The High Court in Chalcot Training Ltd considered whether a payment into an EBT is remuneration or a distribution.
I was troubled by the case of Toone v Ross [2019] EWHC 2855 (Ch) (also known as Implement Consulting) which decided that payments into an employee benefit trust (EBT) as part of a tax avoidance scheme were illegal distributions of the company. It looked like the High Court was overruling the Supreme Court in Rangers [2017] UKSC 45 which decided payments into an EBT were remuneration at the point they were paid in. I couldn’t see how a payment of remuneration which is deductible from profit could also be a distribution out of that same profit. Surely, if it was an illegal distribution, the payment of remuneration must be added back (because it wasn’t remuneration) and there would have been no PAYE or NICs (which should also be added back) which would have increased the profit (on which corporation tax would be payable) which in turn would have increased distributable profit which might mean that the company was not insolvent after all, and in that case, maybe the distribution was legal?
In the case of Chalcot Training Ltd v Ralph and HMRC [2020] EWHC 1054 (Ch), the High Court has had to consider the opposite: the company was arguing that the payment into the EBT was an illegal distribution, whereas HMRC was arguing it was remuneration. The point is it can’t be both.
I am reassured by the judge’s comment (at para 163):
‘I have found [Toone v Ross] a difficult case to follow and understand. It is unclear from the judgment as to the actual nature of the payment that was made into the EBT, although it appears to have been regarded, by HMRC at least, combined with the payment out from the EBT, as a payment of remuneration for tax purposes. Before the decision in the Rangers case, where the use of EBTs was found by the Supreme Court not to affect the fact that employees were receiving remuneration subject to income tax and NICs, I imagine it was hoped that the use of such tax avoidance would mean that payments to or for the benefit of employees via EBTs would not be considered to be taxable remuneration. In other words, the company was not alleging that these were remuneration payments rather than distributions; but it is not at all clear what the company was asserting the payments to the EBT were.’
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Illegal distribution or remuneration?
The High Court in Chalcot Training Ltd considered whether a payment into an EBT is remuneration or a distribution.
I was troubled by the case of Toone v Ross [2019] EWHC 2855 (Ch) (also known as Implement Consulting) which decided that payments into an employee benefit trust (EBT) as part of a tax avoidance scheme were illegal distributions of the company. It looked like the High Court was overruling the Supreme Court in Rangers [2017] UKSC 45 which decided payments into an EBT were remuneration at the point they were paid in. I couldn’t see how a payment of remuneration which is deductible from profit could also be a distribution out of that same profit. Surely, if it was an illegal distribution, the payment of remuneration must be added back (because it wasn’t remuneration) and there would have been no PAYE or NICs (which should also be added back) which would have increased the profit (on which corporation tax would be payable) which in turn would have increased distributable profit which might mean that the company was not insolvent after all, and in that case, maybe the distribution was legal?
In the case of Chalcot Training Ltd v Ralph and HMRC [2020] EWHC 1054 (Ch), the High Court has had to consider the opposite: the company was arguing that the payment into the EBT was an illegal distribution, whereas HMRC was arguing it was remuneration. The point is it can’t be both.
I am reassured by the judge’s comment (at para 163):
‘I have found [Toone v Ross] a difficult case to follow and understand. It is unclear from the judgment as to the actual nature of the payment that was made into the EBT, although it appears to have been regarded, by HMRC at least, combined with the payment out from the EBT, as a payment of remuneration for tax purposes. Before the decision in the Rangers case, where the use of EBTs was found by the Supreme Court not to affect the fact that employees were receiving remuneration subject to income tax and NICs, I imagine it was hoped that the use of such tax avoidance would mean that payments to or for the benefit of employees via EBTs would not be considered to be taxable remuneration. In other words, the company was not alleging that these were remuneration payments rather than distributions; but it is not at all clear what the company was asserting the payments to the EBT were.’
