Shadow Directors: The Danger of Keeping Them in the Shadows
An interesting case which concerned the notification of shadow directors to Companies House is a salutary reminder of the need to understand when notifications should be made – and the risks of failing to do so. A business won its appeal against HMRC on the facts, but the outcome could easily have been different.
The Companies Act 1985 (section 288) requires all companies to keep a register of its directors and secretaries at their registered offices. This provision expressly includes shadow directors – meaning anyone “in accordance with whose directions or instructions the directors of the company are accustomed to act”. However, there is no analogous provision under the Companies Act 2006.
What’s the background?
Bagri Services, a construction firm with a sole director, had been registered at HM Revenue & Customs for gross payment under the Construction Industry Scheme under s66(3) Finance Act 2004.
HMRC decided to cancel, with immediate effect, Bagri’s registration on grounds that it had been obtained on the basis of “false” information. That information was Bagri’s failure to disclose in its returns to Companies House that the director’s husband was a shadow director, who had previously been involved as a director of another company whose gross payment status had been cancelled by HMRC.
The First-Tier Tribunal allowed the appeal against HMRC’s decision on the basis that:
In relation to this appeal, the provisions under the 1985 Act were irrelevant and it was the Companies Act 2006 that applied.
There was no obligation to notify shadow directors to CH under the 2006 Act. Therefore, the failure to notify was incapable of giving rise to ‘false information’ allowing HMRC to cancel the registration.
The FTT found that at all material times (until he was formally appointed a director), the husband was a shadow director – but this was not legally required to be notified to CH. Furthermore, it was also made clear that gross payment status could only be withdrawn if the relevant information was in fact false.
Of course, had HMRC specifically asked the sole director - before registering the company for gross payment status - whether anyone else was involved in the management or control of the business, including shadow directors, the cancellation would have been justified.
Key takeaway
The ruling is an important reminder that companies must ensure they make proper notifications to CH as required under the legislation, or risk losing gross payment or similar status at HMRC (not to mention the possibility of having committed an offence).
Failure to notify, or to respond to specific requests for information by HMRC, could also give rise to providing false information under the Finance Act. If in any doubt, always take specialist advice from experienced corporate and tax lawyers.
1Bagri Services v HMRC [2021] UKFT 0482 (TC)
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