Director not liable for establishing tax evading employee scheme

The liquidators of a company (the “Company”) applied for equitable compensation or damages against the company's managing director.

The Company had established an employee scheme for the avoidance of PAYE and NIC employee liabilities that was in substance the same as the tax scheme that a subsequent decision of the Supreme Court effectively struck down on the ground that it constituted tax evasion.

The liquidators argued that the director had acted in breach of his duty as director to promote the success of the Company pursuant to section 172 of the Companies Act 2006 in establishing the scheme but did not allege breach of any other directors’ duties. The liquidators submitted that the director had acted dishonestly; alternatively that he had not acted in good faith as (even without dishonesty) the director knew that the scheme did not reflect the true facts.  

The principal defence was that there was no breach of the duty applying the usual subjective, good faith test applicable to section 172 in circumstances where, inter alia, the director had relied on tax advice received from solicitors, Baxendale Walker.

The court observed, however, that Baxendale Walker had a conflict of interest in that Mr Baxendale Walker was selling the scheme for his own profit upon which Baxendale Walker would be advising. The court also observed that the subsequent decision of the Supreme Court that such schemes constituted tax evasion determined the law as it had always been but nonetheless the director’s subjective mind should be judged in the context of the law as he understood at the time.

The court held that the claim failed because:

  • On the issue of dishonesty, the liquidators' criticisms of the absence of independent advice and of the inadequacy of the advice provided came nowhere near establishing dishonesty.
  • On the issue of good faith and dishonesty, as a matter of common sense, the proposition that employees can be paid without any PAYE or NIC falling due appeared (at best) unlikely. As a general guide it would be extremely unwise to pursue a scheme having this effect without independent, expert advice or without ensuring sufficient retentions should it fail. However, this general guidance was not absolute. Notwithstanding that Baxendale Walker was conflicted, the director in the present case believed the advice he received from them and acted in good faith in establishing the scheme.

In re Vining Sparks UK Limited (In Liquidation) [2019] EWHC 2885 (Ch)

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