Many years after most responsible advisers abandoned recommending tax avoidance schemes to their clients because they were no longer likely to succeed and therefore to advance their clients’ interests, cases of promoted artificial tax avoidance schemes continue to come before the Tribunal. Often the transactions involved are presented as having a commercial purpose. The Tribunal, however, is not naïve and is astute to distinguish between schemes which have really been entered into for commercial reasons and those the purpose of which was simply to obtain a fiscal advantage. Often the taxpayers’ difficulties are compounded by poor execution of the transactions.
The case of AD Bly Groundworks and others v. HMRC [2021] concerned what the Tribunal described as ‘a tax planning scheme’ ‘brought to the Appellants … by’ a firm of Chartered Accountants. The essence of the scheme was very simple.
The client companies participating in it would enter into agreements with their shareholder directors to pay to the directors pension benefits in the future. The liabilities this created would be unfunded. The companies would be required under standard accounting practice to recognise these future liabilities immediately by debiting their profit and loss accounts and by crediting a liability account in the Balance Sheet.
The scheme’s promoters claimed that, under the legislation in force at the time concerned, the participating companies would receive a deduction of the amount of the debit from their trading profits for the purposes of Corporation Tax. The directors on whom the rights were conferred would not be subject to Income Tax on the vesting of the rights to future payments when the agreements were made but only later when pension payments were made to the directors in accordance with the agreements.
The question at issue was whether the debit to the profit and loss account recognising the creation of the liability was disallowed for Corporation Tax purposes by CTA 2009 s. 54 as an ‘expense … not incurred wholly and exclusively for the purposes of a trade’.
The participating companies claimed that the purpose of the arrangement was to allow it to provide their directors with an incentive to the better performance of their duties in a manner that involved no immediate charge on the companies’ working capital. The Tribunal:
‘ … concluded that the provision of pensions to directors was, at best, only an incidental aim of the Appellants when they established an UURBS and entered into the Unfunded Pension Agreements.’
Rather, concluded the Tribunal:
‘ … the Appellants’ primary purpose in entering into the Unfunded Pension Agreements was to reduce their liability to pay tax without incurring any actual expenditure. It follows that the liability to pay pensions under the Unfunded Pension Agreements was not incurred wholly and exclusively for the purposes of the Appellants’ trades.’
In reaching this conclusion the Tribunal referred to the fact that the appellants did not take their main advice on the arrangements from remuneration and pensions experts but from the promoters, the firm of chartered accountants, who had no expertise in this area. They did engage the advice of companies who were described as ‘remuneration consultants’ but the advice given by those consultants was very limited and specifically excluded ‘financial, pension [or] investment… advice’. The Tribunal also noted that:
‘If the Appellants had wanted to incentivise, motivate and retain key employees then we would have expected the Appellants to seek advice on the competitiveness of their remuneration packages but they did not do so. Although they are described in the papers as remuneration consultants, we were not provided with any evidence to show that Synergis and FLB had any expertise in the area and their reports clearly only addressed the “commercial suitability” of the provisions. We were struck by the fact that the only comparative evidence of remuneration levels referred to in the reports is a reference in FLB’s reports to the indication of senior salaries in the accounts of companies conducting broadly similar activities. We would have expected any remuneration consultant to carry out a much more detailed exercise and to explore comparators in depth if the true purpose was to ascertain appropriate levels of remuneration to retain, incentivise and motivate senior personnel.’
The Tribunal considered the whole arrangements to be uncommercial because they involved unfunded liabilities increasing at least in line with the increase in the Consumer Prices Index and possibly by more which represented a threat to the participants’ future profits.
The Tribunal’s conclusion was strengthened by evidence that the companies’ treatment of the advice they did receive from the remuneration consultants was to some extent cavalier.
For example, the ‘remuneration consultants’ advising one of the two taxpayer companies who were parties to the litigation based their advice as to the level of pension liability to be created on an estimate of the profits for a year being just over £1 million. The actual profits were £1,300,000 and the pension liability to the directors which was created was simply increased pro rata without any reference back to the consultants to consider whether the increased pension provision was in line with market levels of remuneration. In respect of the other company which was a party to the litigation, the consultants’ recommendation was to provide a total benefit sum for a year of 80% of the company’s estimated profits for the year of £3 million. Its profits were actually £5.5 million and the 80% was applied to the increased figure again without reference back to the consultants.
The Tribunal also noted various other inconsistencies and failures in record-keeping. The directors of one of the companies claimed that the Board had met to discuss incentivising senior employees before having met the promoters. The Tribunal decided that no such meeting had taken place on the basis that there were no records of it having done so and the director had given evidence that it was the company’s practice to keep written minutes of all directors’ meetings.
The Tribunal also noted that the companies involved, having no other connection with, or similarity to, one another other than the fact that they had both participated in the scheme, had used very similar language, including identical key phrases and terms in their witness statements. Their directors admitted under cross examination that this was because the statements were to a great extent drafted for them by the promoters.
In respect of one company, the original agreements between the companies and its directors were ‘misplaced’ and ‘replacement agreements’ were made at a later date.
The directors of the companies seem to have had a rather shaky understanding of the companies’ legal forms and modes of operating. For reasons which are not explained in the case report both companies had, before the relevant transactions, transferred their trades to LLPs of which they were members. At the time the companies entered into the pension liabilities, therefore, they did not conduct trades but were members of LLPs which did so and the companies did not have any employees. A director of one of the companies said in his witness statement:
‘The Company during the periods in question was trading as a medium sized trading company dealing in the wholesale travel agency business, there were two shareholders, two directors and circa 20 employees.’
The same director said in his witness statement that the company needed working capital. The Tribunal commented:
‘We do not accept that CHR Ltd needed working capital when its trade had been transferred to CHR LLP in 2011 and it had no staff. It is clear that Mr Galpin must have been talking about working capital and key employees of CHR LLP.’
In view of the now well established hostility of the Tribunals and Courts to artificial tax avoidance, even the best specified and implemented tax avoidance schemes are unlikely to achieve their objectives. As we have said, that is why most responsible firms no longer recommend them to their clients. Artificially dressing up such schemes to appear to be commercial arrangements is unlikely to fool the Tribunal and incompetently implemented schemes will certainly not succeed.
