Tribunal upholds HMRC notice transferring debt from managed service company to its former director

07 September 2022. Published by Alexis Armitage, Senior Associate

In Nigel Victor Gradidge v HMRC [2022] UKFTT 189 (TC), the First-tier Tribunal (FTT) dismissed an appeal against a debt transfer notice (DTN) issued by HMRC under section 688A(2), Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the Social Security Contributions (Managed Service Companies) Regulations 2007, transferring a debt from a managed service company (MSC) to a former director of the company.


N19 Training Services Ltd (the Company) was incorporated in August 2011 and was set up in order to provide the services of Nigel Victor Gradidge to third party agencies. Mr Gradidge was the sole director and shareholder of the Company and the Company had no employees. The Company was set up by Think Accounting Ltd (TAL) who also carried out statutory and financial compliance management for the Company. 

In March 2015, Mr Gradidge terminated the services of TAL’s successor, New Wave and appointed Davison & Co as the new accountants to the Company. Following enquiries into TAL, HMRC opened an enquiry into the Company in August 2015. 

Following a meeting with Mr Gradidge in December 2015, HMRC concluded that the Company was a MSC and that TAL was a Managed Company Service Provider in connection with the Company. In March 2016, HMRC issued Regulation 80 determinations and section 8 decision notices to the Company in respect of PAYE income tax and Class 1 National Insurance Contributions, for the 2011/2012 to 2013/14 tax years. 

On 24 March 2016, an application was made to strike the Company off the register at Companies House. In April 2016, Mr Gradidge resigned as a director of the Company and Davison & Co resigned as company secretary at the same time. In January 2019, the Company was eventually dissolved by voluntary strike off.

HMRC's determinations and decisions were not appealed by the Company but remained unpaid. In November 2016, HMRC issued a DTN to transfer the Company's debt to Mr Gradidge.  Mr Gradidge subsequently appealed against the DTN and following an internal review in which HMRC upheld its decision, his appeal came before the FTT for determination.

FTT decision

The appeal was dismissed. 

The FTT held that, although the list of persons on whom service of a DTN could be made is worded in the present tense, section 688A, ITEPA, permits a DTN to be served on directors who have resigned by the time that a DTN is issued. This conclusion followed from the High Court's decision in RCI Europe v Woods [2003] EWHC 2139. Therefore, although Mr Gradidge had resigned by the time the DTN was issued, he had been a director at the time that the liability was incurred by the Company and the DTN was therefore properly issued by HMRC.

The FTT noted that even if Mr Gradidge was required to be a director of the Company at the time the DTN was served, he would have been considered a director by virtue of being the sole member of the Company as, for present purposes, a member that controls a company is deemed a director (section 67, ITEPA).

The FTT also commented that although there was no claim by HMRC that Mr Gradidge had knowingly been involved in the arrangements, or sought a tax benefit "the purpose of this legislation is clearly to ensure that those who benefit from this type of arrangement, even without specific intention to do so, should be liable in order to ensure a ‘level playing field’".


Under the debt transfer rules, HMRC may recover from certain persons (including directors, office-holders and associates of a MSC) amounts which should have been deducted under PAYE by the MSC, if they are irrecoverable from the MSC, by serving a DTN on the relevant person. Importantly, it would appear from this decision that it will not be sufficient for such persons to assert that they were not knowingly involved in the arrangements or sought a tax benefit. It will be interesting to see if Mr Gradidge seeks to appeal the FTT's decision to the Upper Tribunal. 

The decision can be viewed here.

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