CISR85150 | CIS fraud measures: S72B Officers’ Liability: Scope

HMRC may issue a notice to a company officer, making them liable to part or all of a FA04/S72A penalty charged on the company: FA04/S72B.

The main condition is that the ‘actions of the company’ which gave rise to the penalty were attributable to the officer.

The officer, or officers, are not liable to pay the amount if the company’s actions relate to conduct for which the person or people have already been convicted of an offence.

Here company means a body corporate or an unincorporated association.

Knew or should have known

HMRC will only make a company officer liable to pay a company penalty if we can show that they personally ‘knew or should have known’ that the relevant transactions were connected to deliberate non-compliance.

You should apply the ‘knew or should have known’ test to the individual according to the same principles and practices that you use in applying it to the company as a whole, but focusing only on the information and understanding held by the individual in question.

The test for ‘knew’ is: can we prove on the balance of probabilities that the company officer did know of the connection with the deliberate non-compliance?

The test for ‘should have known’ is: would a reasonable businessperson have concluded that the company officer ought to have known that the only reasonable explanation for the transactions was that they were connected with deliberate non-compliance?

When are actions of the company attributable to an officer?

Where we can show that an officer ‘knew or should have known’ that the payments they made or the credit they claimed were connected with deliberate non-deduction or non-payment of CIS deductions or PAYE, then we can say that the actions of the company which led to the s72A penalty were attributable to that director’s agreement (at least) in the transactions. Directors have a responsibility to intervene in such a situation, even if they did not set it up themselves.

In some circumstances it may be reasonable for a director not to know about the connection with deliberate non-compliance. This is most likely where a director has no involvement with agreeing contracts, reasonably trusts another company officer to do this work well, and sees nothing in the company’s work or financial results to arouse suspicion. In such a case, we would probably not look to make the director liable for the penalty.

A company officer who is not a director (or a shadow director) may also meet the ‘knew or should have known’ test. But the company’s relevant actions are unlikely to be attributable to them unless they took an executive role in either arranging or authorising the transactions, or authorising returns. A ‘manager’ who merely acts under instructions would be a company officer, but would not usually be a suitable subject for a FA04/S72B notice.

Where a non-employed agent is hired to manage contracts, and arranges the connection to deliberate non-compliance, they will rarely be a company officer themselves . But any director who ‘knew or should have known’ that the agent was arranging transactions connected with deliberate non-compliance may be made liable to pay the penalty under s72B.

Who is an officer?

Officer means:

• For a body corporate other than one whose affairs are managed by its members: Directors, managers, secretaries, or similar roles, shadow directors (Companies Act 2006 definition, section 251)

• For LLPs or other corporate bodies whose affairs are managed by its members: Members exercising management functions,

• For LLPs: Shadow members which are persons in accordance with whose directions or instructions the members of an LLP are accustomed to act. A person is not a shadow member by reason only of the fact that the members act on advice given by that person in a professional capacity.

• For unincorporated associations: Persons exercising functions of management with respect to it, or purporting to do so.