Shah v Insafe International Ltd and another
| Jurisdiction | England & Wales |
| Judgment Date | 12 May 2016 |
| Neutral Citation | [2016] EWHC 1036 (Ch) |
| Date | 12 May 2016 |
| Court | Chancery Division |
Mr Simon Monty QC, (Sitting as a Deputy Judge of the Chancery Division)
Mr James Stuart (instructed by Vyman Solicitors) appeared for the Claimant
Mr Simon Forshaw (instructed by Anthony Gold Solicitors) appeared for the Defendants
Employee benefit trusts – PAYE and NIC settlement agreement between employer and HMRC in respect of monies settled on sub-trusts – Subsequent winding up of sub-trusts – Whether sums distributed to be paid net of amounts paid to HMRC under the settlement agreement.
Sums to be distributed to the principal beneficiary of an EBT sub-trust, on its winding up following a Settlement agreement in respect of PAYE and NIC liabilities reached between the employer and HMRC, were to be paid after deducting amounts paid to HMRC under the Settlement agreement.
In 2006, the first Defendant, Insafe International Limited (Insafe) established Employee Benefit Trusts by settling a total of £1.25m into two EBTs. Most of the trust monies were then placed into sub-trusts, 80% into a sub-trust for the benefit of the second Defendant (who was the sole shareholder and Managing director of Insafe) and his family, and 20% for the benefit of the Plaintiff (who was Insafe's Finance director and Company secretary) and his family. Insafe was the employer company and also trustee of the EBTs and sub-trusts. The sub-trusts loaned funds back to the company, at an agreed rate of interest.
The various trusts and powers of the EBTs included certain obligations to pay income tax and social security contributions resulting from benefits provided or other defined circumstances, notwithstanding liability to pay the same might not be enforceable (by HMRC) against the trustees; and certain powers to pay any tax, duty or fiscal imposition whatsoever becoming payable … in respect of the Trust Fund or any part thereof.
The sub-trusts provided, under an Exclusion of Settlor clause, that no discretion or power conferred on the trustees, and no provision of the EBT trusts or sub-trusts, was to be exercised or permit any part of the sub-trust funds to become in any way payable to or for the benefit of the Settlor [defined as Insafe].
In 2009, HMRC notified Insafe of its intention to enquire into the EBT arrangements, and in 2010 issued Determinations in respect of PAYE and Notices of Decision in respect of NICs. This was on the basis that the amounts paid into sub-trusts or otherwise allocated to directors and employees by the trustees amount to payment of earnings and should have been subject to PAYE tax and Class 1 NICs.
In August 2015 Insafe and HMRC entered into a Settlement agreement pursuant to the EBT Settlement Opportunity, under which the sums paid or allocated into the sub-trusts were treated as remuneration, and it was agreed that liabilities for PAYE and NICs were unpaid wholly or in part because of the Employer's failure to meet all its obligations. The net settlement sum was the agreed amount of unpaid PAYE and NICs and interest thereon, less a deduction for overpaid corporation tax. The Plaintiff played no part in the discussions leading to the Settlement agreement, and was not a party to it.
The main issue between the parties, having agreed that following the settlement with HMRC the EBTs were to be wound up and assets distributed, was who should bear the liability for PAYE and NICs (and interest thereon) under the Settlement agreement and should those amounts be deducted from the trust funds or not. There were ancillary issues as to the correct rate of interest to be paid by Insafe as borrower under the loan arrangements (to itself in its capacity as trustee under the sub-trusts), and whether the costs of the accountants in negotiating the Settlement agreement with HMRC were properly chargeable to the sub-trusts.
The judge said it was noted that it was expressly agreed between HMRC and Insafe in the Settlement agreement that the obligation to make PAYE tax and NIC payments arose when monies were allocated from the EBTs to the sub-trusts.
In November 2015, the Court of Session had delivered its judgment in the Advocate General for Scotland v Murray Group Holdings Ltd TAX[2015] BTC 36 case. The judge said that the Court of Session held that monies paid via EBTs were taxable as earnings because the monies represented the product of the employee's work, even though the monies were paid to a third party via an EBT, and that the employer's liability to make PAYE and NIC payments arose when the monies were paid into the EBTs. In his view, Murray Group represented the correct position in law and should be applied in this case. But the fact the employer had the obligation to deduct PAYE and NICs did not detract from the fact the liability to pay income tax and employee's NICs was always that of the employee.
Against that background, the judge said he considered that, under the EBT and sub-trust documentation, the trustees had an obligation to make the PAYE and NIC payments in question out of the trust fund because a number of the conditions triggering such obligation had been met.
Further (although this finding as to obligation was sufficient to dispose of the case), they also had power to do so. This was because, whilst the trustees were precluded from exercising their powers for the benefit of the Settlor (Insafe), the liability to tax (on the remuneration, which had been settled by Insafe under the Settlement agreement with HMRC) was that of the Plaintiff, and any exercise of powers by the trustees to deduct amounts in respect of PAYE and NICs was not therefore for the benefit of Insafe. That analysis also applied, the judge said, to the interest payable on late paid tax and NICs.
From the above it followed, the judge said, that the amount to be distributed to the Plaintiff and the other beneficiaries of the Plaintiff sub-trusts was the amount after deducting the sums paid to HMRC under the Settlement agreement.
As regards the accountants' fees, the judge said he considered they were advising Insafe both in its capacity as employer and as trustee, and that their costs could be settled out of trust funds.
Judgment therefore fell to be made for the Defendants.
This is not a tax case as such; it is also a decision on its own facts, including the specific terms of the EBT documentation in question.
Nevertheless, it is a case that will interest those involved with EBTs, as regards how tax and NICs which have been or have to be accounted for, might fall to be borne as between employer, employee and EBT trustees. It perhaps emphasises the importance of the terms of the EBT (or other) documentation in issue; of the need for consideration as to how negotiations with HMRC on liability are handled; and of how recoupment may arise, if not under the PAYE regulations or the EBT arrangements themselves, under the general law of restitution (as explained in McCarthy v McCarthy Stone UNK[2008] All ER 221).
[1] This action concerns the sums which should properly be paid out by the First Defendant to the Claimant on the winding up of various trusts and sub-trusts.
[2] The Claimant (Mr Shah) is an accountant. The First Defendant (Insafe) is a company which supplies and maintains security safes. Mr Shah was employed by Insafe as its Finance Director from 2001 and as its company secretary from 2004, until he was dismissed in January 2014. The Second Defendant (Mr Bullock) is the sole shareholder of Insafe and its Managing Director.
[3] In 2006, with advice from a firm of financial advisers Powrie Appleby LLP (PA), Insafe established Employee Benefit Trusts (EBTs) by settling a total of £1.25m on trust in two EBTs, the trustees of which were Insafe. Most of the trust monies were then placed into two sub-trusts. 80% of the money (£982,400) went into a sub-trust for the benefit of Mr Bullock and his family and the remaining 20% (£245,600) into a sub-trust for the benefit of Mr Shah and his family. The sub-trusts then loaned back money to Insafe at an agreed interest rate of 3% over NatWest base rate compounded quarterly. By 2010 the sub-trusts had lent Insafe a total of £1,292,935, being almost the entire sum of £1.25m together with accrued interest.
[4] When these EBTs were established, it was thought that they would have tax advantages for Insafe, Mr Bullock and Mr Shah. Insafe would receive a corporation tax deduction on the payments into the EBTs, and whilst any bonus payments from the trust would attract income tax, if payments out were made to employees as loans, the employee would not pay income tax on the loans.
[5] HMRC challenged the use of EBTs, contending that their use was disguised remuneration and that income tax and national insurance charges became due from the date on which the employer company paid money into the sub-trusts. HMRC introduced disguised remuneration rules with effect from 6 April 2011, which created a charge to income tax where third party arrangements are used to provide what is in substance reward, recognition or a loan in connection with an employee's current, former or future employment, deeming those sums as employment income taxable through pay as you earn (PAYE). At the same time, HMRC launched an EBT Settlement Opportunity (EBTSO) to enable employers who used EBTs the opportunity to resolve the tax position.
[6] On 3 August 2015, having taken advice from PricewaterhouseCoopers LLP (PWC), Insafe entered into an agreement with HMRC (the Agreement), pursuant to the EBTSO, under which the sums paid into the sub-trusts were treated as remuneration, and Insafe paid PAYE and NIC thereon; Insafe claimed a corporation tax deduction for the amount paid; and Insafe paid interest on the unpaid tax but no penalties for late payment.
[7] Following that settlement, it is agreed that the EBTs are to be wound up and the assets distributed. In...
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