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EBT settlement for company in insolvency

Living directors are told they are liable to repay the liability owed for deceased former director

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I am dealing with a situation in which a company has attempted liquidation and in doing so requires the repayment of tax liability amounting from the use of EBTs.

The issue is that of the 3 former directors, one (who held 1/3 shares) at the time during which the EBTs were taken has died. He was not involved in the settlement process before death.

HRMC, through the insolvency practice, are requesting that the two living former directors (as well as the current directors - who were not directors at the time of the EBTs) clear the company's debts and therefore repay the tax liability owed not only for themselves but additionally for the deceased former director. This will mean an individual tax bill per former living director, as they are considered to be responsible for the EBTs taken during their directorship. We assume that the estate of the deceased former director is unable to repay his share. They have not been contacted.

Any help would be highly appreciated.

Replies (16)

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By paul.benny
14th Feb 2021 15:38

This looks to be primarily a legal question (or actually, several questions) and, given the sums involved, I would imagine the parties can afford to pay lawyers rather than attempting to rely on advice from an internet forum.

Further, if HMRC are seeking recovery from current directors, it rather suggests there are wider issues than just EBT liability.

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By lesley.barnes
14th Feb 2021 15:45

www.gov.uk/government/publications/disguised-remuneration-independent-lo...

www.rossmartin.co.uk/disguised-remuneration-zone/3026-ebt-s-where-are-we...

Does this help as a starting point at all? EBT schemes are not my area but given the amount of money involved it may be worth advising the Directors perhaps collectively paying for specialist advice tailored to their situation. It seems like a combination of legal and accountancy advice they need. Are the insolvancy practice appointed by the directors or HMRC?

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Replying to lesley.barnes:
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By witney_212
14th Feb 2021 17:36

Thank you for your response.

They are appointed by the current directors.

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By witney_212
14th Feb 2021 15:55

Thank you for your replies. I should have added:

The current directors were employees during the period of EBTs and received their wages this way. Therefore, they are included in the settlement process. They became directors upon the retirement of the former directors.

Additionally, we assume that the estate of the deceased former director has little or no assets.

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By Hugo Fair
14th Feb 2021 16:20

You haven't actually asked a specific question ... but as it has now become clear that all the people from whom HMRC are seeking restitution were beneficiaries of the EBT scheme (whether as directors or as employees at the time), and given the amounts indicated, I can only presume that those individuals have appointed an expert in both the legal & tax aspects of the case.

If they haven't then they should do so without delay ... and I hope that they do so jointly rather than muddying the waters (and escalating the costs) by each of them appointing their own expert.

The heart of your (unspecified) question appears to relate to HMRC chasing all the directors to be severally liable for the total debt (including that generated by the deceased director) ... so actually requires advice on those directors' liability for this (or not) - just one of the many aspects on which you would expect the appointed expert to be able to provide an opinion.

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Replying to Hugo Fair:
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By witney_212
14th Feb 2021 17:22

Thank you for your reply. You are correct in that HMRC are chasing all the directors to be severally liable, but the former directors for the relative debt of the deceased director.

I agree with your recommendation about expertise. If you have recommendations regarding this, then please do say.

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By witney_212
14th Feb 2021 17:33

Interestingly, one of the EBTs did not receive its Regulation 80, and it was made clear that if it were not received within 6 years, then the cut off time would have elapsed. The cut off occurred in 2013, and yet this EBT is included in HRMC's total that they are persuing for settlement.

Does anyone have any knowledge on this?

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By Matrix
14th Feb 2021 17:51

You say that the current Directors were not Directors at the time of the deceased Director’s EBT but also say that HMRC are going after any Directors where EBTs were taken during their directorship so which is it? Why the Directors and not the shareholders?

I think it is a legal question and you won’t get any decent answers here (since the calibre of the posters is not that great) but I would pursue the advisers who advised one company for all contracts rather than separate PSCs.

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Replying to Matrix:
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By witney_212
14th Feb 2021 18:27

Thanks for your response. The current directors were not directors at the time of the EBT.

HMRC are after the sums from everyones EBTs. They claim that the former living directors are ultimately responsible for the total sums.

I am unaware of the advisory company who you refer to. If you are able to point me in that direction, that would be of help.

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Replying to witney_212:
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By Youareatit
15th Feb 2021 10:41

witney_212 wrote:

I am unaware of the advisory company who you refer to. If you are able to point me in that direction, that would be of help.

Not sure why you would think matrix can point you in the direction of the l advisory company. It is the original company who provided advise you need to look to.

You indicated originally you were not sure who had instigated the insolvency (then edited to state it was the Directors). There appear to be some possibly unfounded assumptions in your responses back to folk. Exactly what is your role in this?

