Between 2000 and 2015, the upper echelons of society forgot the wise words of 19th century US Supreme Court Justice, Oliver Wendall Holmes, that “I hate paying taxes, but I love the civilisation it gives me”, depriving society of essential revenues by entering into so called tax ‘efficient’ or ‘avoidance’ schemes and on an industrial scale.
As redress, we are pleased to announce the hard won judgment handed down today in Re Implement Consulting Limited (in liquidation); Toone v Ross & Bell [2019] EWHC 2855 (Ch), which will serve as a timely reminder of the perils of such behaviour. For the first time, a myriad of post-liquidation claims have been placed on a solid, distinct footing that is more adept for office-holders than the application of the Loan Charge regime (now under government review).
The decision will have seismic consequences for all claims in insolvent companies that have avoided liabilities to HMRC through disguised remuneration and other tax avoidance schemes. The route to recovery has typically been through claims against directors personally, and while HMRC has typically worked with liquidators in bringing such claims, the lack of a clear case authority – coupled with the loan charge regime – has led to a degree of uncertainty over their merits, making reaching settlement challenging.
Re Implement Consulting Limited (in liquidation); Toone v Ross & Bell [2019] EWHC 2855 (Ch) now surely puts an end to the doubt surrounding tax avoidance schemes. The factual pattern – the gist of which will be familiar to experts – was that two directors/shareholders of an insolvent company established EBTs in 2009 and 2010, subsequently paying themselves and a third shareholder through the schemes in proportion with their shareholding. After HMRC informed them that the EBTs were being investigated, they set up another scheme and paid themselves substantially all of the company’s remaining capital through it.
The Liquidators (Richard Toone and Elias Paourou) argued that the payments made through the EBTs were dividends by another name – which, as the formalities set out in the Companies Act 2006 had not been complied with, were unlawful irrespective of whether or not the company was insolvent at the time. ICCJ Briggs agreed, and the directors were ordered to pay all sums that had been paid into the schemes – totalling £3 million – back to the company.
Two legal findings are highly significant. Firstly, it is now clear that when directors/shareholders pay themselves through tax avoidance schemes, those payments may be considered dividends by another name – meaning Directors can no longer claim such payments are “rewards for employees” or similar. Secondly, the finding that tax was due and owing at the point monies were paid into EBTs prevents directors from asserting that no liabilities arose until EBTs had been decided on in courts and APNs issued – generally around 2015 onwards.
The most profound implications for the insolvency industry, however, will be practical. An EBT judgment which favours liquidators so emphatically should instil the profession with some much-needed confidence in litigating EBT-type claims. Those that sought to avoid their obligations will now find it much harder to avoid the consequences and would do well to remember the words of Benjamin Franklin “in this world nothing can be said to be certain, except death and taxes”.
For more information, please contact Crispin Jones in our Restructuring & Insolvency team.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
