Remuneration schemes involving Employee Benefit Trusts (EBTs) have become more prevalent over the last 20 years, often as a way of seeking to remunerate key employees without making pay as you earn or national insurance contributions. Given the developments highlighted below, insolvency practitioners are advised to investigate such schemes in matters coming across their desks to see whether funds can be clawed back for the benefit of creditors.
HM Revenue and Customs’ opinion on EBT schemes
Tax avoidance schemes using EBT arrangements typically operate through trusts and other intermediaries allocating funds or making loans available to employees or their families. In addition to avoiding PAYE and NIC contributions, the operators of these schemes also may have sought to obtain a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated.
Although many of these schemes did not breach legislation at that time, HMRC has for years regarded them as aggressive tax avoidance and has taken the view that when funds were allocated to the employee or family member, those funds became earnings on which PAYE and NICs was due and for which the employer should have accounted. HMRC first took action in August 2010, publishing its opinion in a “spotlight” paper and then introduced legislation in December 2010 specifically targeting these schemes.
Legislative and case law developments
The Finance Act 2011 (announced 9 December 2010) introduced provisions specifically targeting EBT schemes, which ensured that these schemes were not effective after that date. EBT schemes put in place prior to that were not affected by the legislation and HMRC pursued those on separate legal grounds, with mixed success. HMRC subsequently announced settlement opportunities for employers who had already used EBT schemes and the government is proposing further legislation to tackle them in the Finance Bill 2017.
HMRC has also pursued the “Glasgow Rangers” EBT litigation earlier this year ( UKSC 45). The Rangers scheme was a fairly extreme use of EBT tax planning, which is perhaps why HMRC used this as a test case. The Supreme Court handed down its judgment earlier this year ( UKSC 45). This looked at the period before the disguised remuneration rules were implemented and covers the period which was the subject of the “spotlight”. The Supreme Court held that payments made under the scheme operated by Rangers were subject to PAYE and NICs, albeit through a new line of argument.
What does this mean to Insolvency Practitioners?
There are potentially two claims open to insolvency practitioners against the directors of companies that adopted EBT schemes – for misfeasance under Section 212 of the Insolvency Act 1986 (the “Act”) and for transactions defrauding creditors pursuant to Section 423 of the Act. Whether such claims arise will depend on when the schemes were entered into and how they were operated.
A word of caution though. Not all schemes fall foul of the legislation introduced in 2011, often because of “grandfathering” provisions in that legislation and there are also a number of tax planning schemes which continue to be operated legally. That said, where an EBT scheme is equivalent to the Glasgow Rangers scheme or otherwise breaches the legislation insolvency practitioners will want to weigh up whether any claims arise against company directors.
When an officer of a company is guilty of any misfeasance or breach of any fiduciary or other duty in relation to that company, a liquidator can bring a misfeasance claim. If successful, the officer may be required to repay or restore money and/or property of the company or to contribute to the company’s assets.
A claim on this basis would depend upon whether a director exercising reasonable care, skill and diligence would have implemented a scheme, based on both the knowledge of that director at the time and that of a reasonable director.
The strength of the claim will depend heavily on the time the scheme was entered into, when the payments were made and the actions of the directors in putting the scheme in place. If the directors acted upon professional advice, it would be more difficult to show a breach of duty. If, however, the directors acted in the knowledge that such a scheme may be challenged in the future, against professional advice and took no precautions to protect the company’s position (such as establishing reserve account of the tax that may need to be paid) then the prospects of a claim would be greater.
Transactions Defrauding Creditors
This section is a bit of a misnomer in that fraud need not to be demonstrated, but claims under this section are nonetheless difficult to prove. It would have to be shown that the monies paid into trust were transferred for little or no consideration and that the substantial purpose of the transaction was to otherwise prejudice the interests of a creditor in relation to any claim he may make.
Again, the strength of the claim will depend on the circumstances at the time the scheme was taken out and the evidence available. However, given that many of these schemes were clearly entered into in an effort to avoid certain tax liabilities (albeit legal at the time), the second strand of this claim ought to be upheld if it can be shown (by correspondence or otherwise) that the purpose of the scheme was to prejudice HMRC’s interest by avoiding certain tax liabilities.
One key point for insolvency practitioners to bear in mind is that the court will be reluctant to deprive employees of reasonable remuneration if it would unjustly benefit the company to do so. In a case of misfeasance, where services necessarily required are supplied on the basis that they would be paid for and there is no other claim, the law imposes an obligation to pay a reasonable sum for them. Failure to do so would deprive the recipient of the payment and unjustly enrich the company. This test was recently applied in Global Corporate Ltd v Hale  EWHC 2277 (Ch).
As a result, if a proportion of the monies received could be seen as reasonable remuneration for services supplied, then this amount will not be recoverable and this should be borne in mind by insolvency practitioners when considering claims.
Acting honestly and reasonably
If a director relied upon legal advice and acted honestly and reasonably then he may be able to apply to court for an order that he ought fairly to be relieved from liability under the Companies Act 2006. Such an application was recently considered in Burnden Holdings (UK) Ltd (In Liquidation) v Fielding  EWHC 2118 (Ch). However, the efficacy of this provision in misfeasance claims is open to debate, as if a court has found that a director has acted in breach of duty, it is questionable whether the Court will then grant relief on the basis that the director acted honestly and reasonably.
What to look out for
It is clear that any claim in relation to EBT schemes will heavily depend on the timing and circumstances when the scheme was entered into, the volume and timing of the payments made and the actions of the director(s). In weighing up whether a claim ought to be made, insolvency practitioners should consider at least the following:
- whether the scheme was entered into before or after 5 August 2010;
- the advice received by the director at the time (if any) and his reliance upon that advice; and
- whether the monies paid under the scheme represent reasonable remuneration (at least in part)
It is advisable to seek a legal opinion as soon as possible on the merits of an EBT case as much will turn on the strength of the evidence available.