Christopher Purkiss (as Liquidator of Ethos Solutions Ltd) v Tim Kennedy & 34 Others
| Jurisdiction | England & Wales |
| Judge | Barber |
| Judgment Date | 08 December 2022 |
| Neutral Citation | [2022] EWHC 3098 (Ch) |
| Court | Chancery Division |
| Docket Number | CR 2018 010778 |
[2022] EWHC 3098 (Ch)
ICC JUDGE Barber
CR 2018 010778
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST
IN THE MATTER OF ETHOS SOLUTIONS LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Royal Courts of Justice
7 The Rolls Building
Fetter Lane
London
EC4A 1NL
Hugh Sims KC and Simon Passfield (instructed by Clarke Willmott LLP) for the Applicant
Setu Kamal for the Ethos Respondents
Hearing dates: 16 June 2022, 2 September 2022, 18 and 21 October 2022
Approved Judgment
This judgment was handed down remotely by email. It will also be sent to The National Archives for publication. The date and time for hand-down is 9.30 a.m. on 8 December 2022
ICC Judge Barber
On 13 December 2018, Ms Michaela Hall, as liquidator of Ethos Solutions Limited (‘the Company’) issued an application (‘the Main Application’) pursuant to s.423 of the Insolvency Act 1986 seeking to challenge payments in the total sum of approximately £9 million alleged to have been made by the Company to sixty-two respondents (‘R1-R62’) via a business benefit trust (‘the Trust’) of which the sixty-third respondent was the trustee company.
By application dated 8 June 2022, Mr Purkiss, who has since replaced Ms Hall as liquidator, now seeks permission to re-amend the Main Application (i) to add the Company as the second applicant and (ii) to plead additional, alternative claims in unjust enrichment (‘the Re-Amendment Application’). The Re-Amendment Application is opposed by a number of remaining respondents collectively referred to as ‘the Ethos Respondents’.
Background
The background to this matter is set out in my earlier judgment dated 4 February 2021, reported at [2021] EWHC 142 (Ch) and [2021] BPIR 550.
In brief summary, the Company was an ‘umbrella’ company which ran a business benefit trust scheme from 2008 to 2012. Under the terms of the scheme, the respondents received a modest ‘PAYE’ salary from the Company and the balance (net of various commissions and expenses) by way of discretionary loans made from an offshore trust.
At the time that the Company was incorporated, the courts did not accept HMRC's views on the tax consequences of loan schemes. In Sempra Metals Ltd v Revenue and Customs Commissioners [2008] STC (SCD) 1062, the court had rejected the argument that loans made by an employer's EBT were subject to income tax.
HMRC made some progress in 2010. On 29 October 2010, judgment was handed down in the case of Aberdeen Asset Management Plc [2010] UKFTT 524 (TC). This case was slightly different on the facts, (involving monies paid by the employer which ultimately, via a series of steps, found their way to a ‘cash-box’ company in which the relevant employee was sole shareholder), but the rhetoric was Ramsay; see, by way of example, the Aberdeen Asset judgment at [48]:
“Gone are the days, and rightly so, when a taxpayer could elide the literal interpretation of a taxing statute by a complex series of prearranged transactions, involving an almost impenetrable jungle of companies, trusts and shareholdings with each participant following a well scripted plan … designed to defeat the Revenue's fiscal claims. The law is no longer impressed, if it ever was, by superficial facts and apparent discretions … The law looks through these arrangements, identifies the substance of the transaction (by viewing the facts realistically), and considers whether they fall within the taxing provision in issue, construed purposefully …”
At [54] of the judgment in Aberdeen Asset, the tribunal further concluded that it did not matter if the payment to the cash-box company was made by the employer or by the EBT. Subsequent appeals to the Upper Tribunal and to the Court of Session were later dismissed.
On 9 December 2010, the government published draft legislation designed to tackle loan schemes, alongside a written ministerial statement, warning that anti-forestalling provisions would apply between 9 December 2010 and 5 April 2011 to any payments which would be caught by the legislation if paid after 6 April 2011.
In January 2011, the Company modified the Scheme. The modifications included the introduction to the Scheme of a business registered in Jersey known as Scope Self Employment Jersey (‘Scope’). The Ethos Respondents contend (inter alia) that following the introduction of Scope, the Company ceased to be ‘employer’. The Liquidator disputes this.
