Dukeries decision is not the end

So, I am working away on my ideas, and I had some interesting calls this week. One of those calls brought to my attention a High Court ruling on 23 July 2021, which is very interesting. The ruling relates to claimants seeking to have contributions made to a remuneration trust overturned.

For those that don’t know, Paul Baxendale Walker (PBW) a now struck off solicitor, previous adult film industry actor and producer, bankrupt (2018), concealer of assets and general all-round star of the tax advisory world is believed to be largely responsible for designing and mass promoting the remuneration trusts. PBW is thankfully not the only person with technical expertise of these type of trusts. I don’t state that because of the colourful life PBW has lived but instead because having seen some of the paperwork, I can’t help but consider some of it to be rather poor quality. Other similar structures have been established in the past with maybe less provocative names.

The remuneration trust or RT is not a particularly complicated piece of structuring. Basically:

• You don’t want to avoid tax but instead are driven by commercial reasons to place large amounts of money into an offshore trust.
• You are excluded from benefit from the trust as are your family whilst you are still alive.
• The trust is for the benefit of suppliers and future employees but not past or present ones.
• The gift to the trust ends up in a bank account of a fiduciary company which you are the shareholder, and it makes loans to you or similar instruments are used from which you arguably derive a benefit.

Its simples! You have reduced profits chargeable to corporation tax, got funds in your hands without income tax and the trust is not within the scope of IHT. If this really works, HMRC are going to be peeved. But it should work from a tax perspective if it is done for the very reasons it is intended.

In the High Court Case Dukeries Healthcare Ltd v Bay Trust International Ltd & Ors [2021] EWHC 2086 (Ch) (23 July 2021) the claimants claimed they had no idea what they had transferred £4.05m to on 30 March 2010. A subsequent transfer was made on 31 March 2010 (£0.55m). Maybe knowledge wasn’t required because within two days the following had happened:

1. Mr Levak signed letters to Bay Trust International (Belize) requesting funds held by Baxendale Walker LLP to be paid to specified RTs (three of) and to Minerva (fees) and to APL (a company owned and directed by Mr Levak).
2. Bay Trust International appointed a delegated manager and custodian for each trust: Heduk Holdings Limited, a Belize company described as ‘controlled by Mr Baxendale-Walker’
3. The RT’s, Heduk Holdings Ltd and APL entered fiduciary services agreement – basically an agreement whereby funds are held on nominee for investment ultimately for the RT.
4. Mr Levak entered a finance agreement with APL and was provided with a loans (totalling £2.6m).

A summary of the RT amounting to one page was provided to the claimant, which set out:

“Using legal strategies successfully implemented over a decade, the company, partnership or trader can fund an incentives plan, under statutory protection, through a tax free trust-based environment. Then:

• Contributions are deductible against corporation tax/income tax
• Post-tax profits can also be used
• Incentives can be accessed tax free
• Fund grow tax free
• Fund available tax free to post-death beneficiaries”

A manual was also prepared upon instruction of the claimant to explain the tax implications and distribution of funds held by the RT. The claimant’s objectives were set out as:

“3.1.1 to utilise the Remuneration Trust as a commercial incentive scheme;

3.1.2 to receive commercial loans and other financial assistance directly or indirectly from the Trust, free of tax;

3.1.3 for the Trust funds to be used to provide genuine benefits in cash and/or kind to suppliers of services, custom, products of [sic] finance to the Company;

3.1.4 for the Shareholder’s family to be able to enjoy the trust funds tax free after the Shareholder’s death.”

There was also a report for the proposed “gift of cash to the Trustees of the Remuneration Trust”. It therefore appeared that the claimant’s must have had an idea what they had transferred £4.6m to unless they indeed chose not to read the summary, manual and report. What may be nearer to the truth is that the claimant was told not to bother themselves with the detail because that was for the adviser.

“We were not encouraged to ask any questions. Mr Baxendale-Walker claimed to speak authoritatively and also claimed that many of his clients had formed Remuneration Trusts and that they had worked very successfully.”

The claimant did confirm they did not read the summary, manual and report. An adviser in my mind has a responsibility to ensure their clients do understand what they are doing and why but maybe I am just being old fashioned.

So here we have a claimant that has established an RT with a large sum of money who knows not what he has given that money to, but he has had a loan back of the same money. Furthermore, the claimant acknowledged they were seeking to reduce their taxes.

The claims failed due to the inadequate evidence about the claimants having acted under a mistake of so serious a character to render it unjust on the part of the first claimant to retain the gift. The claimant had a sufficient understanding of what the trusts were expected to achieve. The failure to consider the documents provided or seek advice on the documents demonstrated ‘a cavalier attitude to risk’. The judge went on to state:

“Were it necessary to do so I would conclude that the claimants deliberately ran the risk of the schemes not operating in the way Mr Baxendale Walker’s sales pitch had suggested…….Furthermore, the schemes are properly characterised as being artificial tax avoidance. Even if there was no actual assumption of risk, it is reasonable in this case, based upon the factors I have summarised above, to conclude that Mr Levack and the companies must be taken to have accepted the risks of the schemes failing.”

It was found that the claimants had not shown that it would be unconscionable for them to remain bound by the schemes. Does this mean that the RT is not within disguised remuneration, the loan charge and is not actually tax avoidance?

The case was not a tax case. It relates to the claimant’s desire to unwind the RT and the judgement clearly states that the evidence was not strong enough to demonstrate having acted mistakenly. The judgement may have elements that would assist to demonstrate that a trust for suppliers that excludes employees is not an employee benefit trust. Such a trust would not be able to provide benefits to employees, but does that mean that for tax legislation purposes a benefit derived is not from employment (or self-employment) for the purposes of disguised remuneration. For tax purposes, the difficulty in light of this High Court case will be determining:

• whether there is an arrangement to which a person, employee (former or prospective employee) covers or relates to that person; and
• it is reasonable to suppose that the relevant arrangement is a means of providing or otherwise concerned with the provision of rewards or recognition or loans in connection with the person’s employment (former or prospective).

The claimant considered they were facilitating the making of loans to themselves, an employee, although the RT excluded the claimant from benefit, but loans were still made by virtue of the supplier relationship to the claimant. Does the legal exclusion of beneficiaries in the RT deed prevent the tax legislation applying?

For the tax legislation to apply, it will be required to look through and determine the real purpose of the RT is for benefiting employees or that the intention of the employer was to benefit employees. This may be difficult for HMRC and therefore, the Treasury may have to rethink legislation. If they do, will that legislation be retroactive and as much as a balls up as the disguised remuneration legislation?

When disguised remuneration was introduced over a decade ago, I wrote about the way it had missed the mark and suggested a legislative rethink. Here we are over a decade later. It really is a poor show!

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