High Court refuses to set aside tax avoidance schemes

In Dukeries Healthcare Ltd and Ors v Bay Trust International Ltd, HMRC and Ors [2021] EWHC 2086 (Ch), the High Court dismissed claims to set aside Remuneration Trust arrangements using the equitable doctrine of mistake. There was insufficient evidence of serious mistake and the claimants had accepted the risk the schemes would fail.

The claimant companies had entered into Baxendale Walker (BW) Remuneration Trust (RT) tax planning schemes.

• In 2010, prior to the introduction of the Part 7A ITEPA 2003 Disguised Remuneration rules, they made substantial cash contributions into offshore trusts set up for the benefit of persons who supplied services to the companies and as well as future, but not present or past employees.
• Under the trust deeds, the claimant company directors were excluded from benefitting until their death at which time their surviving spouses and children could become beneficiaries. This sought to prevent the trusts from being Employee Benefit Trusts. The trustees were permitted to make loans to the directors as excluded persons.
• Corporation Tax deductions were claimed on the contributions and the directors received loans from the trusts.
• No independent advice was taken by the directors. The claimants received a summary from BW which said the scheme did not involve any tax avoidance, it had been known about by HMRC “for years”, was not a retirement benefits scheme and promised:

“Using legal strategies successfully implemented over a decade, the company… can fund an incentives plan, under statutory protection, through a tax-free trust-based environment” and “such contributions are not subject to PAYE, since none of the contribution constitutes assessable income of any employee, or indeed specific receipt by any person. Similarly, such contributions are not liable to Employers Class 1 NICs."

• The claimants applied to have the trust deeds and contributions set aside under the doctrine of Mistake and for orders that assets vested in the offshore trust structure be re-vested with them, on the grounds that the schemes did not work for tax purposes and the contributions made were not permitted under the trust deed.

The High Court dismissed the claims:

• There was inadequate evidence about the claimants having acted under a mistake of so serious a character as to render it unjust on the part of the trust to retain the contributions.
• When the court is asked to apply the doctrine of mistake in the case of a company, they must be able to establish what the collective understanding of the board of directors was.
• The evidence came nowhere near to demonstrating that the collective understanding of the respective boards was materially mistaken or what the board’s view was about the risks involved. In the case of the director who gave evidence in court, his evidence did not meet the requisite threshold.
• The claimants had not shown that it would be unconscionable for them to remain bound by the schemes.
• The schemes were properly characterised as being artificial tax avoidance. Even if there was no actual assumption of risk, it was reasonable in this case, to conclude that the directors and companies must have accepted the risks of the schemes failing.

Comment

One of the claimants, Dukeries Healthcare, has a case pending with the First Tier Tribunal (FTT) which is stayed subject to the decision in the High Court. In that case, HMRC claim the contributions into the trust are not tax-deductible and are payments of earnings subject to PAYE and NICs. The decision in that case will be key for other users of this particular scheme. It is worth noting that in another recent case Marlborough DP Ltd v HMRC [2021] TC08246 the FTT held that loans funded by a remuneration trust were not earnings, or taxable under part 7A and were taxable as distributions. FTT decisions are not precedent however and it may be that HMRC appeal that case.

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External link

Dukeries Healthcare Ltd and Ors v Bay Trust International, HMRC and Ors [2021] EWHC 2086 (Ch)