HomeFWJ TakeawayTax disputesDisguised remuneration and APNsE Shares Tax Avoidance Scheme

This Blog deals with the recent issues arising from E Shares Tax Avoidance Schemes. If you require any assistance at all on these or other tax related matters, contact our expert team today.

The E share tax avoidance scheme was created and promoted by Black Star (Europe) Ltd and their accounting contacts. On its face, the scheme appeared straightforward, but relied heavily upon creative accounting and technicality. The scheme was high risk and fell under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation. Ultimately, HMRC held that the E shares scheme failed to properly avoid tax liability and that any payments made under the scheme were properly classified as remuneration giving rise to PAYE and NIC liability.

Blackstar (Europe) Limited appointed a liquidator on 9 June 2016.

The E Shares Tax Avoidance Scheme

In order to carry out the scheme, the company allotted a new class of “E shares” to an employee who would pay only 1% of the share’s value. The unpaid balance of the share value (99%) would then be credited to the directors’ loan account. The employee would often pay 1 pence for each share and remain liable for the remaining 99 pence per share. The number of e-shares issued via this scheme were often in the hundreds of thousands meaning that users were accruing a significant unpaid share capital debt.

The 99 pence per share that had been drawn down was supposedly not to be treated as taxable earnings. Additionally, the credit created on the applicable loan account would then translate to a debit on the profit and loss account which would result in the company making a corporation tax saving for the year.

Claims in liquidation

The E Shares scheme is becoming an increasingly prevalent topic in liquidations notwithstanding that Black Star (Europe) Limited themselves entered liquidation in 2016.  

The simplest claim available to the company (made by the liquidator) in relation to the e-share scheme is a claim against the shareholder, who was granted the shares, for non-payment of the unpaid share capital. The liquidated company has the right to call the 99p per share still unpaid, at which point the unpaid value becomes due and owing. The shareholders normally resolved to amend the company Articles of Association to confirm that the balance for the shares would be payable in the event of liquidation.

Alternatively, the liquidator often has a claim against the company’s directors for losses flowing from the directors’ breaches of statutory and common law fiduciary duties. Breaches tend to include  permitting the company to issue E Shares (usually for personal profit placing the director and the company’s interest in a position of conflict), for failing to set aside funds necessary to pay HMRC in the event that the scheme failed (the engagement letters issued we have seen, make it clear that there was no guarantee that the scheme would succeed) and failing to act in the company’s interest.

Director & shareholders – how we can help

Director and shareholders who receive a claim by a liquidator, as a result of an E-share scheme, should take early advice from a team that has experience in advising in this area.

  • we have seen a number of director / shareholders provided with poor legal advice which has led to material legal costs being incurred in running weak defences that were always destined to fail.
  • this has simply served to unnecessarily increase the financial liability and stress for the director / shareholder.
  • our team are experienced in advising directors as to viable defences and the best strategy to adopt when having regard to the relevant company and adviser’s paperwork and the applicable case law.

By way of example, see our blog on the Court of Appeal case on Chalcot Training Limited v. Matthew Anthony Ralph, the Commissioners for Her Majesty’s Revenue and Customs.

Director and shareholders may have a claim for professional negligence against the accountant that first recommended the Black-Star (Europe) Limited e-share scheme. This is something that is often over-looked as an option for those who were mis-sold the scheme.

As with all professional negligence claims, steps should be taken to

  • understand exactly what professional advice was provided by the adviser at the time;
  • what was recorded in the accountants written advice;
  • and what the adviser’s terms of business were and whether this excluded or limited the adviser’s liability.

Our expert tax disputes team can assist directors and shareholders to assess merits of succeeding with a claim against an adviser for professional negligence or deal with any other tax related matters you might have. Call us today and we can help.

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A Company Director

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