It has been difficult to escape the on-going press coverage on the Loan Charge legislation: any company involved in an Employee Benefit Trust (EBT) entered into since 6 April 1999 is going to be caught. If the EBT loan (widely defined!) is not repaid, or a settlement not made with HMRC by the deadline, HMRC can recover directly from the individual employee who has benefitted.
EBT avoidance schemes can be the undoing of a company. They cause it to become unable to pay the tax it tried to avoid, forcing it into formal insolvency.
HMRC are not the only ones interested in EBTs. Once appointed, the office holder’s gaze will turn to the conduct of directors where an EBT scheme is involved and consider whether there is personal culpability.
Almost always, the directors, owners, and benefitting employees are the same people and so there is little question that the scheme was designed to benefit them. Not, of course, that that is a requirement for misfeasance.
It certainly helps if the directors have benefitted personally if the office-holder is running out of time to bring the claim, as there is no limitation period for bringing a misfeasance claim which amounts to a breach of trust. The recent and very welcome Supreme Court case of Burnden Holdings (UK) Limited v Fielding and another (2018) settled the law on this point.
Each case will depend on the facts, and whether there is a good claim in misfeasance as a consequence of an EBT can depend on a number of factors, including:
1. The advice, if any, that was given prior to the EBT being entered into;
2. The extent to which it was reasonable to rely on that advice;
3. The prevailing political, statutory and common law positions around the time/s of the EBT;
4. The size of the payments – were they excessive in their own right irrespective of the tax issue;
5. The financial position of the company at the time of the EBTs;
6. The immediate and deferred effect of the EBTs on the company.
Misfeasance is not the only claim available to an office-holder where the company has used EBTs. It could also be a transaction at an undervalue (under s238 of the Insolvency Act 1986) if the remuneration paid grossly exceeds the value of the work carried out by the employee. If the office holder is out of time for s238, then s423 (‘transactions defrauding creditors’ – a misnomer, as no fraud is required to be proved) is potentially available.
S423 is usually a tricky claim to bring as the office holder has to prove the subjective test that there was an intention to put assets out of reach one (or more) present or future claimants or otherwise prejudicing them. However an EBT scheme would seem to fit that test well: it pulls money out of the company in a way which prejudices HMRC, it generates a current or future creditor in HMRC (in PAYE and NI), and at the same time it makes the money due to HMRC not available to it because the employee has taken it and the company then goes under.
Just as office-holders are gearing up to bring misfeasance actions based on EBTs, HMRC may be starting to run their own claims against the employee/directors directly as a consequence of the Loan Charge legalisation.
The right of HMRC to make the individuals liable for the company’s failure to pay PAYE (and in certain cases NICs) is nothing new. The legislation has existed for a number of years now, under the Income Tax (Pay As You Earn) Regulations 2003.
What is new, however is HMRC’s ability to make a loan charge against a company which could be substantially higher than the amount due if the tax had been paid when it should have. They can also make a claim against a wider category of anti-avoidance schemes.
Any office-holder who has identified the use of an EBT by the company is well advised to keep HMRC firmly ‘on side’ as they prepare for and then launch the misfeasance action against the directors. They should also look to be able to demonstrate to HMRC that they have a firm grip and understanding of the anti-avoidance legislation prevailing at the time of the misfeasance which may be required to underpin the claim.
Tim Symes is Head of Restructuring and Insolvency.