Fulmar Contracting Ltd, Re: High Court rejects liquidators' claims against doctors paid via fraudulent umbrella company

The High Court has dismissed claims brought by the liquidators of a collapsed umbrella company against two consultant doctors who received gross payments for NHS locum work, in a judgement that clarifies how insolvency claims against workers interact with HMRC's acceptance of a worker's own tax return.

Fulmar Contracting Ltd operated as an umbrella company, engaged by the recruitment agency Fresh Medical to employ workers, including Dr Maria Nina Williams and Dr Tatyana Viner, supplied to NHS hospitals. The company failed to deduct PAYE and national insurance contributions from payments made to its workforce and failed to account to HMRC for VAT it had received, and was wound up in September 2023 following a petition from HMRC. Its liquidators brought two separate claims against each doctor: a contractual claim, based on a clause in what were said to be their employment contracts requiring repayment of any "overpayment" caused by the company's failure to deduct tax, and a claim under section 238 of the Insolvency Act 1986 alleging that the gross payments constituted transactions at an undervalue, since the company had thereby assumed a tax liability for no consideration.

The contractual claim failed at the first hurdle. The judge found, after hearing evidence from both doctors, that neither had in fact entered into the employment contracts relied upon, which were typed rather than signed, contained a materially undefined term for the "Services" to be provided, purported to fix pay at the national minimum wage despite the doctors having been paid at rates appropriate to consultants, and had never been sent to either doctor. Both had previously worked on a self-employed basis through the agency and there was no reliable evidence that either had agreed, expressly or by conduct, to become an employee of the company or to accept a contractual repayment obligation.

The transaction-at-undervalue claim raised a more significant point of principle. The judge accepted that a company's assumption of an unpaid tax liability, as a consequence of paying a worker gross rather than net, is capable in principle of amounting to consideration passing to a third party sufficient to render the payment a transaction at an undervalue. However, he held that this analysis could not survive where the worker had subsequently declared the same income to HMRC in their own self-assessment return and been taxed on it, as both doctors had done, one of them partly through a company she controlled. Since HMRC had accepted those returns without challenge, allowing the liquidators to recover the notional shortfall from the doctors would expose the same income to tax twice and hand HMRC an unwarranted windfall, a result the judge considered inconsistent with the purpose of section 238. He distinguished the position from Purkiss v Kennedy, where employees had never declared the relevant sums to HMRC at all. Had he reached the opposite conclusion on liability, the judge indicated he would in any event have exercised his discretion to grant no remedy, given that HMRC's overall position was no worse off than if the company had deducted tax correctly in the first place.

The judgement also records the difficulties faced by liquidators pursuing claims against an umbrella company's workers without access to the company's own records, and criticises, while ultimately setting aside, the doctors' early reluctance to disclose their tax affairs, which the judge found had needlessly prolonged the litigation. The claims against both doctors were dismissed in full.