Christopher Purkiss (as Liquidator of Ethos Solutions Ltd) v Tim Kennedy
| Jurisdiction | England & Wales |
| Judge | Mr Justice Rajah |
| Judgment Date | 08 May 2024 |
| Neutral Citation | [2024] EWHC 1081 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2018-010778 |
[2024] EWHC 1081 (Ch)
THE HONOURABLE Mr Justice Rajah
Case No: CR-2018-010778
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Hugh Sims KC and Simon Passfield KC (instructed by Clarke Willmott LLP) for the Applicant
Mr Setu Kamal for the Respondents
Hearing dates: 17 and 18 April 2024
APPROVED JUDGMENT
Introduction
The Applicant is the third “Court appointed” liquidator of Ethos Solutions Limited (“ the Company”). The Company was incorporated on 24 September 2008. It was an umbrella company which promoted and operated a tax avoidance scheme (“ the Scheme”) whose intended effect was that self-employed individuals who participated could avoid paying income tax and national insurance contributions (“ NICs”) on their remuneration. HMRC considered the scheme to be ineffective – a position which appears to have been vindicated by the decision of the Supreme Court in RFC 2012 Plc v AG for Scotland [2017] UKSC 45 (“ Rangers”).
The Scheme involved individuals, who provided their services on a consultancy or independent contractor basis to an end user, becoming employees of the Company, and providing their services to the end user through the Company. The bulk of the remuneration for their services was paid by the Company to an offshore employee benefit trust from which the individuals requested and received loans. It was the Company's intention, based no doubt on the then prevailing decisions in Dextra Accessories Ltd v HM Inspector of Taxes [2002] STC (SCD) 413 (“ Dextra”) and Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062 (“ Sempra”), that no liability would fall on it to deduct income tax from the payments it made to the employee benefit trust. Many years after the events in this case, the Supreme Court held in Rangers that Dextra and Sempra were wrongly decided. Income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee, regardless of whether the payments are paid to the employee personally or redirected to a third party (such as the trustee of a trust).
On 4 December 2012, HMRC assessed the Company as being liable under the PAYE regime to pay income tax and NIC of £2,238,057.72 in respect of the tax years 2008/09 and 2009/10. The Company entered into creditor's voluntary liquidation (“ CVL”) on 18 December 2012, without making any payment, or seeking to appeal.
On 13 December 2018, these proceedings were commenced (“ the Application”) against 63 Respondents seeking orders under section 423 Insolvency Act 1986 (“ s.423”) against 62 of them. They were almost all individuals who had participated in the Scheme. The claims against many of the original respondents have been resolved by settlement, judgment or discontinuance or, some of the respondents having been debarred from defending for failure to file a defence, are awaiting an uncontested disposal hearing. This is the trial of the claims against the remaining 23 respondents who I will refer to as “ the Respondents”.
The Applicant's case in summary is that:
a. the Scheme is a composite transaction at an undervalue (within the meaning of s.423(1)(c)) because the consideration the Company received was significantly less than the liabilities it accrued as part of it; in particular the Company incurred an income tax and NIC liability to HMRC which significantly exceeded the sum received by the Company for the transaction;
b. the Company entered into each such transaction for the prohibited purpose in s.423(3), since the purpose of the arrangements, by which the Respondents received most of their earnings in the form of “loans” rather than salary, was the avoidance of income tax and NIC that would otherwise have arisen, so prejudicing the interests of HMRC, and recovery made more difficult through the use of an offshore trust;
c. in consequence, the Court should exercise its discretion pursuant to s.423(2) to make orders against the Respondents requiring them to pay to the Company a sum equivalent to the income tax and NIC which should have been deducted from the sums paid to the Trust for their benefit (or such other orders as the court thinks fit).
The Respondents dispute every stage of the Applicant's case, save that it is accepted that the Scheme is a composite transaction.
