Court finds EBT schemes amounted to an unlawful return of capital and breach of directors’ duties (Toone and others v Ross and another)

Court finds EBT schemes amounted to an unlawful return of capital and breach of directors’ duties (Toone and others v Ross and another)  

The High Court has ruled that two EBT schemes that involved making payments to employee-shareholders constituted an unlawful return of capital. This resulted in a breach of directors’ duties where the directors had not made adequate provision for the payment of creditors, including HMRC, and the company was or was likely to become insolvent. The decision highlights the court’s willingness to probe payments to members to ensure the proper formalities have been followed. Written by Paul Wright, barrister, 9 Stone Buildings.

Toone and others v Ross and another [2019] EWHC 2855 (Ch)

What are the practical implications of this case?

‘If it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family Anatidæ on our hands’ (Douglas Adams, Dirk Gently's Holistic Detective Agency).

It appears that this aphorism holds true for the court’s approach to the consideration of tax avoidance schemes. If a company enters into a scheme whereby its shareholders receive a tax-free sum of money from the company’s capital in proportion to their shareholdings, the court will examine whether it is in fact a distribution of the company's assets to its members.

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.