Background
In 2010, HSJ Consultancy Limited (Company), a company providing services as accountants and tax consultants, engaged in two tax planning schemes: an employee benefit trust, or EBT, scheme, and an employer financed retirement benefits, or EFRBS, scheme (Schemes).
On establishing the Schemes in 2010, £150,000 was paid into the EBT Scheme and £300,000 into the EFRBS Scheme. This money was subsequently paid out to Kim Jackson and Robyn Hughes (Respondents), the Company’s directors, respectively (with the exception of £13,750 from the EBT Scheme which was paid to other employees of the Company), following which loans were made which went unpaid.
In 2011, HMRC began an enquiry into the Company’s 2010 tax return and subsequently concluded that the schemes were ineffective in reducing its tax liabilities. HMRC made several statutory determinations of the Company’s liability following this and it ceased to trade in 2012, with its business being transferred to an LLP, while the Respondents attempted to have the Company struck off the register, to which HMRC objected.
HMRC went on to issue settlement proposals in 2013 for the sums owed under the EFRBS Scheme, followed in 2014 by notices relating to corporation tax, PAYE and NIC liabilities. An accelerated payment notice was issued in 2015. This notice was challenged by the promoter of the EFRBS Scheme in judicial review proceedings, to which the Company was a party, but the challenge was ultimately unsuccessful.
The Company entered creditors’ voluntary liquidation (CVL) in 2016, and Simon Barriball and Helen Whitehouse of McAlister & Co. were appointed as joint liquidators (Liquidators). In the statement of affairs accompanying the CVL, HMRC’s debt was listed as £1, with a note explaining that HMRC had claimed £165,912.70 but that this was disputed.
Following investigations, the Company, acting through the Liquidators, brought claims under s.212 of the Insolvency Act 1986 (IA86) against the Respondents for £436,500 plus interest, alleging that they had caused the Company to enter into the Schemes in breach of their duties as its directors. ICC Judge Mullen awarded the full amount.
The judgment offers helpful commentary on several issues: how disputed tax liabilities should be treated in a solvency assessment, when the creditor duty was engaged on the facts, and whether the Liquidators could pursue historic claims notwithstanding limitation.
Disputed Tax Liabilities and the Test for Solvency
S. 123 IA86 provides two tests for determining insolvency, known commonly as the cashflow test (where, per s. 123(1)(e), a company is unable to pay its debts as they fall due) and the balance sheet test (where, per s. 123(2), the value of a company’s assets is less than the amount of its liabilities taking into account its contingent and prospective liabilities [emphasis added]).
The Respondents’ position was that the relevant tax liability was a disputed, contingent and historically uncertain tax risk. Accordingly, the Company was solvent at the time when the EBT and EFRBS payments were made.
This was not accepted.
In his assessment, ICC J Mullen found that although the Company’s liability to HMRC had been recorded as £1 in the statement of affairs prepared for its entry into CVL, those liabilities had in fact arisen by operation of statute at the point they were incurred, rather than when HMRC later determined that they were owed. He further noted that an appeal against an HMRC determination or decision does not postpone the collection of tax. Tax remains due notwithstanding any postponement granted by HMRC or the First-tier Tribunal, and HMRC retains the power to issue penalties, which are treated as assessments.
The Court also emphasised that a later decision in RFC 2012 plc (in liquidation (formerly Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC, which affected the effectiveness of the Schemes, did not change the law but clarified the existing statutory position. Further, determinations had been made by HMRC regarding the Company’s tax liability for the relevant years of 2010 and 2011 and the Court was said to have limited power to go behind such assessments which is more properly the role of the relevant tax tribunals.
ICC J Mullen concluded that HMRC’s contemporaneous assessments (namely, that the Company owed at least £80,000 in respect of the EBT Scheme and at least £150,000 in respect of the EFRBS Scheme) were not contingent liabilities for the purposes of the balance sheet test under s.123(2) IA86 simply because they were disputed. Unless and until set aside by a tribunal, those assessments should have been treated as liabilities on the Company’s balance sheet for 2010 and 2011 and at the time the Schemes were entered into. The Court also found that the Company was, in any event, cash-flow insolvent at the relevant times.
When was the Creditor Duty Engaged?
The Court had to consider whether the creditor duty was engaged when the Company entered into the Schemes. Namely, whether the duty in s. 172(1) of the Companies Act 2006 (CA06) to act in a way that a director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, switches to a duty to consider or act in the interests of creditors as suggested by s. 172(3) CA06 and notably confirmed in BTI 2014 LLC v Sequana SA [2022] UKSC 25.
The Respondents’ position was that the creditor duty was not engaged. They argued that the Company was solvent when the schemes were implemented because the tax liabilities were disputed, had not been finally determined, and were thought to be unlikely to arise in light of the advice to them (e.g. promoter materials).
