Category: Article

In this article David Brogelli discusses the use of a Standstill Agreement specifically in disputes with HMRC but also their relevance in wider applications.

Limitation

The Limitation Act 1980 sets out specific time limits for certain actions to be brought.

A Claimant’s failure to do so is an absolute bar to bringing the Claim, but the defence of limitation must be pleaded in any Defence.

Note, the court will not simply strike out a claim of its own motion.

Recently, Elysium Law has been approached by a number of clients who, either as individuals or via their Company entered Tax Avoidance Schemes all of which were registered under DoTAS.

Not surprisingly, HMRC has issued determinations under Regulation 80 of the Income Tax Pay As You Earn and Regulation 2003 and  Section 8 of the Social Security (Transfer of Contributions) regulations 2001.

Again, not surprisingly, given the planning arrangements and various challenges most of these assessments have been the subject of an appeal with the tax held over pending the outcome.

As far as the collection of National Insurance Contributions are concerned, this is a contractual debt. HMRC is therefore bound by the provisions of Section 5 of the act in that any claims for a debt must be issued within the 6-years period, failing which the Taxpayer can raise limitation as an absolute bar to the claim.

For the avoidance of doubt, the NIC is due from the year in which it should have been paid and not of course from the date of the assessment.

The Letter of Claim and the Pre-Action Protocol for debt Claims

HMRC is not bound by the pre-action protocol on debts.

Their position is covered by Practice Direction 7 D Section 1.1 (e).

Generally, if a defence is filed, the court will fix a date for a hearing and the only evidence that is needed from HMRC is a certificate – the PD goes on to state;

3.1 On the hearing date the court may dispose of the claim.

(Section 25A(1) and (2) of the Commissioners for Revenue and Customs Act 2005 (‘the 2005 Act’) provides that a certificate of an officer of Revenue and Customs that, to the best of that officer’s knowledge and belief, a sum payable to the Commissioners under or by virtue of an enactment or by virtue of a contract settlement (within the meaning of section25(6) of the 2005 Act) has not been paid, is sufficient evidence that the sum mentioned in the certificate is unpaid.)

The ’PD’ goes on to state:

3.2 But exceptionally, if the court does not dispose of the claim on the hearing date it may give case management directions, which may if the defendant has filed a defence, include allocating the case.

Protective proceedings and the issue of a Claim

In their Particulars of Claim HMRC say:

“The Claim is issued to protect the Claimant’s right to NICs that it considers to be correctly due…once the Claim is issued, it is the Claimants intention to make application to the court for a general adjournment pending the outcome of the Defendant’s appeal.”

As far as the issue fee is concerned, most if not all of these cases fall into the County Court and the issue fee is payable in the sum of 5% of the amount alleged to be owed. In the event that the Claimant loses the claim, the disbursement as well as any cost will automatically follow the event as will interest on the debt, which must be pleaded in the Claim.

In the majority of cases, HMRC has written to the various Defendants and has threatened proceedings.

Prior to issuing proceedings, it is prudent that HMRC is offered a standstill agreement in order to stop time running during the limitation period. We believe that this will protect the Taxpayer on the question of costs should the challenge to the planning fail and the NICs become due and payable, as at that stage, there can be no defence to the Claim.

Standstill Agreements

In our view and in order to protect your client or yourself on costs, we suggest that you offer HMRC a standstill agreement under which the Claimant agrees not to rely on the expiry of a limitation period as a defence and which runs from a given date (usually the date of the agreement) until notice is given to restart the claim.

This will, in effect, freeze the running of time at the date of the agreement, while giving the Defendant the option to start the clock running again by giving notice to the claimant. Of course, if the Defendant taxpayer wanted to restart the claim before the planning issues had been decided by for example the FTT, then HMRC would be within its rights to issue and stay the claim. This would result in no costs protection for the Defendant, on the contrary.

How is time stood still?

There is a difference between extending time and suspending time for limitation purposes.

An agreement to suspend time (Standstill Agreement) is set out in the following way.

The suspension of time under this agreement shall continue in force until the earlier of:

(a) 30 days after the service by any party of a notice stating that the running of time is to recommence; or

 (b) the service of proceedings by any party in connection with the Dispute; or

 (c) [add in a long stop date] or an event such as determination of the issues taken by HMRC (mention the planning).

