CVR Global’s Bai Cham, an insolvency specialist on tax avoidance and disguised remuneration schemes, recently penned his thoughts on tax avoidance for Credit Strategy magazine following his involvement in a landmark court case.
Tax avoidance has been HMRC’s Achilles Heel for decades, but a recent court case brought by CVR Global will have profound implications for the insolvency industry.
The ruling, handed down by Chief Insolvency and Companies Court Judge Briggs, will see the directors and shareholders of Implement Consulting Ltd having to pay back over £3 million to the company and its creditors – despite the company entering liquidation in 2016.
We successfully argued that the millions of pounds placed into Employee Benefit Trusts (EBTs) and an Interest In Possession scheme between 2009 and 2011, were effectively dividends by another name and were unlawful.
The judgment, which favours the liquidators so emphatically, should instil the insolvency profession with some much-needed confidence in litigating EBT-type claims.
EBTs were initially created in the early 2000s as a means of disguising income as tax-free loans from offshore trusts and were considered legitimate tax planning arrangements. However, HMRC has always disputed this and has been challenging the legitimacy of these schemes through the courts – particularly since the decision in the Rangers FC case.
The Implement Consulting Ltd judgement is a landmark moment, as the insolvency profession now has case law that can be applied to thousands of other similar EBT-type cases to pursue recovery of monies owed to HMRC arising from the use of EBTs.
This latest ruling is important because it builds momentum in HMRC’s drive to clamp down on tax avoidance. The decision of the Supreme Court in the Glasgow Rangers case in 2017 where they were ordered by the court to pay back millions of pounds’ worth of tax arising from payments made to employees via EBTs since 2001 was also a significant moment, as it initially proved that EBTs were not legitimate tax planning arrangements.
Now, with the latest judgment on Implement Consulting Ltd, anyone who has used an EBT since the turn of the century is at increasing risk of being forced to repay tax. Any business – trading or not – that has operated an EBT to avoid paying tax is at real risk of going out of business if it can’t repay its tax liabilities to HMRC in full.
The Implement Consulting Ltd case is typical of the majority of EBTs – where shareholders and directors used the schemes to pay themselves – so in such cases, it is highly unlikely that such directors can be seen as innocent employees.
HMRC winning more court cases is one thing, but they need effective avenues in which to retrieve what they are owed.
HMRC can approach the recovery of tax arising from disguised remunerations in a number of ways, including Accelerated Payment Notices (APNs) introduced in 2014 and most recently the 2019 Loan Charge.
APNs put the onus on the taxpayer to prove their innocence by enabling HMRC to demand payment before the settlement of any appeals. This is one of the main ways in which individuals will be pursued.
Accelerated Payment Notices is one effective way of yielding owed taxes, but there is a feeling that that this legislation did not go far enough as it does not afford HMRC the ability to demand the tax owed from the beneficiaries of the tax avoidance schemes.
The Loan Charge legislation, introduced in the Finance Act 2017, seeks to address the perceived gap in the APN legislation. The Loan Charge applies to any disguised remuneration scheme loans made from 1999 onwards and remain outstanding as at 5 April 2019.
The Loan Charge is the most potent recovery route as it allows HMRC to recover the amounts due from the company concerned first, and if they are no longer trading or can’t pay, then the end beneficiaries are pursued for payment. However, the Loan Charge is currently under review by the Government amidst concerns about its fairness, size of sums demanded, and the circumstances in which contractors in particular historically entered into EBTs.
Any directors and shareholders past or present who engaged in tax avoidance schemes and are unwilling or unable to settle with HMRC will be forced into insolvency either voluntarily or by petition from HMRC – so there really is becoming nowhere for tax avoiders to hide.
Those who know they have been involved in any form of tax avoidance in the past would therefore be wise to consult an insolvency practitioner to understand the best options available to them.
The sheer scale of tax avoidance is hard to quantify and will only really become clear over time, but such was their commonality at the turn of the century that it is safe to say there will be thousands of similar cases in the future.
While I expect to see a rising number of claims brought by insolvency practitioners in EBT type cases as a result of this judgement – it is likely that HMRC will become more open to accepting tripartite settlement agreements in such cases to enhance recovery prospects.
Implement Consulting Ltd’s case will be typical of a lot of tax avoidance cases brought into the public eye in the future. Because they stretch back over so many years, the amount owed to creditors in such cases, particularly HMRC, is likely to stretch into hundreds of thousands of pounds at best, and millions at worst.
To conclude, the Implement Consulting Ltd judgement will have seismic consequences for all claims in insolvent companies that have avoided liabilities to HMRC through disguised remuneration and other tax avoidance schemes.
Historically the route to recovery has typically been through claims against directors personally, and while HMRC has been working with liquidators in bringing such claims, the lack of a clear case authority – coupled with the Loan Charge regime – has made reaching settlement challenging – until now.
HMRC and users of tax avoidance schemes alike will be holding their breath to see the outcome of the Loan Charge review – however, those who have participated in tax avoidance and have sought to avoid their obligations will now find it much harder to avoid the consequences.
For more insolvency-related advice regarding tax avoidance contact Bai via firstname.lastname@example.org