Factual and procedural background
The Company and the Scheme
When the Company was incorporated on 24 September 2008, its first director and sole shareholder was Mr Justin Webster. He set up the Company as a vehicle to implement tax planning advice concerning the creation of a ‘Business Benefits Trust’, which he had received pursuant to a professional services agreement with Montpelier Tax Consultants (Isle of Man) Limited. Mr Webster resigned as director on 9 October 2008 before any, or any significant trading had occurred, and was eventually succeeded by Mr Jeremy Clark, on 9 February 2009, who served as the Company's sole director during trading. On 24 September 2011, Mr Webster transferred his 100 per cent shareholding to Mr Clark.
On 27 February 2009, the Company created the Ethos Solutions Ltd Business Bonus Trust (“ the Trust”) for the benefit of the Company's employees and their dependents. The trustee was a Jersey company called Nautilus Trustees Ltd (“ Nautilus”). The Company agreed to pay Nautilus a fee of 2% on all payments made into the Trust for its services.
The Scheme operated as follows:
a. individuals who provided services to end users on a consultancy or independent contractor basis and wished to avoid paying tax on their income became an employee of the Company. They entered into contracts of employment with the Company which provided for the Company to pay them a nominal, or modest, salary (e.g, basic remuneration at £6.75 per hour, up to a maximum of 37.5 hours week, to be paid to the employee as payroll payments “ less tax and national insurance payments”);
b. the Company entered into consultancy agreements with either: (i) the end users; or (ii) the individuals' personal services companies or employment agents (which in turn entered into consultancy agreements with the end users), by which the Company agreed to provide the individuals' services to the end users/personal services companies/employment agents in return for the payment of consultancy fees. These significantly exceeded the nominal, or modest, salaries payable by the Company to the individuals;
c. when the Company received payment of the consultancy fees from the end users (or their personal services companies/employment agents), it: (i) retained any applicable VAT (and subsequently accounted to HMRC in respect thereof); (ii) retained an agreed proportion of the monies by way of payment for its services, what Mr Sims KC called the “administration fee” (the average was about 13.4%); (iii) applied part of the balance to the payment of the individuals' nominal salaries payable under the contracts of employment; and (iv) transferred the remainder of the monies to the Trust (without deducting income tax and NIC on those monies and paying them to HMRC under the PAYE regime);
d. subsequently, the monies paid to the Trust were: (i) transferred by Nautilus into sub-trusts set up in the names of the individuals; and then (ii) transferred from the sub-trusts to the individuals in the form of discretionary loans, the individual having written to Nautilus' administrators making a loan request.
I was shown, by way of worked example, a manuscript note relating to one of the debarred respondents (Dr Mazhar Mirza). This shows that the Company received consultancy fees of £9,240 based on two invoices for services provided by Dr Mirza to an end user as an employee of the Company. After deducting £1016.40 for the administration fee, £ 8223.60 or 89% of Dr Mirza's earnings was left over. Out of this, two payments of £253.16 and £1028.46 were made to Dr Mirza as payroll. This left £6941.98 to be paid to the Trust (plus the trust fee at 2% of this sum, of £138.84). Any PAYE and NIC due on the payroll payments – as well as the 2% trust fee – were borne by the Company out of its administration fee, such that the payroll payments to individuals were essentially ‘grossed up’.
Thus, through his participation in the Scheme, in Dr Mirza's example, he received apparently net of all tax c.89% of the remuneration for his services. 75% of that remuneration was channelled to the Trust, not treated by the Company as subject to tax, and passed on to Dr Mirza as loans.
The Company attracted its clients to the Scheme through ‘introducers’ – whose job it was to identify individuals who provided services to end users on a consultancy or independent contractor basis and who wished to avoid paying tax on their income. The Company's introductory material explained how the Scheme would work and made assurances as to its efficacy. So, an introductory letter from Mr Clark stated that “[o] nce you are a beneficiary of the Business Bonus Trust you may ask for a loan at any time. The loans you receive will not be reported to HMR&C and are not a taxable benefit of your employment”. Another “FAQ” document contained the...
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