Fortunately, the settlement was not one I was involved with. As an adviser to clients facing significant tax liabilities, I would always want to do my best to mitigate the cost and demonstrate the value of appointing a specialist. I would also want to protect my client from prosecution, which means disclosing all material facts.
The UK’s tax authority is suing EY over alleged misrepresentations regarding a settlement entered for Jamie Ritblat. The son of Sir John Ritblat is a prominent property investor: The redevelopment of Elephant & Castle, Earls Court and the former Olympic Village. You would think that even modest errors would have resulted in more than the settlement entered in 2015 for a mere £400. What a great deal negotiated by EY!
Ritblat argues the deal entered precludes HMRC from collecting £141m of carried interest profits paid by trust to its employees. HMRC has taken legal action against Delancey (the employer) and EY. Delancey also brought proceedings against HMRC ‘as they have breached the terms of an agreement in respect of an employee benefit trust settlement opportunity which they publicly initiated and offered to hundreds of employers and trusts.’
HMRC consider that ‘Misrepresentations were made in 2015’ and ‘the settlement would not have been entered into.’
The DV4 Trust was established for the benefit of employees and former employees. Between 5 April 2016 and 5 April 2020, distributions amounting to £141,404,723 were made to beneficiaries. HMRC sought to recover Class 1 NIC amounting to £32,243,742.53. Basically, it was argued that the pre 6 April 2011 step was a taxable event under the remit of the employee benefit trust settlement opportunity (‘EBTSO’) and the value of assets held by the DV4 Trust in 2015 was irrelevant i.e. the investment growth which HMRC were unaware of was outside the scope of tax. Evidently, HMRC later disagreed and maintained that EY withheld or misrepresented the information.
EY’s ‘Mr Wilson was highly knowledgeable in respect of the EBTSO, and had a full understanding of what facts and matters HMRC would take into account when negotiating a settlement under the EBTSO.’ The settlement agreement stated that “The assets included within the settlement, together with any subsequent investment growth, could be distributed in the future without any further employment tax or disguised remuneration charges.”
The claim against EY was issued in July although HMRC has yet to serve it on the firm. The High Court heard last week that HMRC intends to serve the case before the deadline (28 November). EY is already defending a High Court negligence claim by the administrators of former FTSE 100 audit client NMC Health. Following one of the biggest frauds ever alleged at a UK-listed company, NMC Health collapsed in 2020.
The case is important for those acting in relation to settlement negotiations with HMRC. It highlights the evolving approach of HMRC to consider not only the acts of ultimate tax payers but also those advising them. Advisers are governed by a professional responsibility to act diligently and honestly and may face action by their professional bodies. However, the expectation that HMRC would litigate against an adviser has not really been present. Over the past decade legislation has sought to deter promoters of tax avoidance. HMRC has also established a specific unit to counter professionals who are too assertive seeking to minimise tax liabilities for their clients. The unit operates to ‘educate’ advisers about what HMRC consider acceptable practice although inevitably that unit must ultimately consider whether the practices adopted are against the interest of the Revenue.
Over two decades ago, HMRC stated they desired changing the public’s perception towards acceptable tax planning and in particular tax avoidance schemes. It was Dawn Primarolo that criticised the professionals that were then responsible for remuneration planning such as gilt strip planning – options over gilts resulting in employees receiving tax free amounts in return for performance. Despite that announcement, the promotion of other remuneration structures has continued. Some have legally appeared to not be in respect of employment although ultimately employees or shareholder/directors have benefitted. Will HMRC launch other attacks on professionals or promoters of tax avoidance?
Given the strains on HMRC’s resources, it may be unlikely that they will turn to widespread litigation due to the costs involved. Promoters who have acted on a large scale may be at risk although inevitably any such action will rumble on for years. Can we expect more legislative changes to deter promotion of tax avoidance or assertive tax planning? Would it not be simpler to introduce legislation that allowed HMRC to counter planning they feel inappropriate more quickly?
For those advisers who are not specialist at tax investigations and negotiating settlements, the case against EY may encourage them to follow professional guidance and recommend clients seek specialist advice. Equally, the risk for taxpayers relying on a non-specialist is significant – not only in tax costs but also the potential for further professional costs in the future if that settlement is later found to be based on misrepresentation.