 In this case, upon the conclusion of the trigger event, the remainder of the limitation period would run.

If however, the Parties decide to contract to extend the limitation this will expire on the date set out in the agreement.

 The author’s view is that the suspension of time is by far the safest way of proceeding.

 If you want to know more about standstill agreements or want advice upon litigation against HMRC, or any other party, then contact us www.elysium-law.com

In this article Richard Gray Barrister looks at the courts power to issue costs against a non-party; that is a party who is not directly involved in the litigation. Such orders may be considered against directors of an impecunious company formed only to protect the real litigators by the proposed use of the Company to litigate the claim.

The Statutory basis and the overall grounds for the award

Section 51 of the Senior Courts Act 1981, which is governed by CPR 46.2, gives the court power to award a non-party costs order. The award can be made in any court and the court is asked to exercise its jurisdiction to make it.

Generally, the only criterion for its application is whether, in all the circumstances, it is just to make the order. This is fact specific in each case.

Considerations for the Court to make the order

The court must consider whether the non-party is the (real) party interested in the outcome of the litigation, or

(i)         whether they have been responsible for bringing the proceedings; and

(ii)        that those proceedings were brought in bad faith; or

(iii)       there is some other conduct, which in all the circumstances, justifies the court in making the order.

It is not enough simply that the non-party is the sole director and controlling mind of a company. If, however, the interests of a company and its director were so close, it could be considered just to make the order against the director personally, the court will do so. Again, much is fact dependent and needs to be considered during the litigation.

If the non-party acted without impropriety or on legal advice, this does not prevent an order being made against them. However, a non-party costs order may be more likely to be made when the applicant can show improper conduct of litigation. See Turvill v Bird and others [2016] EWCA Civ 703

• It will be exceptional for an order for costs to be made against a non-party where the applicant has a cause of action against the non-party and could have joined them as a party to the original proceedings.

• There must be a costs order made against the primary party and there is no power to order the non-party to pay costs beyond those ordered to be paid by the claimant or defendant in the particular litigation.

Litigation Funders for Claimants

Generally, the jurisdiction will not be exercised against litigation funders meaning “those with no personal interest in the litigation, who do not stand to benefit from it and in no way seek to control its course.” (Hamilton v Al Fayed and others [2002] EWCA Civ 665)

Conversely however, there is authority to say that such orders can be issued against third-party funders who fund defences. See Merchantbridge & Co v Safron General Partner & another [2011] EWCH 1524.

Note however that if the funder effectively controls or participates in it, then they may be liable. See the case of  Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655

Causation

This is by no means settled law and the review of the authorities as to its necessity is beyond the scope of this article.

In Byrne v South Sefton Health Authority [2001] EWCA Civ 1904 the court said that it was necessary to determine whether the conduct complained of was really an effective cause of the costs incurred.

Generally, if there is no causation, whilst it may be possible to obtain the order, the granting of such orders will be rare.

An Application for Security for Costs – is it a prerequisite to the making of the order?

In any proposed litigation brought by a Company, a seasoned litigator would apply for security for their clients costs pursuant to CPR 25.

Those considerations will be the subject of a separate article given the litigation Our Clients are threatened with currently.  

Principles that the Court will consider in granting the order against a director

The court will consider the following non-exhaustive) principles:

(i)            Despite not being a party to the litigation, does the court consider that the non-party director properly be described as ‘the real party to the litigation’

(ii)        Where proceedings by an insolvent company are funded by a non-party solely or substantially for their own financial benefit, they should be liable for the costs, if the action brought or defended fails.

(iii)       To succeed impropriety need not be shown.

Section 51 orders may be made to avoid the injustice of an individual director hiding behind a Company and engaging in what they see as risk-free litigation for his own purposes (Re North West Holdings PLC and another [2001] EWCA Civ 67).

Such orders will not be made however where the Director is acting in proceedings to, for example protect shareholders. Of note here is that where a liquidator brings proceedings, the court will not usually make such an order.

In order to assess whether the director was the real party to the litigation, the question will be whether the individual director was seeking to benefit personally from the litigation.