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By Paul Crowley
14th Feb 2021 21:48

https://www.antonybatty.com/employee-benefit-trusts/?gclid=EAIaIQobChMIy...

Googled EBT

Unlikely any regular responder got involved in those avoidance schemes

Look to the scheme seller
They took legal advice and had councils opinion.

Everything properly declared by all under DOTAS?

( the only person I had dealings with had not declared under DOTAS)

Surely the company is responsible for the tax and NI it failed to deduct and pay over. Why should that be restricted to current shareholders?

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Replying to Paul Crowley:
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By witney_212
15th Feb 2021 00:53

Hi Paul,

Yes all DOTAS was declared.

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By bernard michael
15th Feb 2021 09:17

Why do you assume the estate cannot pay it's share??
The executors should be contacted as it has equal liability

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By Justin Bryant
15th Feb 2021 10:05

It sounds like HMRC are out of time to assess directors and in any event the article in the link below confirms that to recover from the employee, HMRC must show that “the employer had wilfully failed to deduct the amount of tax which should have been deducted from those payments’ , which is a million miles away from typical EFRBS/EBT planning.

http://www.taxation.co.uk/taxation/Articles/2012/06/20/290601/recovery-p...

http://www.legislation.gov.uk/uksi/2003/2682/regulation/72/made

This bit from the above article supports the employee/director non-liability position even further:

“As an illustration, should an employer wish to argue that they had sought advice, relied on it and followed it, HMRC may argue that unless tax counsel’s opinion had also been sought, the employer had not done everything it could to verify the position and was therefore careless.
HMRC also often now want to see a specific tax counsel opinion sought by the employer rather than a generic opinion that has been provided to them – for example if they have implemented a tax planning arrangement from a third party provider”
HMRC’s Compliance Handbook at CH81130 gives some examples of taking reasonable care: not being careless.
The recent decision in JR Hanson [2012] UKFTT 314 (TC) may help too, particularly when HMRC are proposing to charge a tax-geared penalty, as it shows that relying on a competent adviser who was given a full set of facts before giving the advice is sufficient in most cases to constitute taking reasonable care.”

You clearly need some wilful default (or a lack of any rightful abstraction), as explained in para 53 of the case in the link below:

https://library.croneri.co.uk/cch_uk/btc/2016-tc-04927

See also: https://www.rossmartin.co.uk/sme-tax-news/2288-liability-for-paye-not-tr...

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By richard thomas
15th Feb 2021 17:48

This is all rather vague, and a piecemeal feeding of information.

From the reference to cut-off point in 2013 I assume the OP is talking about events in 2006-07. And from the remark about reg 80 determinations in relation to each employee/director, I assume that a reg 80 determination was issued on the (one and only) EBT separately for each employee.

As the law was understood in 2006-07 the EBT was the person liable to pay the PAYE unless a reg 81 direction has been made to put the liability on the employee, but as Justin points out, the conditions for making a reg 81 direction do not seem present.

The OP says one reg 80 determination has not been made but does not say if it was on the deceased director or not. For the reasons Justin gives there can be none made now and so there can be no reg 81 direction on that employee.

Just as an aside, these were obviously issued before Rangers in the Supreme Court, which decided that it was the payment by the employer to the EBT that was a payment of earnings, not the loan by the EBT or sub-trust to the players. There is then an argument that the EBT, which could only be assessed under reg 80 as an "intermediary" of the employer within s 687 ITEPA 2003, was not a deemed employer making "relevant payments", a prerequisite for giving it a liability to deduct PAYE, as "relevant payments" are payments of PAYE income, which on the authority of Rangers the loans are not.

So I don't understand the basis for the liquidator saying that the two clients are liable to meet the company's debts. Are they saying that the employer was liable to pay the PAYE? If so that's the company's affair, not the directors, and there are no known (to me) ways in which joint and several liability for a company debts devolves on the directors, at least none I know of in tax law. Thus as many have said this looks like a company law and insolvency question, and there is interesting reading in a recent non-tax case which Justin also brought to our attention (Hall (Liquidator of Ethos Solutions Ltd) v Nasim & Ors [2021] EWHC 142 (Ch)).

Landing the current directors with the liability (if any) of the deceased director is also a concept I know of no legal basis for.

I endorse the consensus that they need legal advice from a company/insolvent law expert and a tax adviser with experience of EBTs and remuneration schemes using them.

What about NICs?

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Lisa Thomas
By Insolvency Practitioner
16th Feb 2021 10:35

If the Liquidator is pursuing the Directors then this would fall under the category of misfeasance, in which case all Directors are held jointly and severally liable in allowing any misconduct to occur.

However, that appears to be at odds with that OP has stated, if 2 of the directors were not directors when the misconduct occurred.

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