Chalcot Training Ltd v Matthew Anthony Ralph

JurisdictionEngland & Wales
JudgeMr Michael Green
Judgment Date05 May 2020
Neutral Citation[2020] EWHC 1054 (Ch)
Docket NumberClaim No: BL-2017-000429
CourtChancery Division
Date05 May 2020

[2020] EWHC 1054 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

BUSINESS LIST (ChD)

Royal Courts of Justice

Rolls Building

Fetter Lane, London, EC4A 1NL

Before:

Mr Michael Green QC

(sitting as a Deputy Judge of the Chancery Division)

Claim No: BL-2017-000429

Claim No: BL-2018-002252

Between:
Chalcot Training Limited
Claimant
and
(1) Matthew Anthony Ralph
(2) The Commissioners for her Majesty's Revenue and Customs
Defendants
And Between:
Chalcot Training Limited
Claimant
and
(1) Susan Elizabeth Stoneman
(2) The Commissioners for her Majesty's Revenue and Customs
Defendants

Mr Edward Davies QC and Mr Laurent Sykes QC (instructed by Lewis Silkin LLP) for the Claimant

Mr Richard Vallat QC and Mr Jack Rivett (instructed by Solicitor to HM Revenue and Customs) for the Second Defendant

Hearing dates: 5 to 7, 11 to 13 February 2020

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Michael Green QC

Mr Michael Green QC:

Paragraphs

A

INTRODUCTION

1 – 4

B

BRIEF OUTLINE OF THE FACTS AND THE E SHARES SCHEME

5 – 19

C

RELIEF SOUGHT AND MAIN ISSUES

20 – 23

D

WITNESSES

24 – 38

E

DETAILED FACTS

39 – 123

F

CHARACTERISATION

124 – 224

G

DISCOUNT AND COMMISSION

225 – 261

H

REPAYMENT

262 – 269

I

MISTAKE

270 – 285

J

DISCRETION

286 – 292

K

DISPOSITION

293 – 294

A. INTRODUCTION

1

The old adage “ if it seems too good to be true, it probably is” is particularly applicable to the tax avoidance scheme entered into by the Claimant company, Chalcot Training Limited ( the Company) which is the subject matter of this case (called hereafter the E Shares scheme). Even Ms Susan Stoneman, one of the Defendants but also the sole shareholder and director of the Company, said in her witness statement that it seemed to her at the time “ a little too good to be true”. The E Shares scheme purported to avoid all corporation tax, income tax and national insurance contributions ( NIC) on monies paid out by the Company to Ms Stoneman and her ex-husband, Mr Matthew Ralph.

2

There are a number of cases progressing through the First Tier Tax Tribunal ( FTT) concerned with the E Shares scheme, including appeals by the Company. I have been told that they have all been stayed pending the outcome of this case. That is because this case concerns an attempt by the Company to set aside all the material transactions that were entered into as part of its E Shares scheme on the grounds that they were unlawful on various company law grounds. The Company says principally that the transactions should properly be characterised as distributions to shareholders, rather than remuneration to directors/employees (as they were described), and that they were therefore unlawful; additionally, the Company asserts that the transactions fell foul of restrictions in the Companies Act 2006 (the Act) relating to the issue of shares at a discount (s.580 of the Act) and the payment of commissions (ss.552 and 553 of the Act). If the Company is right in those respects, it says that everything should be unwound, its share register rectified and it should be placed back into the position that it would have been had the E Shares scheme never been entered into.

3

This is opposed by the Commissioners for Her Majesty's Revenue and Customs ( HMRC). HMRC says that the Company is bound by the transactions it entered into, which were reflected in its accounts and supporting documentation and that those transactions should be characterised in the way the Company itself did at the time, namely as remuneration to the Company's directors. Whatever tax consequences flow from that will ultimately be determined by the FTT and are not a matter for me. This case is purely concerned with the lawfulness and effectiveness of the transactions from a company law perspective.

4

Each side has criticised the other in relation to their respective positions adopted in this case: the Company says that HMRC's stance is “ surprising and unmeritorious” as HMRC should be expected not to support the formal E Shares scheme documentation over the true substance of the transactions; whereas HMRC says that the Company's claims are “ brazen” as it is the very individuals who caused the Company to use the E Shares scheme for three years running who are now seeking to set aside those transactions on the grounds that they were not the real transactions that they and the Company entered into. My main task is to decide the true nature and characterisation of the transactions that were integral to the E Shares scheme; that will be based on the evidence and submissions of Counsel, uninfluenced by the parties' descriptions of each other's position.