It follows therefore, that before embarking upon funding of such litigation parties and their advisors are warned to consider whether in doing so, they are placing themselves at risk of being the recipient of such an order.

Conclusion

The courts power to award costs against non-parties is a significant incentive to dissuade others to encourage risky litigation. Where claims are made by Companies, litigators instructed to defend such claims should consider this power early in the proceedings and warn the other side in any pre-action correspondence.

If you require more information or are think of instructing a firm to act for you or your Company in litigation, then please email clerks@elysium-law.com or visit our website.

In this article, Richard Gray barrister takes a brief look at the differences between a Deed of Assignment and a Notice of Assignment and the effect of the assignment on the contracting party

At the end of 2020, Elysium Law were instructed to act for a significant number of clients in relation to claims made by a company known as Felicitas Solutions Ltd (an Isle of Man Company) for recovery of loans which had been assigned out of various trust companies following loan planning entered into by various employees/contractors.

Following our detailed response, as to which please see the article on our website written by my colleague Ruby Keeler-Williams, the threatened litigation by way of debt claims seem to disappear. It is important to note that the original loans had been assigned by various Trustees to Felicitas, by reason of which, Felicitas stood in the shoes of the original creditor, which allowed the threatened action to be pursued.

After a period of inertia, Our Clients, as well as others, have been served with demand letters by a new assignee known as West 28^th Street Ltd. Accompanying the demand letters is a Notice of Assignment, by reason of which the Assignee has informed the alleged debtor of the Assignees right to enforce the debt.

Following two conferences we held last week and a number of phone call enquiries which we have received, we have been asked to comment upon the purport and effect of the Notice of Assignment, which the alleged debtors have received. Questions such as what does this mean (relating to the content) but more importantly is the ‘Notice’ valid?

Here I want to look briefly at the differences between the two documents.

There is no need for payment to make the assignment valid and therefore it is normally created by Deed.

 The creation of a legal assignment is governed by Section 136 of the Law of Property Act 1925:

136 Legal assignments of things in action.

(1)Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

(a) the legal right to such debt or thing in action;

(b) all legal and other remedies for the same; and

(c) the power to give a good discharge for the same without the concurrence of the assignor:

Some of the basic requirements for a legal assignment are;

• The assignment must not be subject to conditions.
• The rights to be assigned must not relate to only part of a debt, or other legal chose in action.
• The assignment must be in writing and signed by the assignor.
• The other party or parties to the agreement must be given notice of the assignment.

Notice of assignment

To create a legal assignment, section 136 requires that express notice in writing of the assignment must be given to the other contracting party (the debtor).

Notice must be in writing

Section 136 of the LPA 1925 requires “express notice in writing” to be given to the other original contracting party (or parties).

 Must the notice take any particular form?

The short answer is no. Other than the requirement that it is in writing, there is no prescribed form for the notice of assignment or its contents. However, common sense suggests that the notice must clearly identify the agreement concerned.

Can we  challenge the Notice?

No. You can challenge the validity of the assignment assignment by ‘attacking the Deed, which must conform with Section 136. In this specific case, the Notice sent by West 28^th Street in itself is valid. Clearly, any claims made must be effected by a compliant Deed and it is that which will require detailed consideration before any right to claim under the alleged debt is considered.

Can I demand sight of the assignment agreement

On receiving a notice of assignment, you may seek to satisfy yourself that the assignment has in fact taken place. The Court of Appeal has confirmed that this is a valid concern, but that does not give an automatic right to require sight of the assignment agreement.

In Van Lynn Developments Limited v Pelias Construction Co [1969]1QB 607  Lord  Denning said:

“After receiving the notice, the debtor will be entitled, of course, to require a sight of the assignment so as to be satisfied that it is valid…”

The Court of Appeal subsequently confirmed this  stating the contracting party is entitled to satisfy itself that a valid absolute assignment has taken place, so that it can be confident the assignee can give it a good discharge of its obligations

Summary

The important document is the Deed of Assignment, which sets out the rights assigned by the Assignor. The Notice of Assignment is simply a communication that there has been an assignment. The deed is governed by Section 136 of the LP 1925. It should be possible to obtain a copy of the Deed prior to any action taken in respect of it.

