In our December and January Newsletters we considered some of the main issues arising out of the Government’s changes to the “loan charge” legislation which were announced following publication in December of the independent review by Sir Amyas Morse.
An, as yet, unanswered question asked in our January Newsletter, was whether HMRC would change its approach, as a creditor for disguised remuneration liabilities, in cases where the employer company is now insolvent. It seems likely to us, based on the current backlog of open enquiries into disguised remuneration schemes that a significant number of cases will need to be brought before the courts, by the liquidator or administrator of now insolvent employer companies, if HMRC wish to pursue their claims for unpaid PAYE and National Insurance Contributions (“NICs”) against the former directors, in such cases.
One of the first decisions of the courts in such cases was the October 2019 judgment handed down in Toone & Ors v Ross & Anor, re Implement Consulting Ltd  EWHC 2855 (Ch.). In that case, Judge Briggs deciding in favour of the joint liquidators held that payments made by the insolvent company under 3 disguised remuneration schemes covering the period from 2009 to 2013, were unlawful distributions under Company Law and, therefore, the shareholders were legally obliged to repay those distributions to the company.
The case is perhaps an unusual one, in so much that the liquidators had claimed that payments made under the disguised remuneration schemes by the company were distributions to Mr Ross and Mr Bell in their capacity as shareholders, rather than remuneration paid to them as directors. It is also important to note that the case was not a tax appeal, but a claim made against the directors/shareholders by the liquidators on behalf of the company and the decision has no direct bearing on the tax treatment of the underlying disguised remuneration schemes.
There were specific facts found in the case which supported the decision made by Judge Briggs, in particular the fact that payments were made pro rata to the relative amount of the shareholdings of Mr Ross and Mr Bell in the company and also an acknowledgement, in Mr Bell’s oral evidence in the hearing, that he and Mr Ross “were interested in the tax planning as a way of … providing a return to shareholders in the most tax efficient manner”. Such a fact pattern may not have been replicated in the disguised remuneration schemes used by many other companies.
However, that is not the end of the story in Toone v Ross, as Judge Briggs also accepted an alternative claim made by the liquidators, that the directors had breached their fiduciary duties to the Company in making the payment under the final disguised remuneration scheme in 2013. The judge held that at that point in time the Company was insolvent taking into account, as it should have done, the contingent tax liabilities which HMRC had claimed were due under the 2 earlier disguised remuneration schemes.
Whether HMRC will modify its approach in insolvency cases in consequence of the Morse Review, or if, alternatively, it will be emboldened by the judgment in Toone v Ross, only time will tell.
In our view, any former director or shareholder who is, potentially, facing personal liability for unpaid PAYE and/or NIC liabilities, in respect of historic disguised remuneration schemes, should now consider taking specific professional advice on both the tax and insolvency aspects of HMRC’s claim or potential claim against them. Each case needs to be considered on its own merits and establishing all of the relevant facts and circumstances will always be the starting point in providing such advice.
If you would like more information on any of the points covered in this Newsletter, or you would like to discuss any of the issues arising from it, or from the loan charge changes which were the subject of our December and January publications, please do not hesitate to contact us for an initial, confidential discussion.