My article a few months ago resulted in a request for more information about the HMRC approach when tax is due by a company in liquidation, particularly if an Employee Benefit Trust “EBT” is involved.
Liquidators have the ability to agree a company’s tax liability with HMRC: sometimes achieved by discussion and provision of the limited information available; sometimes by the preparation of accounts and detailed computations.
If the liquidator advises HMRC there is nothing with which to pay a claim arising from a director’s involvement in an EBT, there’s an opportunity to pursue the director who received the cash under the principle of unjust enrichment and seek restitution to the company.
HMRC have been successful in most court cases that have challenged the validity of the myriad of EBT schemes.
In conjunction with the liquidator, an income tax and national insurance calculation can be prepared by HMRC which paves the way to lift the protection of limited liability and pursue a director personally for such deductions. It is often argued an EBT must have seemed too good to be true when a director elected to participate in terms of the ability to live and work normally in the UK without paying tax on substantial income earned from UK employment, meaning they have only themselves to blame.
The counter view is that all those who became involved in an EBT did so on the advice of professionals and so had every right to believe it was valid.
An increasing number of directors are seeking advice regarding their personal financial affairs because, when the money was received through an EBT it was spent rather than invested – that is, there is nothing left to settle any amount that may be due to HMRC.
Worrying times, but HMRC seem to have a conciliatory approach over repayment terms as they understand EBT participators were not trying to evade tax but merely avoid it with a scheme now shown to be inappropriate.
The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.
