'neglect' was accepted by both parties and the matter was therefore not raised.

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