In Chalcot Training Ltd v Ralph & HMRC [2020] EWHC 1054 (Ch), a test case, an attempt to reverse an ‘E Shares’ tax scheme failed. HMRC can now fully challenge the scheme through the tax tribunal.

  • The E Shares tax avoidance scheme was claimed to achieve tax-free profit extraction.
  • It was devised and promoted by Blackstar and sold to company owners.
  • The scheme aimed to reward a company’s key employees in a way which avoided Corporation Tax, Income Tax and National Insurance Contributions (NICs).

The directors of Chalcot, Ms Stoneman and Mr Ralph took up the scheme.

They subscribed for a new class of E shares as directors/employees. The shares had no rights or value. They were issued and only 1% was paid and therefore there was a contingent liability to pay the remaining 99% of nominal value, and no charge under the Employment-Related Securities regime.

The creative accounting with what would have otherwise been just a nil paid shares scheme was that the unpaid balance of the nominal value was credited to the directors' loan accounts. The accounts disclosed the payments and credits from tax schemes as part of directors' remuneration and as ‘an employment expense’. These were one of the largest items in the accounts.

The directors were credited with £6 million through the scheme over three years and paid £920,250 in fees to the promoter.

HMRC challenged the scheme and submitted that the payments and credits to the directors were remunerations or they were distributions to shareholders.

The company argued that the payments were not employment-related.

The directors divorced. Faced with the prospect of a large PAYE and NICs bill, the company and one of the directors, tried to reverse the scheme and cancel the share issue. It was argued that the company had made unlawful distributions of capital.

The company brought an action to the High Court, which was opposed by HMRC together with the other director Mr Ralph.

The court found that:

  • Ms Stoneman signed off three sets of accounts that all recorded the E Shares scheme payments as the major part of the directors' remuneration and as an 'employment expense'.
  • The company’s external accountant and the directors’ corporate divorce lawyer reviewed the scheme and concluded that the payments were remuneration for services to the company, not distributions to shareholders.
  • It was necessary for the scheme for the directors to be receiving the payments in their capacity as directors or employees. It was not necessary for them to be shareholders.
  • The scheme payments were described in all the relevant documentation as a form of remuneration in recognition of their services to the company.
  • In terms of restitution to the company, Ms Stoneman could have been asked by the company to pay up the unpaid amounts on her E shares instead of repaying the company.

The company’s appeal was dismissed.


Yet another ‘too good to be true’ tax scheme. HMRC now have to decide how to go about assessing PAYE. Presumably, this will be via a Regulation 80 and NICs determination, issued to the companies involved rather than a Regulation 72(3) against the individuals personally, or perhaps the scheme users will fight on via the tribunals.


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