EM8701 - Close Companies: Settlement: Employment Income Route: Introduction

Approval is required from contact link before the employment income route is chosen as a basis for settlement except where

• you have in place “alternative” CT/S419 and employment income assessments made in accordance with the final paragraph of EM8605 that the tribunal can determine, or
• there is clear evidence that extractions were in the nature of remuneration.

Often approval can be given over the telephone with sight of the papers only requested where necessary.

Whenever settlement by the employment income route appears probable, and before any necessary approval is sought, you should make advance informal contact with Specialist Investigations, Insolvency & Securities (SI, I&S) to ascertain whether sufficient relevant facts have been established to enable a direction under Regulation 72 to be given. Often a formal direction will be required for an insolvent company or company in liquidation EM8730. As recovery will be from the director(s) the extent to which funds are available to them needs to be considered.

At the same time you should also consider NICs liability

• after 05/04/99 for personal liability notices on culpable officers (NIM12201) and
• after 05/04/2004 under Reg 86 of the Social Security (Contributions) Regulations 2001, if there are unpaid primary Class 1 NICs due to negligence on the part of the employee (NIM12125).

If a satisfactory offer is not made so that formal action becomes necessary and, where appropriate, the decision to go down the employment income route has been approved, employment income assessments (and/or amendments to self assessments) for all relevant years must be finalised. The taxpayer may notify any appeals that cannot be resolved through discussion or the review process to the tribunal for them to adjudicate. If HMRC’s contentions are successful, or partially successful, then, in accordance with the Income Tax (Pay as you Earn) Regulations 2003, a direction under Regulation 72 (or, if Regulation 80 determinations have been made, under Regulation 81) is required to transfer the liability from the company to the individual director before the tax can be recovered EM8710.

A direction transferring liability to a director can only be made by an officer who is authorised. You will have to ask SI, I&S to make the necessary direction.

Once the direction under Regulation 72 has been made, the liability can be included on the SA Taxpayer Statement and interest will accrue. In the absence of any acceptable offer from the director in settlement a TMA70/S95 penalty determination could be made EM5250+. If the penalty relates to an inaccuracy in a return or other document for a period beginning on or after 1 April 2008 with a filing date on or after 1 April 2009, a penalty assessment under FA07/SCH24 can be made, see CH83000+.

Where the expenses in the accounts include the payment of directors' private expenses, which have been "hidden", deliberately or otherwise, under some broader description and they have not been declared as benefits on P11Ds, or in the Directors' returns, they would generally be disallowed in the Corporation Tax computation and debited instead in the director’s loan account. However, there may be cases where it is acceptable to allow these as Corporation Tax deductions and deal with them instead as benefits assessable as employment income on the director as part of his or her remuneration package. Class 1A NIC (together with related interest and penalties) will be due from the company. EM8505.