In P D Allen and another v A M Bernard and others [2019] EWHC 2885 (30 October 2019), the High Court found that a director’s participation in a tax avoidance scheme designed to avoid PAYE and NICs was not in breach of his duties.
Vining Sparks had established an employee remuneration trust scheme which, if successful, would have meant that sums previously paid as commission to its employees were no longer subject to PAYE and NICs. The scheme was similar to the scheme implemented by the Rangers Football Club (RFC 2012 Plc [2017] UKSC 45).
The High Court observed that the Supreme Court’s decision raised no objection to earnings or emoluments being paid into a remuneration trust. ‘The simple point was that the PAYE and NIC regime applied to sums paid as emoluments or earnings.’
The claim by the liquidators addressed the consequences, for Mr Bernard, one of the directors, of adopting the avoidance scheme. They sought £1,587,548.97 from him, as they claimed that he had acted in breach of his duties (Companies Act 2006 ss 172 to 176) and had engaged in fraudulent trading (Insolvency Act 1986 s 213).
Mr Bernard submitted that the decision to use the employee scheme and make the payments to the trust had been based on advice received from solicitors, advice from the company’s accountants, and the approval of the company’s in-house counsel who had checked that such schemes were commonly used and promoted. He had therefore understood the arrangement to constitute a ‘legitimate tax avoidance scheme’.
The court observed that the employee scheme was centred upon artificial elements and was created and entered into for avoidance purposes. The trust, sub-trusts and loans were all elements to achieve that result. However, this did not establish dishonesty. Indeed, the liquidators, rightly, did not allege that the arrangements were a sham. They must therefore have accepted that the arrangements created rights ‘which truly existed’. There was no concealment within the trust deed and all the documents disclosed the underlying intention. ‘The question for all concerned was whether they worked but there was no dishonest intention.’
The joint liquidators’ alternative case was that Mr Bernard had not acted in good faith when no reasonable director could have concluded that an employee scheme would be in the best interests of the company. The High Court observed, however, that Mr Bernard had relied on his solicitors’ advice, which was itself based on the Dextra decision ([2002] STC (SCD) 413).
Why it matters: The High Court opened its decision with the following comment: ‘Whilst some ascribe to the view that payment of tax purchases civilisation and others that the payment of tax, like death, is a certainty, there are always others who seek or are attracted to schemes which will ensure that tax is avoided. There is nothing unlawful in this, provided it is not tax evasion.’ This was followed by a quote from the eponymous decision in Duke of Westminster [1936] AC 1: ‘Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.’ In confirming that the implementation of a remuneration scheme was not a breach of a director’s duties, this decision was in sharp contrast to the decision in R Toone. It remains to be seen whether either (or both) of these decisions will be appealed.
In P D Allen and another v A M Bernard and others [2019] EWHC 2885 (30 October 2019), the High Court found that a director’s participation in a tax avoidance scheme designed to avoid PAYE and NICs was not in breach of his duties.
Vining Sparks had established an employee remuneration trust scheme which, if successful, would have meant that sums previously paid as commission to its employees were no longer subject to PAYE and NICs. The scheme was similar to the scheme implemented by the Rangers Football Club (RFC 2012 Plc [2017] UKSC 45).
The High Court observed that the Supreme Court’s decision raised no objection to earnings or emoluments being paid into a remuneration trust. ‘The simple point was that the PAYE and NIC regime applied to sums paid as emoluments or earnings.’
The claim by the liquidators addressed the consequences, for Mr Bernard, one of the directors, of adopting the avoidance scheme. They sought £1,587,548.97 from him, as they claimed that he had acted in breach of his duties (Companies Act 2006 ss 172 to 176) and had engaged in fraudulent trading (Insolvency Act 1986 s 213).
Mr Bernard submitted that the decision to use the employee scheme and make the payments to the trust had been based on advice received from solicitors, advice from the company’s accountants, and the approval of the company’s in-house counsel who had checked that such schemes were commonly used and promoted. He had therefore understood the arrangement to constitute a ‘legitimate tax avoidance scheme’.
The court observed that the employee scheme was centred upon artificial elements and was created and entered into for avoidance purposes. The trust, sub-trusts and loans were all elements to achieve that result. However, this did not establish dishonesty. Indeed, the liquidators, rightly, did not allege that the arrangements were a sham. They must therefore have accepted that the arrangements created rights ‘which truly existed’. There was no concealment within the trust deed and all the documents disclosed the underlying intention. ‘The question for all concerned was whether they worked but there was no dishonest intention.’
The joint liquidators’ alternative case was that Mr Bernard had not acted in good faith when no reasonable director could have concluded that an employee scheme would be in the best interests of the company. The High Court observed, however, that Mr Bernard had relied on his solicitors’ advice, which was itself based on the Dextra decision ([2002] STC (SCD) 413).
Why it matters: The High Court opened its decision with the following comment: ‘Whilst some ascribe to the view that payment of tax purchases civilisation and others that the payment of tax, like death, is a certainty, there are always others who seek or are attracted to schemes which will ensure that tax is avoided. There is nothing unlawful in this, provided it is not tax evasion.’ This was followed by a quote from the eponymous decision in Duke of Westminster [1936] AC 1: ‘Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.’ In confirming that the implementation of a remuneration scheme was not a breach of a director’s duties, this decision was in sharp contrast to the decision in R Toone. It remains to be seen whether either (or both) of these decisions will be appealed.
