When tax avoidance is honest

The managing director of Vining Sparks UK Ltd (the “Company”), was found not liable for sums that the Company owed to HMRC following the failure of an employee remuneration trust scheme (the “Scheme”).

Mr Bernard had allowed the Company to engage in the Scheme in good faith, believing that it would promote the success of the Company.

If successful, the Scheme would have meant that sums that were previously paid to employees as commission would be paid into a trust (the “Trust”). The payments into the Trust, which could then be advances to the employees/beneficiaries by way of a loan, would not attract PAYE or NIC. Following the Supreme Court’s decision in RFC 2010 PLC (in liquidation) [2017] UKSC45, Mr Bernard accepted that the sums paid into the Trust under the terms of the Scheme were earnings or emoluments that were subject to PAYE and NIC. Mr Bernard argued that he genuinely did not understand this to be the case when the payments were made, having taken advice.

Notwithstanding that the Scheme had “artificial elements” and that its purpose was to avoid liability for PAYE and NIC, Mr Bernard was found to have acted honestly. Details of the Scheme and Trust were provided to HMRC and, even after HMRC made determinations in 2008, Mr Bernard continued to receive advice that the Scheme was effective. This was supported by decisions of the Special Commissioners’ and First Tier Tribunal. Whilst the advice relied on by Mr Bernard was, it transpired, wrong, he had acted in good faith from the time that the Scheme was created and throughout the time that payments were made into the Trust. The absence of dishonesty meant that the alternative claim for fraudulent trading could not succeed.

Given the Government’s implementation of recommended changes to loan charges, published on 20 January 2020, liquidators may find themselves under pressure to litigate claims arising from the existence of employee benefit trusts. It is therefore essential to consider the factual matrix of each individual case, including whether the directors were, in fact, acting in breach of duty before running a claim against directors or beneficiaries in connection with an employee benefit trust.

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

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