Shah v Insafe International Ltd & Anor [2016] EWHC 1036 (Ch)

[2016] EWHC 1036 (Ch)Case No HC-2015-000096
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue 7 Rolls Building, Fetter Lane.Date 12 May 2016
London EC4A 1NL
Before
MR SIMON MONTY QC(SITTING AS A DEPUTY JUDGE OF THE CHANCERY DIVISION!
Between
ARVIND SHAHClaimant(1) INSAFE INTERNATIONAL LIMITEDDefendants(2) MR ALAN BULLOCKDefendant
Mr James Stuart (instructed by Vyman Solicitors) for ClaimantMr Simon Forshaw (instructed by Anthony Gold Solicitors) for DefendantsHearing Hearing dates: 12,13,14 April 2016
Judgment ApprovedMr S Monty QC :
[1]This action concerns the sums which should properly be paid out by the First Defendant to the Claimant on the winding up of various trusts and sub-trusts.

The background

[2]The Claimant (“Mr Shah”) is an accountant. The First Defendant (“Insafe”) is a company which supplies and maintains security safes. Mr Shah was employed by Insafe as its Finance Director from 2001 and as its company secretary from 2004, until he was dismissed in January 2014. The Second Defendant (“Mr Bullock”) is the sole shareholder of Insafe and its Managing Director.[3]In 2006, with advice from a firm of financial advisers Powrie Appleby LLP (“PA”), Insafe established Employee Benefit Trusts (“EBTs”) by settling a total of £1.25m on trust in two EBTs, the trustees of which were Insafe. Most of the trust monies were then placed into two sub-trusts. 80% of the money (£982,400) went into a sub-trust for the benefit of Mr Bullock and his family and the remaining 20% (£245,600) into a sub-trust for the benefit of Mr Shah and his family. The sub-trusts then loaned back money to Insafe at an agreed interest rate of 3% over NatWest base rate compounded quarterly. By 2010 the sub-trusts had lent Insafe a total of £1,292,935, being almost the entire sum of £1.25m together with accrued interest.[4]When these EBTs were established, it was thought that they would have tax advantages for Insafe, Mr Bullock and Mr Shah. Insafe would receive a corporation tax deduction on the payments into the EBTs, and whilst any bonus payments from the trust would attract income tax, if payments out were made to employees as loans, the employee would not pay income tax on the loans.[5]HMRC challenged the use of EBTs, contending that their use was disguised remuneration and that income tax and national insurance charges became due from the date on which the employer company paid money into the sub-trusts. HMRC introduced “disguised remuneration” rules with effect from 6 April 2011, which created a charge to income tax where third party arrangements are used to provide what is in substance reward, recognition or a loan in connection with an employee’s current, former or future employment, deeming those sums as employment income taxable through pay as you earn (“PAYE”). At the same time, HMRC launched an EBT Settlement Opportunity (“EBTSO”) to enable employers who used EBTs the opportunity to resolve the tax position.[6]On 3 August 2015, having taken advice from PricewaterhouseCoopers LLP (“PWC”), Insafe entered into an agreement with HMRC (“the Agreement”), pursuant to the EBTSO, under which the sums paid into the sub-trusts were treated as remuneration, and Insafe paid PAYE and NIC thereon; Insafe claimed a corporation tax deduction for the amount paid; and Insafe paid interest on the unpaid tax but no penalties for late payment.[7]Following that settlement, it is agreed that the EBTs are to be wound up and the assets distributed. In safe says that the amount to be paid to Mr Shah is net of the payments made to HMRC under the Agreement, whereas Mr Shah contends that Insafe are not entitled to make those deductions and he should receive a sum equivalent to the monies held on trust before those deductions. The issues in this case[8]The Particulars of Claim raise a number of matters which are no longer relevant and which I do not have to decide following the Agreement with IHMRC and the decision to wind up the trusts.[9]To an extent it might be said (and indeed Mr Forshaw does say) that the court is being asked to resolve issues which Mr Shah has not pleaded. However, the three issues for determination are really encapsulated in paragraph 6 of the Prayer for Relief, which seeks “the payment to the Claimant of all sums held for him pursuant to the EBTs.” Thus in my view it is not necessary to consider whether there has been a breach of trust, and if so whether there should be relief from any breach of trust under section 61 of the Trustee Act 1925. The three issues can and in my view should be decided on the simple basis of determining what sum should be paid to Mr Shah from the trust funds.[10]The three issues for determination in this action are: i) Issue 1: What sum should be distributed to Mr Shah as part of the winding up of the EBTs and sub-trusts? In other words, who should bear the liability for paying the PAYE and NIC and interest thereon under the Agreement? Should those sums be deducted from the trust funds or not? ii) Issue 2: What rate of interest is due to be paid by Insafe to the trusts pursuant to the loan arrangements? Is it 3% over base rate, as Mr Shah says, or was there an agreed reduction to 1.19% over base rate, as Insafe maintains? iii) Issue 3: Are PWC’s costs properly chargeable to the trust funds?

