Analysis
The claims concerned various tax avoidance schemes that had been established as ‘Remuneration Trusts’ for the claimants by Baxendale Walker LLP. The claimants were a successful businessman, Mr Levack, and various businesses of which he was a director and/or shareholder. In each case, one of the claimants was the ‘founder’ of the relevant trust. The defendants were various corporate entities having had a role in the trusts, together with HMRC.
The claimants maintained that the Remuneration Trusts had been entered into on the basis that they would offer various tax benefits, and would provide for the family of Mr Levack. Under the terms of each trust, the trustees were to hold the trust fund on a discretionary trust for ‘the beneficiaries’. ‘The beneficiaries’ were defined to include various family members of past, present and future ‘providers’, including, inter alia, their spouses, children and remoter issue, but so that no ‘excluded person’ would be a beneficiary. A ‘provider’ was defined, inter alia, as a person who provides, has provided or may provide in future finance to the trustees etc, subject only to the provisions defining ‘excluded persons’. ‘Excluded person’ was defined to mean the founder, any person connected with the founder, any participator in the founder, any person connected with any such participator, and each and every ‘present or former employee’ for the purposes of the Finance Acts 2003 and 2004. Mr Levack and his family members were excluded persons, variously as founder, person connected with the founder or a participator in such. Mr Levack also however lent £100 to the trustee of the trusts, to the intent that by so doing he would become a ‘provider’ within the meaning above.
Provisos were added with a view to ensuring that the trusts could not be construed as ‘employee benefit schemes’ within the Finance Act 2003, and hence would not attract the adverse fiscal consequences that would follow from being so construed. These provisos were as follows. First, as noted, no ‘excluded person’ would be a beneficiary. Secondly, the trustees would not have power to provide (whether directly or indirectly) any benefit to any excluded person, nor participate in an ‘employee benefit scheme’ as defined by the Finance Act 2003, or any arrangement which would engage the relevant provisions of that Act. Thirdly, the trusts would not have effect so as to be accounted for as an asset of the founder.
To the same intent, further provision was made defining ‘prohibited benefits’ so as to apply, inter alia, to any application of the trust fund for present or former employees of the founder and any ‘pension’ for the purpose of the Companies Act 1985, and defining ‘permitted contribution’ to mean a payment by the founder which does not constitute an ‘employee benefit contribution’ (within the meaning of the Finance Acts 1989 and 2003).
It was further provided that ‘any person who is or becomes an excluded person shall cease to be an excluded person if… for any reason [they] cease… to fall within the categories of description specified… and from the date of such cessation’. This appeared to be intended to entail that Mr Levack would cease to be an excluded person upon his death and hence that his wife and daughter could become beneficiaries at that point because they were no longer connected to an excluded person.
A further clause expressly provided that nothing in the deed would prohibit the exercise of any administrative or investment power by the trustees, as a result of which any excluded person receives any form of loan (subject to a number of conditions). This was intended to allow Mr Levack to benefit from loans from the trusts on favourable terms during his lifetime. Finally, clause 10.1 provided that, notwithstanding anything to the contrary in the deed, no power etc of the trustees would be exercisable/exercised so as to cause any part of the trust fund or the income thereof to be used to provide a prohibited benefit or to become payable to the founder, while 10.2 provided that no power of the trustees would be exercisable/exercised so as to permit any settlement of property by the founder upon the trusts, except to the extent that the same was a ‘permitted contribution’.
The claimants maintained that the trusts did not in fact provide the benefits which had been promised since, inter alia:
- (1) the making of loans to Mr Levack on beneficial terms was prohibited in the final instance by clause 10.1;
- (2) the trusts were in fact employee benefit schemes with the concomitant fiscal disadvantages, and contributions to them would be employee benefit contributions under the Finance Act 2003, which could never be accepted by the trustee in light of clause 10.2 of the trusts; and
- (3) benefits to an employee’s family, even after the employee’s death, were still benefits, with the consequence that Mr Levack’s family could not benefit even after his death.
The claimants therefore sought two remedies. First a determination as to whether:
‘upon a true construction of the respective trust deeds… all or some… part of the assets of the trust (a) fall, by reason of not having been “Permitted Contributions” which were capable of acceptance into trust by the first-named defendant, to be re-vested in the claimant for its own use absolutely and free of any trust; or (b) are held upon some other (and if so what) trusts.’
Secondly, in the alternative, orders setting aside the Remuneration Trusts ab initio and their contributions to them, on the basis of the doctrine of mistake, the claimants having been mistaken as to the intended beneficiaries and as to the effect of the trusts on the tax burden which they would encounter.
Held:
The claim would be dismissed. As to the construction issue, the question of whether some of the assets of the trust had not been ‘Permitted Contributions’ turned on the question of whether they had been ‘Employee Benefit Contributions’. In turn, this depended on para 1(2) of the Finance Act 2003 which makes a transfer of money/assets to a third party an Employee Benefit Contribution if:
‘… the third party is entitled or required under the terms of an employee benefit scheme to hold or use the money for or in connection with the provision of benefits to employees of the employer’.
Since the income and capital could be applied for the benefit of members of the families of Providers who were not past or present employees of the Founder, and since the trusts, inter alia:
- • prohibited trustees from participating in employee benefit schemes;
- • prevented excluded persons from benefiting; and
- • prevented the trustees from exercising powers in such a way that contributions to the trusts were not Permitted Contributions, and hence from exercising their powers in such a way as to make an employee benefit contribution,
the trustees had been neither permitted nor required to use the money received to benefit employees under an employee benefit scheme, and hence contributions to the trust had not been prohibited contributions. Whether the trusts were effective for fiscal purposes was irrelevant to this issue of construction.
As to the mistake question, little if any reliance could be placed upon Mr Levack’s evidence about his understanding of the way the schemes would affect his and the companies’ liability to tax and his ability to pass wealth to his family. Among other things, his statement was not the product of his recollection, but rather had been constructed to make a legal case; it was not clear how he could have been able to recall what his legal adviser had said to him nearly ten years previously; and by his own admission he had not read key documents concerning the trusts, including the trust deeds themselves, and had not thought about most aspects of the schemes. A claim in mistake had to be founded on sufficient evidence that a causative mistake of sufficient gravity had been made by the claimants to render it unjust for the recipients of the funds to retain the gifts. The nature of Mr Levack’s evidence entailed that there was inadequate support for this view and so the claim would fail.
Had it been necessary to do so, the Deputy Master would have concluded that the claimants deliberately ran the risk of the schemes not operating in the way which had been suggested in the sales pitch, and so would not be entitled to have them set aside for mistake. That the claimants should be treated as having assumed such risks followed from, among other things, the fact that Mr Levack decided to proceed with the Remuneration Trusts immediately after leaving the meeting with his legal adviser, before he had had any opportunity to consider the documents that were provided at that meeting, or the documents that were received later, or to take advice, and that he had failed to consider the documents provided.
JUDGMENT DEPUTY MASTER MARSH: [1] These four Part 8 claims were listed for a disposal hearing on 10 and 11 June 2021 pursuant to an order for directions dated 18 November 2020. Prior to the hearing, an agreement was reached concerning claim number PT-2019-000748 (‘the Allev Claim’) and the court was not required to make …Continue reading "Dukeries Healthcare Ltd v Bay Trust International Ltd & ors [2021] WTLR 809"