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4-12-2019

Failed Disguised Remuneration Schemes

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Responsibility of Directors for Failed Disguised Remuneration Schemes (Re Vining Sparks UK Ltd (in liquidation))

This article was first published on Lexis®PSL  Restructuring & Insolvency on 12 November 2019. Click for a free trial of Lexis®PSL

Restructuring & Insolvency analysis: This case gives some insight into the challenges that will face liquidators and directors in prosecuting and defending claims arising from a company’s use of disguised remuneration schemes. In this particular case, the court dismissed the liquidators’ claims. Edward Saunders, Partner at Moon Beever LLP, considers the practical implications of the judgment and background to the case.

Re Vining Sparks UK Ltd (in liquidation) [2019] EWHC 2885 (Ch), [2019] All ER (D) 07 (Nov)

 

What are the practical implications of this case?

Over a period of years, particularly from the late 1990s onwards, increasing numbers of businesses were advised to set up trust schemes with the ultimate intention of avoiding tax. There were many different types of such trust schemes, but the taxes avoided were generally mainstream such as PAYE and national insurance. An industry grew up around such schemes involving, among others, numerous accountancy firms (or their offshoots) and lawyers.

Given that income tax and national insurance contributions collectively are responsible for well over 40% of all UK government tax revenue [see Institute of Fiscal Studies, e.g. in 20172018, the percentage for all Income Tax and National Insurance was 44%], the propagation of such arrangementsparticularly so-called disguised remuneration schemesand the integrity of long established tax legislation inevitably became a matter of national concern. Nevertheless, and notwithstanding legislative changes, for a period at least the incidence of such trusts continued to increase, not decrease.

From about 2010 more concerted efforts were made by government to deter the marketing and use of tax avoidance schemes. Chief among these were the significant amendments made to the Income Tax (Earnings and Pensions) Act 2003 by the Finance Act 2011. However, while HMRC adhered to a position that disguised remuneration trust schemes did not work to avoid PAYE and national insurance, collectability was not aided by statutory interpretations applied by tribunals and courts that were later found to be flawed. A number of key decisions favoured the businesses seeking to avoid tax. In respect of many schemes devised to avoid PAYE and national insurance, it was not until 2015, and ultimately mid-2017 with the Supreme Court decision in RFC 2012 Plc (In Liquidation) (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] 1 WLR 2767, [2017] 4 All ER 654, [2017] All ER (D) 19 (Jul), that the correct interpretation of various long standing legislation was applied so as to fundamentally inhibit the viability of such schemes. By this time government had introduced a raft of other anti-avoidance measures culminating in the retroactive ‘loan charge‘ payable in respect of loans from trusts remaining unpaid, in some instances up to nearly 20 years.

The clarification in statutory interpretations ultimately led to many companies going into liquidation, with liquidators subsequently appointed to see if claims could be pursued against directors or advisors. The decision in Re Vining Sparks UK Ltd (in liquidation) is one of the first such cases against directors to reach judgment and gives some insight into the challenges that will face liquidators and directors in prosecuting and defending claims arising from a company’s use of disguised remuneration schemes, often well in the past. Given that the result went against the liquidators, the case represents a salutary warning that not every case will be on a firm footing. However, the judgment reveals enough to give encouragement to liquidators that there is no reason in principle why many claims will not succeed in full, notwithstanding that significant time may have passed since a company made payments into a trust.

 

What was the background?

Vining Sparks UK Limited was a wholly owned UK subsidiary of a US investment bank. It arranged transactions for its profoundly solvent parent and was, in effect, a cost base for the US entity and received all its money from that source. In 2002 it changed its employees’ terms of employment and started to pay money into a remuneration trust. The purpose of the arrangement was not about profit extraction. It was to enable UK sales employees to receive greater rewards without a commensurate increase in cost for the US parent. In using the scheme and in continuing to do so until 2011 after HMRC had raised queries and made determinations for PAYE and national insurance, the company relied upon the advice of Baxendale Walker solicitors, whose (later struck off) founder, Paul Baxendale-Walker, became notorious not least for scale and breadth of the schemes he devised and promoted.

The company’s appeals against HMRC’s determinations remained in abeyance for many years and, in 2014, the company ceased to trade due to its decline in profitability. The UK director was made redundant. Thereafter, further to case law turning in its favour, HMRC pressed for the company’s appeals to be advanced and in the absence of the same subsequently forced it into compulsory liquidation.

The liquidators brought claims against the US-based directors and the sole UK-based director. Of the directors, only the UK director had received loans out of the trust arrangements. The liquidators alleged that the directors had acted in breach of their fiduciary duties. In putting this case, the liquidators’ primary position was that such breaches had been dishonest, with an alternative claim that the directors had not acted in good faith in discharging their duties to promote the success of the company. There was also a claim for fraudulent trading. Save to the extent that the UK company was put into compulsory liquidation upon an HMRC petition raised years after the UK company had ceased to trade, it was not alleged that the UK company was insolvent as a result of the payments into the Employment Benefit Trust (EBT) scheme. The wealthy US parent would put the company in funds when needed and insolvency was not relied upon in alleging breaches of duty.

By the time the claim reached trial, the case against the US-based directors had settled, and the UK director was the sole remaining respondent.

 

What did the court decide?

In a detailed judgment, Insolvency and Companies Court Judge Jones dismissed the liquidators’ claims in their entirety. He concluded that the liquidators had come ‘nowhere near’ to proving a case of dishonesty. He found that the UK director had acted honestly, believing the advice he had received to be sound. The evidence and the case law as it stood prior to the clarification provided by the Rangers Football Club (Murray Group) decision also supported the proposition that the director acted in good faith. Indeed, specifically in relation to the advice received, the judge stated that, on the case law as it stood, it was not advice that will have been obviously in error or even of questionable merit even if applying an objective test.

 

About the author:

Edward Saunders is a partner at Moon Beever LLP conducts a wide range of litigation including commercial and insolvency litigation and contentious probate proceedings.

If you have any questions regarding the article or would like some advice, please contact Edward on esaunders@moonbeever.com

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