Susan Currie: Tax avoidance schemes and liquidation
Susan Currie, solicitor at Blackadders, discusses the intricacies of tax avoidance schemes and liquidation.
In this day and age tax avoidance schemes are rarely out of the news. The schemes, although they may not be moral, are legal. Tax avoidance is when an individual or company arranges their assets to minimise tax liability. On the other hand, tax evasion is the illegal non-payment of tax. Often solicitors advise that each case will turn on its own facts. The recent cases of Vining Sparks UK Limited (In Liquidation) and Toone v Ross highlights this.
Vining Sparks UK Ltd (In Liquidation)
In Vining Sparks, the Director applied an Employee Remuneration Trust Scheme which resulted in the commission being paid into a trust which employees took as a non-repayable loan. The intention was to release Vining Sparks from becoming liable for PAYE and national insurance contributions for its employees, resulting in a higher income for the employees creating an environment whereby staff would want to stay. Given the competitiveness of the market this was deemed to be a legitimate aim. Vining Sparks obtained advice from the creator of the scheme and an in house lawyer, as to the legitimacy of the scheme.
The scheme had been in place for a number of years when HMRC advised that the company had outstanding liability for PAYE and national insurance. Six years later, Vining Sparks went into liquidation resulting in HMRC submitting a claim for £1.5 million in respect of the perceived liabilities.
The Court decided that the Director had not made any attempts to conceal assets or misrepresent the position to HMRC. Further, the Director had actively considered the scheme by taking advice and being provided with previous Tribunal decisions supporting the scheme. He acted honestly throughout, meaning he was not liable to make payment of any sums.
Toone v Ross
A similar situation was set up by the Directors of Implement Consulting Limited in Toone v Ross whereby the company Directors were also shareholders. The Employee Benefit Trust had been set up to benefit the Directors only. The Directors were paid via capital payments through a possession fund. The Directors received notification that HMRC may pursue a claim and at this point, if they had, the company would have been insolvent. Despite this, no payments were made to HMRC. Although the ongoing payments to the directors continued. The company then entered into liquidation although there is an argument that they were insolvent before the final payment was made to the Directors.
The Directors were held to be liable for the payments as the scheme was not set up to promote the benefit or success of the company. This meant that the payments were unlawful and thus void. The Court went further noting that the Directors had breached their duty to act in good faith as they had failed to look at their role of a Director independently.
So what is the difference?
Both of these cases have similar circumstances, with a significantly different outcome. In Vining, the payments were made before HMRC provided notice of the claim. In Toone, the payment was made after. Whilst this may seem a trivial difference the focus of the company shifts after insolvency or deemed insolvency. Not being able to satisfy the notice of claim from HMRC creates deemed insolvency. At this stage, creditors become more important than the shareholder. The Directors failed to differentiate between what is best for the Company and what is best for shareholders in Toone, creating a key difference.
Many of the decisions taken by liquidators revolve around how just and equitable the decision or action is. Vining included all employees and intended to reduce the liability of everyone. Toone focused only on the directors.
What can we learn from this?
Whilst planning schemes are legal, Directors remain under an obligation to review and assess the intended aims, potential outcomes if unsuccessful and the overall legitimacy. Although there are limited occasions where the corporate veil can be lifted, failure to do so can result in personal liability. Directors should consider obtaining independent legal advice as whilst it was not pivotal in these cases, it may form a basis for any future defence.