For more information on the claims by West 28^th Street or if advice is needed on the drafting of a Deed, then please call us on 0151-328-1968 or visit www.elysium-law.com.

In this article Richard Gray Barrister gives an overview on the use of Employee Benefit Trusts and considers, even though the aggressive EBT schemes are a thing of the past, whether they are still being considered principally as a vehicle to avoid Inheritance Tax (IHT) and the potential pitfalls should that occur.

Having just finished a lengthy conference with a client, I was reminded of something a colleague of mine said, namely that; “Google is not kind to EBTs”.  If you were to Google the point, that appears to be correct and in this case the Client threw many questions at me surrounding the abusive arrangements for which they had previously been used. We now know all too well the effect of those arrangements and the misery they generated.

Aggressive schemes apart, there is very much a place for an EBT within the context of proper business planning and recently, Elysium Law has advised upon their use in the sale of a trading company where, prior to implementation, HMRC gave clearance.

Regrettably, there is still a temptation to use them purely as a vehicle for avoiding IHT and in this article I look at the consequences of the misuse of an EBT and simply ‘getting it wrong’.

Be warned of the use of an EBT in, for example, a small family company who just after incorporation of an investment portfolio now wants to avoid IHT by placing the shares into an EBT. It won’t work!

What is an EBT?

An EBT is a type of discretionary trust set up to fall within the definition of a trust for the benefit of employees within the provisions of Section 86 of the Inheritance Tax Act 1984 (IHTA 1984). This provides exemptions from inheritance tax (IHT) for certain transactions involving qualifying EBTs.

Special Treatment of Section 86 Trusts

The following should be noted in relation to a section 86 trust

It is not a relevant property trust;

A section 86 trust is not a relevant property trust.  Relevant property trusts are subject to the specific inheritance tax regime in Chapter III, Part III of the Inheritance Tax Act 1984. Therefore, a section 86 trust it is not subject to the IHT charges such as the exit charge and the ten-yearly charge.

Transfer of Value to an EBT

If a close company makes a transfer of value to an EBT, this will be a chargeable transfer, apportioned to the participators under section 94, IHTA 1984.

There are, however, four possible reliefs and exemptions that may be available:

• Dispositions not intended to confer a gratuitous benefit;

• Dispositions allowable for corporation tax.

• Disposition for the benefit of employees.

• Business property relief.

Section 13 of the Act deals with transfers of value into the Trust.

Consideration is then to be given to the effects of Section 239 of the Taxation of Chargeable Gains Act 1992., which gives the exemption of CGT for the ‘transfer in’ of the assets.

Inheritance tax

Section 28, IHTA 1984 provides that a transfer of value by an individual to an EBT will be an exempt transfer where the following condition is satisfied:

• The EBT is a section 86 trust with restricted beneficiaries.

However, the reliefs granted are subject to anti avoidance provisions without which it would be easy to use the EBT exemptions to transfer wealth from one generation of a family to another without adverse IHT and CGT consequences

Should an EBT be considered abusive by HMRC, then the trust will be treated as a Relevant Property Trust and a short contrast with that regime, as opposed to EBTs, must be considered.

Inheritance Tax considerations

Lifetime gifts into discretionary trusts are chargeable lifetime transfers (CLTs).  IHT will be charged at the lifetime rate of 20% on the amount above the settlor’s nil rate band. There is

10-year periodic charge

Discretionary trusts are ‘relevant property’ trusts because the trust assets are not included in the taxable estate of any of the beneficiaries, the trust itself will be assessed to IHT. That means that on each 10-year anniversary the trust is taxed on the value of the trust less the nil rate band available to the trust. The rate they pay on this excess is 6% (calculated as 30% of the lifetime rate, currently 20%).

Capital Gains Tax – Gifts into trust

Lifetime gifts of existing assets into trust, other than gifts of cash or the assignment of investment bonds, will be disposals for CGT.

During the life of the trust

If the trustees dispose of trust assets the gains are calculated in the same way as for an individual and taxed at the trust rates of CGT. The trust rates are 20% or 28% for residential property.