B. BRIEF OUTLINE OF THE FACTS AND THE E SHARES SCHEME

5

The Company was established in 2005 by Mr Ralph and Ms Stoneman. Its business was to provide learning and communications products and services to large global organisations. From its inception, the Company was owned 50/50 by Mr Ralph and Ms Stoneman and they were the only two directors. In May 2007, Mr Ralph and Ms Stoneman married.

6

After a difficult start, by 2011 the business of the Company had become well established and following a large pre-payment from a customer, Mr Ralph and Ms Stoneman decided to explore tax planning for the anticipated profits that the Company appeared likely to generate. They were referred by the Company's accountant, Mr David Leigh of Leigh Saxton Green, to specialist tax advisers, Financial and Professional Support Services ( FPSS). The initial advice was to transfer the Company's business to a limited liability partnership that was called NKD Learning LLP (the LLP). The transfer happened gradually over the course of a year from October 2011. The Company, Mr Ralph and Ms Stoneman were appointed as the members of the LLP. While drawings (effectively borrowings) taken from the LLP were tax free, tax was payable on the profits of the LLP by the members (it is treated as their income) and the intention was to transfer the LLP's profits to the Company, as a member of the LLP, to take advantage of the more favourable corporation tax rate.

7

In September 2011, through FPSS, Mr Ralph and Ms Stoneman were introduced to the E Shares scheme which had been developed and sold by Blackstar (Europe) Limited ( Blackstar). The E Shares scheme was designed to avoid corporation tax payable on the Company's profits, which were intended to be the profits allocated by the LLP. This was to be achieved by payments being made out of those profits to employees in respect of their employment which was deductible for the purposes of corporation tax. The clever twist of the E Shares scheme was that the payments to the employees would not be subject to PAYE income tax or NIC because they did not constitute taxable earnings of the employees. This was because the payments were subject to the obligation of the employees to subscribe for shares in the employer, via the E Shares scheme.

8

On 28 November 2011, the Company, Mr Ralph and Ms Stoneman entered into the first iteration of the E Shares scheme by signing various documents including agreements to subscribe for E Shares, board minutes and written resolutions of the shareholders (the 2011 scheme). By this first iteration, total payments of £2,180,000 were made to Mr Ralph and Ms Stoneman (£1,090,000 each) in the form of £10,900 paid into their respective bank accounts and the balance of £1,079,100 credited to their director's loan accounts. The £10,900 was immediately paid back to the Company as being 1% of the nominal value of the E Shares that each had subscribed for. The remaining 99% of the nominal value of the E Shares remained uncalled.

9

Mr Ralph and Ms Stoneman had intended to draw on the monies credited to their loan accounts to purchase a holiday home they had found in Ibiza. Unfortunately, however, they separated in January 2012. The events that unfolded during 2012 were against the backdrop of their impending divorce and the removal of Mr Ralph from the business. Ms Stoneman decided to go ahead with the purchase of the house in Ibiza and for such purpose a sum of £1,000,500 was transferred to her from the Company against her loan account. In April 2012, a sum of £1,289,100 was transferred to Mr Ralph also against his loan account. In accordance with the E Shares scheme, no income tax or NIC was paid on these sums or the amounts credited to the loan accounts.

10

On 31 August 2012, as part of the separation arrangements, Ms Stoneman and Mr Ralph entered into a Restructure Agreement whereby Mr Ralph resigned as a director of the Company and transferred his ordinary shares in the Company to Ms Stoneman. In order not to trigger a call on the E Shares, Mr Ralph continued to be employed by the Company potentially for a term of 5 more years.

11

On 19 November 2012, Ms Stoneman and the Company entered into the second iteration of the E Shares scheme with the amount of £2,230,000 being put through the scheme (the 2012 scheme). As with the first iteration, 1% of that amount, £22,300, was paid to Ms Stoneman and immediately paid back by her to the Company as payment of 1% of the nominal value of the 2,230,000 E Shares allotted to her. The balance of £2,207,700 was credited to Ms Stoneman's loan account with the Company. This sum was never paid out by the Company to Ms Stoneman.

12

On...

To continue reading

Request your trial
1 cases
  • Clipperton and Another
    • United Kingdom
    • First Tier Tribunal (Tax Chamber)
    • 20 January 2021
    ...The background to the current position is explained in the recent decision of the High Court in Chalcot Training Ltd v Ralph & Anor [2020] BTC 21, at [135] and [136], as follows: The common law rule as to distributions has its origin in the capital maintenance doctrine, a fundamental pillar......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT