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Tax Avoidance & Insolvency

20 September 2019

Tax planning using Employee Benefit Trusts (EBTs) and variations of such arrangements was a popular method over the last decade. A lot of water has passed since then and business life moves on. Sadly tax often doesn’t, and in the world of EBTs and the wider tax avoidance environment, settlement opportunities and the controversial loan charge remain very topical.

With the passage of time, in our experience usually due to commercial reasons, companies that implemented tax planning are now being placed into insolvency proceedings. The creditors often include HMRC, and disputed tax liabilities arising in respect of the tax planning for most, if not all of, the claims. We have seen a number of examples in these situations where HMRC has instructed its own liquidator to pursue from the former directors / shareholders for the tax that HMRC feels is due – even though it remains disputed.

The approach we have seen is that the liquidator appoints lawyers who send a long letter alleging various offences under the 1986 Insolvency Act. These will include misfeasance, wrongful trading and defrauding creditors. In every case we have seen, the lawyers have also said the expectation is that the company should have withheld the tax saved by the tax planning and kept it to one side pending HMRC’s agreement, despite the proliferation of opinion from learned Tax Counsel at the time that the tax planning was, in fact, legal.

These scenarios are not to be taken lightly. The dynamics in play between the liquidator, HMRC, the client and other parties such as trustees are complex and there are numerous considerations for a client to understand. The process for any Director or Shareholder being challenged to endure are not to be welcomed - one client was subjected to a four hour interview by Counsel on behalf of the liquidator!

Clients facing this scenario should take expert advice.