A Collection is a selection of features, articles, comments and opinions on any given theme or topic. It allows you to stay up‑to‑date with what interests you most.
Login here to access your saved articles and followed authors.
We have sent you an email so you can reset your password.
Sorry, we had a problem.
Tags related to this article
Published 22 julio 2022
The fallout from failed tax saving arrangements using Employee Benefit Trusts (“EBTs”) continues. In Hunt, directors who in reliance on tax advice from a firm of accountants, arranged for a company to use an EBT, were found not in breach of duty. The decision whilst of comfort to directors, increases the likelihood of recovery actions following failed tax saving schemes shifting back on the accountancy firm tax advisors.
In Hunt the Claimant liquidator of a company, Marylebone Warwick Balfour Management Limited, sought to recover c. £38M from the directors (and alleged de facto directors), for losses arising from the company’s participation in an EBT.
From 1998, EBTs were used by certain companies to save tax. By paying dividends through an EBT (instead of paying salaries), PAYE and NICs could be saved. However, HMRC challenged the schemes, following which EBTs ceased to be marketed, and many taxpayers settled their liabilities with HMRC.
Following tax advice from a firm of accountants, the company used an EBT structure from 2002, which resulted in it avoiding nearly £28 million in PAYE and NICs. Following notification of the scheme, HMRC raised queries. The company continued to rely upon and consult the tax accountants, who in turn sought advice from counsel, and the company was advised that HMRC’s case was weak. However, ultimately it became clear that substantial PAYE and NICs liabilities would be due to HMRC, which the company could not pay. The company entered liquidation in 2013, following which HMRC put a claim into the liquidation for the outstanding liabilities.
The liquidator alleged that the EBT scheme was a device to extract funds from the company and avoid or reduce payment of PAYE and NICs. By entering into and continuing to participate in the scheme, the directors were said to have breached their fiduciary duties as directors, including the duty under the Companies Act 2006 to promote the success of the company. Further, participation in the scheme was alleged to have involved transactions defrauding creditors contrary to s.423 Insolvency Act 1986 (transactions at an undervalue for the purpose of putting assets beyond the reach of creditors or to prejudice the interest of creditors).
The directors defended the claims on the basis that, before entering into the scheme and at all material times thereafter, they relied upon their professional accountancy tax advisors. The liquidator contended this was unreasonable, including because the accountants were conflicted (as promoters of the scheme), were not lawyers, were not advising on director’s duties and did not advise in writing.
In a judgment handed down on 6 April 2022, the claim was dismissed. The Judge accepted that the scheme was put in place for genuine commercial reasons, including incentivising scheme members through their receipt of dividends based on commercial results. Highlighting the important distinction between the purpose of the scheme, a pre-condition to liability under s.423, and the consequence of the scheme, the Judge found that its purpose was not to put assets beyond the reach of HMRC, even though that was its consequence.
The accountants fashioned the scheme and were actively involved in overseeing it. The Judge found that the directors were entitled to rely upon the accountants, being advisors of the highest reputation, in relation to the scheme.
Accordingly the claims for breach of duty, and under s.423 failed.
This decision is good news for company directors, demonstrating that where they obtain and follow professional advice when making decisions, it will be more difficult to show they acted in breach of their director duties.
For accountancy firms and tax advisors, the decision cuts both ways. On the one hand, recovery actions for losses from failed tax schemes may focus away from the directors and more on the professional advisors. On the other hand, it may reduce the likelihood of litigation and, for the advisors, the prospect of being joined to proceedings as third party defendants. We note, the liquidator had also contemplated a claim against the accountants, but funding for the claim could not be secured.
+44 (0)113 251 4793
+44 113 251 4761
Richard Highley, Julian Bubb Humfryes, Annabel Walker, Naomi Park, Kevin Hawthorn, Hannah Gregory, Rebecca Smith, Jamie Tomlinson, Francesca Muscutt, Isabel McNeile
Richard Highley, Kevin Hawthorn, Annabel Walker
Richard Highley, Julian Bubb Humfryes, Isabel McNeile
Annabel Walker, Victoria Grantham, Amie Roberts
Hannah Gregory, Rebecca Smith
Jamie Tomlinson, Francesca Muscutt
Richard Highley, Julian Bubb Humfryes
Richard Highley, Naomi Park, Francesca Muscutt, Christopher Dyke, Jamie Tomlinson, Rebecca Smith, Kevin Hawthorn, Giles Hindle, Christopher Wall
Christopher Dyke, Rebecca Smith
Richard Highley, Jamie Tomlinson
Jamie Tomlinson, Richard Highley
Kevin Hawthorn, Giles Hindle, Christopher Wall
Richard Highley, Rebecca Smith, Phil Murrin, Christopher Dyke, Gill Burnett, Julian Bubb Humfryes, Naomi Park, Benson Egwuonwu, Jamie Tomlinson
Richard Highley, Rebecca Smith, Kevin Hawthorn