The Court rejected that analysis. In applying Sequana to the facts of this case, ICC J Mullen adopted the position in Hunt v Singh [2023 EWHC 1784 (Ch) that, per the Supreme Court’s obiter comments in Sequana, it is necessary to establish some form of knowledge of insolvency (actual or constructive) on the part of the directors for the creditor duty to arise, even where the company was at the relevant time actually insolvent. ICC J Mullen also adopted the reasoning in Hunt v Singh regarding disputed claims, namely that “Where a company is faced with a claim to a current liability of such a size that its solvency is dependent on successfully challenging that claim, then the creditor duty arises if the directors know or ought to know that there is at least a real prospect of the challenge failing.”
Against that framework, the Court considered several factors.
First, the advice the Respondents relied on when causing the Company to enter the Schemes. They obtained no independent legal or tax‑planning advice, relying solely on promotional materials provided by the scheme promoters (C3 Partnership Limited (for the EBT) and OneE Tax Limited (for the EFRBS)). Those materials asserted that each scheme respectively was supported by an opinion from a leading tax QC yet explicitly warned that HMRC was likely to challenge their effectiveness. The documentation was heavily caveated, highlighted that HMRC enquiries were ongoing or anticipated, and included provisions for the promoters to appeal adverse First‑tier Tribunal decisions. The EFRBS materials also stressed the need for the Respondents to take independent advice on their directors’ duties, and both C3 and OneE offered assistance with potential litigation - features which, taken together, should have been clear red flags as to the Schemes’ risks and reliability.
Second, the fact that the Respondents chose not to establish a reserve for the payment of any tax liabilities or penalties that HMRC determined were due because of the Schemes. Mr Hughes stated that there was no obligation to do this and that he considered the risk to be remote. The Court noted that the only extant board minutes in evidence in relation to the Schemes, which related to the EBT Scheme and were prepared based on a proforma C3, showed no consideration of how such liability would be discharged if so required, and make no reference to the impact of the EBT Scheme on the Company’s solvency or any potential impact on its cash flow position.
Third, Mr Hughes’ confirmation that he had not read the tax QC’s opinion in relation to the EBT Scheme, it having been read by one of the Company’s employees, and that he had only been allowed to see the opinion on the EFRBS Scheme at a meeting. He conceded that both opinions would have been addressed to C3 and OneE respectively and heavily caveated.
Fourth, that the Respondents, as accountants, had the ability to calculate the Company’s potential tax liabilities were the Schemes found to be ineffective, and could have done so, but did not.
In light of the above, ICC J Mullen concluded that it should have been clear to the Respondents, who were both chartered accountants, on the facts that there was considerable doubt as to the effectiveness of the Schemes, and that the threshold was met on the facts. Accordingly, the creditor duty arose at the point the Company entered into the Schemes, and in failing to consider how the Company’s tax liabilities should be met if the Schemes were to fail, the Respondents were in breach of it when making the payments into the Schemes.
Limitation
The Schemes and the related causes of action notably dated back to 2010, six years before the Company entered CVL in 2016 and even longer before the Company, acting by the Liquidators, brought claims against its directors. The Court considered that the claims were not, however, time barred as the facts of the case fell within s. 21 of the Limitation Act 1980 (LA80).
This holds that there is no period of limitation applicable to an action by a beneficiary under a trust to recover trust property or the proceeds of it in the possession of a trustee or previously received by a trustee and converted for their own use.
Referencing Burnden Holdings (UK Ltd v Fielding [2018] UKSC 14, the Court noted that a director can be treated as a trustee by way of analogy and accepted that the Respondents, as the Company’s directors, had ultimately received the most part of the monies paid into the Schemes and subsequently converted them for their own use. S. 21 LA80 therefore applied, and the Liquidators claim was not subject to any limitation period.
Conclusions
The Court’s decision in Barriball is obviously highly fact specific. Nonetheless, it is a useful reminder that failed or disputed tax planning may not be confined to a company’s dispute with HMRC. Where directors cause a company to enter into avoidance arrangements from which they personally benefit, and the company is left exposed to a material tax liability, that exposure can translate into a personal misfeasance liability.
HMRC will view this as an important win because it shows that tax avoidance risk can have consequences well beyond the tax dispute itself. A disputed HMRC liability is not something directors can simply park: if the company’s solvency depends on beating HMRC, that risk needs to be confronted, documented and reflected in board decision-making.
It is not sufficient to claim that a liability does not exist until HMRC has made a determination that it does, or to treat a liability as definitively contingent simply because a determination is being appealed. A company’s tax liability should be treated as arising by operation of statute at the point it is incurred. Company directors should therefore be careful in relying on such assumptions when considering their company’s solvency and need to be alive to the prospect that the creditor duty is engaged in such circumstances.
Finally, the Court’s comments on limitation underline the possibility of recovery routes for officeholders that might otherwise seem time barred in circumstances where a company’s directors have received company property or its proceeds for their own benefit.
