HMRC | Disguised Remuneration Schemes in Focus
In a previous article entitled ‘Formal Review of The Loan Charge,’ part of a series of articles addressing tax avoidance schemes and umbrella companies, we mentioned the powers enjoyed by HMRC when tax evasion is suspected. Furthermore, we mentioned HMRC’s warning that such schemes never work, as supported by decisions of the Supreme Court in 2017 and the Court of Appeal 2022.
However, HMRC continues to experience difficulties when tackling disguised remuneration schemes as evidenced by the recent case of Christopher Purkiss (as Liquidator of Ethos Solutions Limited) -v- Tim Kennedy & Ors [2025] EWCA Civ 268.
In a highly technical dispute, the Court of Appeal agreed with the Judge of the lower court that a transaction entered into to avoid tax did not fall within section 423 of the Insolvency Act 1986, given that the intention behind the scheme was purely to avoid incurring tax liabilities rather than moving assets beyond the reach of creditors.
Accordingly, in this case HMRC, through an appointed Liquidator, failed to recover a very substantial amount of money which had become due by virtue of an offshore avoidance scheme.
The dispute arose from a typical disguised remuneration scheme whereby funds which represented wages were, after various deductions, paid by an umbrella company, Ethos Solutions Limited (‘the company’), into an offshore trust, which paid the amounts received to the participants by way of discretionary loans as when requested.
Upon learning of the disguised remuneration scheme, HMRC sought to recover the taxes due from the company which resulted in its insolvency. The appointed liquidator commenced proceedings against those seeking to benefit from the scheme but was met with the defence that the scheme had placed the assets beyond the reach of creditors and, accordingly, also beyond the recovery powers of the liquidator.
Both the lower Court and the Court of Appeal (Civil Division) ultimately rejected the Liquidator’s claim.
Tim Thompson of KANGS expands upon the nature of the dispute.
The Background
The company, an umbrella company had been formed for the sole purpose of operating a typical ‘disguised remuneration’ scheme to assist employed individuals to reduce the income tax and NIC on their remuneration.
Under the disguised renumeration scheme, participants contracted with the company, resulting in the receiving modest salaries upon which any tax liability was minimal. The company entered a variety of consultancy agreements with service companies operated by the participants, charged them fees and ultimately, once all appropriate VAT and administration etc. costs had been discharged, the net funds, without any deduction for income tax or NIC having been made, were transferred to the Ethos Solutions Ltd Business Bonus Trust (‘the Trust’) which had been established and run by a Jersey company, called Nautilus Trustees Limited.
The participants would draw down the balance of their income by way of loans as and when they wished. The company had informed the participants that the scheme was legitimate and confirmed as such by professional advisors.
In reality, these loans were never intended to be repaid with the result that income tax, if any, had only been paid on the small amount of income accounted for by the company to HMRC. The majority of the income, paid by way of the loan, avoided payment of income tax and NIC was completely avoided.
On 4 December 2012, HMRC issued determinations assessing the company liable for income tax and NIC for an amount in excess of £2.3m in respect of payments made to the Trust and on 18th December 2012 the company went into creditors’ voluntary liquidation without making any payment to HMRC or seeking to appeal.
The Law Relied on by the Liquidator
The Insolvency Act 1986 provides:
s.423 Transactions defrauding creditors.
A person enters into a transaction at an undervalue with another person if he:
- makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
- enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.
Where a person has entered into such a transaction, the court may, when appropriate, make such order as it thinks fit for:
- restoring the position to what it would have been if the transaction had not been entered into, and
- protecting the interests of persons who are victims of the transaction.
In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose:
- of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
- of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
Section 424 provides that an application for an order under section 423 can be made by, among others, a liquidator of ‘the debtor’ or ‘a victim of the transaction’.
The Court Proceedings
The High Court
The Liquidator maintained that:
- the payments under the scheme were transactions at undervalue to the detriment of the company and each one amounted to a prohibited purpose under s. 423 of the Act,
- the participants of the scheme should repay the company a sum equal to the income tax and NIC which should have been deducted from the money paid to the Trust.
- the purpose of the scheme was to put assets out of reach of the creditors or otherwise prejudice their claim contrary to section 423 of the Act.
The Judge dismissed the claim as he was not persuaded that the company had entered into the transactions for a prohibited purpose under section 423.
Accordingly, the Liquidator appealed to the Court of Appeal
The Court of Appeal
The court upheld the Judge’s decision agreeing that as the scheme had been operated to ensure that tax liabilities to HMRC did not accrue, it did not amount to a ‘prohibited purpose’ under section 423 of the Act. The scheme was designed to ensure that HMRC did not have any claims, as opposed to prejudicing any claims it was making or might pursue in the future.
It stated that Parliament was unlikely to have intended section 423 to extend to ‘commonplace tax mitigation’ which was not generally considered to be objectionable.
How Can We Assist?
Whilst this highly technical case predominantly shows that to bring a claim of this nature it will be necessary to show that the debtor’s actual purpose is to put assets beyond the reach of a creditor, it emphasises the many difficulties faced by HMRC, in this instance through the appointed Liquidator, in seeking recovery of funds operated through schemes clearly used in a manner to avoid payment of income tax and NIC.
The constantly developing focus of HMRC on disguised remuneration schemes and the operation of umbrella companies generally is inevitably going to result in more recovery litigation through the civil courts and, potentially, prosecutions through the criminal courts.
If you are currently participating in a disguised remuneration scheme that is under investigation by HMRC, or if you suspect that you may become the subject of investigation, it is crucial that you seek immediate expert legal advice and guidance.
The team at KANGS have a wealth of experience assisting clients facing investigation by HMRC involving both tax evasion and avoidance. Our team of solicitors have an established reputation for defending clients facing allegations of financial irregularity of every nature.
If we can be of assistance, please do not hesitate to contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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