If the EBT is reclassified by HMRC as a Relevant Property Trust, then penalties and interest will apply and therefore extreme caution must be exercised when advising on the set up of the EBT

DoTAS and the final word

Again, a detailed consideration of these provisions is beyond the scope of this article, but advisors should consider whether placing shares in a small investment company with no employees will fall within the DoTAS legislation. In my view it does and the temptation to do this must be avoided

IHT hallmark a revision from the previous legislation

The IHT arrangement Regulations 2017 were made on 29 November 2017 and came into force on 1 April 2018, replacing the previous IHT hallmark.

Arrangements to which the IHT hallmark applies

The IHT hallmark applies to arrangements if it would be reasonable to expect an informed observer to conclude that both of the conditions below are met.

Condition 1

The main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain one or more of a list of specific advantages in relation to IHT (tax advantage).

The specific advantages are:

• The avoidance or reduction of a relevant property entry charge, the ten-year anniversary and exit charges.

(Regulation 4(2), IHT Arrangements Regulations 2017.)

Condition 2

The arrangements involve one or more contrived or abnormal steps without which a tax advantage could not be obtained.

(Regulation 4(3), IHT Arrangements Regulations 2017.)

EBTs if used properly have a significant place in Tax and Business planning. If you want further advice upon the use EBTs, EOTs and of an EBT upon the proposed sale of trading company, then contact us via email at clerks@elysium-law.com or call 0151 328 1968

In this article Richard Gray of Elysium Law considers amendments to the Model Articles adopted by a company with a sole Director.

Elysium Law were approached recently concerning the amendment to the Model Articles adopted by a Company who only had a sole Director.

The Company had secured the offer of a mortgage, but the lender required an amendment to the articles in that the acceptance of the mortgage offer and a charge over the property could be accepted by the Sole Director.

In pursuance of that requirement, we advised upon and amended the articles in the modified form as well as drafting the Special Resolution required.

The decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has called into question whether the articles of companies which adopt or automatically incorporate the model articles for private companies must be amended if the company is to be a sole director company. The High Court considered, among other things, the proper interpretation of Model Articles 7 and 11 and held that the provisions in Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors.

Article 7

“7.—(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

(2) If

(a) the company only has one director, and

(b) no provision of the articles requires it to have more than one director,

the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Article 11

11.—(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.

(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision

(a) to appoint further directors, or

(b) to call a general meeting so as to enable the shareholders to appoint further directors.”

Article 11, more or less replicates regulation 89, and anticipates that there must be at least two directors to form a quorum. A company as a matter of law however must have only one director.

Where only one director holds office, article 7(2) disapplies any provisions of a company’s articles relating to decision making by directors, provided the articles do not specify that at least two (or more) directors are to hold office at all times. If the articles do specify such a minimum number of directors, a sole director may only take decisions for the purposes of appointing further directors (article 17(1)(b)) or calling a general meeting to allow the shareholders to appoint further directors (article 17(1)(a)).

In Hashmi (above) the Court held that Model Article 7(2) was clear; it permitted a sole director to manage the company, where no provision of the articles required it to have more than one director. In this case, bespoke article 16.1 of the company’s articles replaced Model Article 11(2)) and required there to be multiple directors for board meetings to be quorate which the court considered also to mean that the articles required it to have more than one director. That being the case, Model Article 7(2)(a) was disapplied.

This decision indicates that it would be wise for existing private companies with model articles or articles based upon them may wish to amend them, by for example amending Model Article 11(2) by not requiring the company to have more than one director within the meaning of article 7(2)(a).

It seems that the validity of acts taken by sole directors in companies with articles based on the model articles is now likely to be called into question.

As a consequence, companies which have, or have had, a single director may also wish to consider whether, where appropriate, they should ratify some or all of the previous decisions of those directors. Note that amendments of articles will only take effect from the date of amendment, and not all companies are likely to ratify all past decisions of their sole directors.

Clearly when forming a new company bespoke articles should be filed rather than model articles. The suggestion must be that the provision of Article 11 is changed to accommodate the sole director position. A suggestion has also been made that Article 15; the recording of decisions should also be reviewed to accommodate the position.

Call us on 0151 328 1968 or email clerks@elysium-law.com for an initial discussion with one of our team.