On 10 June 2011, HMRC wrote three letters to the Company and its accountants, Magee Gammon Partnership LLP. These letters confirmed (1) that HMRC would be checking the Company's CTSA (corporation) tax returns for the period 20/12/08 – 19/12/09 and 20/12/09–31/12/09; (2) that such checks would include ‘all arrangements involving the Employee Benefit Trust (EBT)’; (3) that the enquiry into the EBT would be carried out by Special Investigations Liverpool under Code of Practice 8; and (4) that a VAT visit would take place in July 2011.
HMRC's letter of 10 June 2011 to Magee Gammon also enclosed a detailed list of questions. One question related to the deduction of £2,110,911 from the profit and loss account as an expense in respect of the contribution made to the Trust in the year ending 31 December 2009, asking how the directors considered the presumptions imposed by UITF 32 to be rebutted.
UITF 32 was a financial reporting standard covering EBTs which provided that when an entity transferred funds to an intermediary, there should be a rebuttable presumption that the sponsoring entity has exchanged one asset for another and that the payment itself did not represent an immediate expense. This was a potential line of attack on the deductions which the Company had made for corporation tax purposes in respect of sums contributed to the Trust.
Shortly thereafter, by letter dated 27 June 2011, HMRC's Specialist Investigations team wrote to the Company, stating that it was opening an enquiry into the EBT scheme operated by the Company in respect of 2008/9. The letter referred to recent developments in the case law ( Aberdeen Asset Management Plc [2010] UKFTT 524 (TC)) and the potential impact of the new disguised remuneration legislation, by then published in revised form as part of the Finance (No. 3) Bill on 31 March 2011. The letter stated that HMRC would be treating the sums paid to each employee by the Trust or sub-trust as the payment of earnings on which charges to PAYE and NIC would arise, stating that in HMRC's view, the Company had accrued approximately £1,135,670.12 in outstanding liabilities. There is no evidence that HMRC opened an enquiry in respect of the years 2009/10 or 2010/11.
In July 2011, the Finance Act 2011 (inserting Part 7A into ITEPA 2003) received Royal Assent. Part 7A, which had been heralded by the government announcement on 9 December 2010, had retrospective effect; it covered ‘relevant steps’ (as defined) on or after 9 December 2010. In broad terms these included loans made by a relevant trust/sub-trust to an employee on or after 9 December 2010 from ear-marked funds which had been paid to the trust by the employer on or before 9 December 2010.
In November 2012, Mr Clark, the sole de jure director of the Company, instructed a firm of insolvency practitioners, CCW Recovery Solutions LLP (‘CCW’) to take the necessary steps to place the Company into creditors voluntary liquidation. By letter dated 29 November 2012, CCW sent to HMRC notice of a meeting of creditors due to be held on 18 December 2012.
On 4 December 2012, HMRC's Specialist Investigations team wrote to the Company, enclosing regulation 80 determinations (PAYE) and a notice of decision (NIC) in respect of the accounting years 2008/9 and 2009/10 (‘the determinations’). HMRC did not issue a Regulation 80 determination for the tax year 2010/11 or for the year ending 31 December 2011.
On 18 December 2012, the Company entered creditors voluntary liquidation. The Company's creditors comprised (1) trade creditors of approximately £4,500 and (2) HMRC claiming approximately £2.4m. Mr Ian Defty of Kingston Smith & Partners LLP was appointed as liquidator on the vote of HMRC. Mr Defty was appointed within the 30 day period for appealing the determinations, but did not appeal them. Mr Defty was later replaced by Ms Hall as liquidator.
In the 2016 budget, the government announced plans to introduce legislation to tackle both historic and ongoing use of loan schemes: Budget 2016, paragraph 1.217 (‘the loan charge’). Affected taxpayers could settle, repay any outstanding loans, or pay the loan charge.
The loan charge was introduced by the Finance Act (No 2) 2017. When first introduced it could ‘look back’ 20 years; that is to say, it applied to loans made between 1999 and 2019 which were not paid back by 5 April 2019. It also stacked the loans made into a single tax year, imposing a tax charge in a single year on all outstanding loans, regardless of the number of years over which those loans were entered.
In 2017, the Supreme Court in RFC 2012 plc (in liquidation) (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 (‘the Rangers case’) overruled Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062. As summarised by Lord Hodge JSC (giving the judgment of the court) at [58]:
(1) income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee;
(2) the governing primary legislation does not require the employee himself or herself to have received the remuneration for income tax to be chargeable;
(3) references in the PAYE Regulations to making a relevant payment to an employee or other payee fall to be...
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