It seems an age ago now but when Glasgow Rangers Football Club went into administration there were a number of major issues that arose. One of those surrounded an Employee Benefit Trust (“EBT”) where players and staff were paid collectively almost £48 million in tax-free loans.
The EBT was challenged by HM Revenue & Customs (“HMRC”) as a tax avoidance scheme. After losing at the first two tiers, HMRC finally won in November 2015 where the presiding judge could not understand why HMRC had lost in the lower tier hearings. Indeed, the court issued a clear ruling that it is “Common sense” and “Self evident” that payments under the EBT scheme were linked to work. Basically, if it feels wrong and looks wrong then inevitably it must be wrong. There will be some commentators who will argue EBTs do work but this particular case is a stark warning to those running EBT schemes to ensure it is “Above board”.
So, where are we going? In August 2014, HMRC began serving Accelerated Payment Notices (“APN”) where there was likely to be a tax avoidance scheme in place. The Rangers victory can only serve to encourage enhanced activity in this area. An APN provides the recipient 90 days to pay the amount claimed in the APN and with no right of appeal against an APN the recipient could be placed in a very difficult position. The key question surrounds the ability of HMRC to commence recovery proceedings should payment of the APN liability not be paid.
A creditor cannot petition for winding up (or bankruptcy) on a debt that has not been established or is disputed to an extent the net (undisputed) claim is less than the statutory minimum or the claim is one that is a triable issue. A claim under an APN surely falls under this criteria so how is it HMRC can enforce payment? Based upon information to date and notwithstanding this criteria it appears HMRC can petition if deemed appropriate. HMRC have been asked to confirm their intention on enforcement but the only intimation known to date is HMRC accept hardship as a valid reason for non-payment of disputed VAT so may adopt the same approach with APNs.
For a company, an APN creates, at least, a contingent liability. One of the grounds for measuring the insolvency of a company is the balance sheet test, which includes liabilities, whether known, contingent or otherwise. If a recipient company continues to trade beyond receipt of an APN that renders the company balance sheet insolvent does that place the directors at risk of wrongful trading or general malpractice? Strictly speaking, the answer can only be “Yes” which means directors could also find themselves exposed to other potential insolvency-related offences.
At PBC we have been consulted by APN recipients and, in general, each case must be considered on its own merit. However, the one consistent approach is once you are in receipt of an APN or, you have reason to believe an APN is likely to be served on your company, take early advice. The sooner you can recognise the situation the easier it generally proves to be in taking appropriate steps that minimise your personal exposure to offences that arise from insolvency.