Incentive Payments for Online Filing – HMRC refuses to pay incentives for 500 companies

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In 2004, Christopher Ranson and his wife set up 500 companies, giving them names ZXCV1 Ltd to ZXCV100 Ltd, and NHKL1 Ltd to NHKL400 Ltd.  The accounts for each company at the end of the 2004/05 and 2005/06 tax years show receipts of £1, a payment of  78p for director’s remuneration to Mrs. Ranson and a payment of 22p in income tax.  The year-end returns for each company were filed online.  Mr. Ranson’s intention was to claim the financial incentives offered by HMRC to small employers for filing their returns online before it becomes mandatory to do so, namely £250 for each company for each of the 2004/05 and 2005/06 tax years.

In 2005, the Income Tax (Incentive Payments for Voluntary Electronic Communication of PAYE Returns) Regulations 2003 were amended in order to restrict the potential for abuse of the incentive provisions.  The Regulations state that an incentive payment will not be made where a small employer pays PAYE income “wholly or mainly for an impermissible purpose”, i.e. where a small employer is established for the purpose of obtaining an incentive.

During 2005, HMRC enquired into the nature of the 500 companies and Mr. Ranson eventually explained that he had set them up as ready-made service companies to sell to individuals abroad, complete with a bank account that already had a credit balance of £250.

HMRC declined to make the incentive payments, although 33 payments were made initially.  HMRC’s grounds for refusal were that

• there was no evidence that the directors’ remuneration shown in the accounts had actually been paid,
• even if it had been paid, it was not employment earnings that would require each of the companies to maintain a deductions working sheet, and
• the companies had been set up for an impermissible purpose.

Each of the 500 companies appealed against HMRC’s decision and the decision of the Special Commissioner was given on 20 August 2008.  The 500 companies were represented by Mr. Ranson, their company secretary.  The Special Commissioner accepted all of HMRC’s reasons for refusing to pay the incentives and dismissed all of the appeals.

Further information:
ZXCV Ltd, NHKL Ltd and others v. The Commissioners for HMRC

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