The witnesses

[11]Before turning to the issues, I should say a few words about the witness evidence. I read the statement of Mr Shah and he gave oral evidence. For the Defendants, I read the statements of Mr Bullock, Mr Peasley (Insafe’s accountant and auditor) and Ms Whitely (at the material time Insafe’s financial controller) and each of them gave oral evidence.[12]The events surrounding the establishment of the trusts took place nearly 10 years ago. It is not perhaps surprising that none of the witnesses had a perfect recall of what happened, particularly in relation to the production and signing of various documents and a meeting at which at least some documents were signed. Having said that it is clear to me that most of these matters of fact are of no relevance to the issues I have to decide. It is of no relevance to the issues whether, for example, Mr Shah sprung some of the documents on Mr Bullock at a meeting and insisted that he signed them there and then, or when the documents were printed out, or whether the documents were signed in two tranches or at one meeting. There is also a wider context here. Mr Shah has brought claims in the Employment Tribunal for unfair dismissal and in the Commercial Court for wrongful dismissal. These claims have not yet been heard. I expressed to counsel my reluctance to make findings of fact in the present action - unless such findings are relevant to the issues I have to decide - which may touch on matters which properly should be decided by either or both of the Employment Tribunal or the Commercial Court. Both Mr Stuart and Mr Forshaw agreed that I should not do so, and I think this is the right approach. I therefore intend to say nothing more at this point in my judgment about the witness evidence, and will deal with the very limited factual evidence relevant to the issues when I consider each issue in turn. Issue 1: The sum to be distributed on dissolution of the trusts A. The terms of the trusts[13]The First EBT is dated 26 October 2006. The Second EBT and the sub-trusts are dated 17 November 2006. i) £650,000 was settled into the first EBT. ii) £600,000 was settled into the second EBT. iii) The Trustee of both EBTs was Insafe. iv) The EBTs were identical in their terms (save for the sums settled). v) Four sub-trusts were declared in respect of the EBTs, two for each EBT. The beneficiaries of the first and third sub-trusts were Mr Bullock and his family, and the beneficiaries of the second and fourth sub-trust were Mr Shah and his family. I shall refer to these as the Bullock sub-trusts and the Shah sub-trusts. A total of £982,400 was paid into the two Bullock sub-trusts and a total of £245,600 was paid into two the Shah sub-trusts. Save for the beneficiaries and the amounts paid in, the sub-trusts were in the same terms as each other - they were declared on the same terms as the EBTs with Insafe as Trustee.[14]The EBTs were each in the form of a Deed setting out the operative provisions with applicable Regulations at the First Schedule.[15]So far as is material to Issue 1, the terms of the EBTs were as follows: i) Clause 5(1) gives the Trustees the power by any deed revocable or irrevocable to appoint new or other trusts powers and provisions “of and concerning the Trust Fund or the income thereof of any part thereof for the benefit of the Beneficiaries or any one of them ...” The settlement of parts of the Trust Fund into the sub-trusts was expressly pursuant to this clause. ii) “Wherever any payment by way of addition to the Trust Fund or conferment of any benefit whether provided by the Trustees or any other person or a benefit or payment deemed as arising by a competent fiscal authority or treated as arising under relevant legislation results in any liability whether on the Trustees or any other person to pay any social security contribution, whether the liability is that of the employer or employee or provider of the benefit or payment, or any income tax whereby the Trustees or an employer or provider of the benefit or payment is required to account for income or other taxes by payment of tax or deduction the Trustees shall be obliged to pay all such taxes and contributions and make all such deductions or withholdings or payments and account to the relevant authority for the same notwithstanding that there may be no liability so to do or that any liability to do so may not be enforceable against them or that such payment may not in itself result in any benefit to any of the Beneficiaries or may result in an Excluded Person being released from any obligation to make such payment AND so that payment shall be paid by the Trustees out of the Trust Fund or the income thereof but to the extent that any social security contribution would otherwise be a deduction from any such addition or benefit that part shall be treated as deducted from such addition or benefit.” This is Clause 4(6). I need to return to this clause in detail below, because there is a substantive dispute between the parties as to its application in the present case. Mr Stuart says that it does not apply, and does not impose an obligation on the Trustees to deduct PAYE and NICs from the Trust Fund, whereas Mr Forshaw says that it does. iii) “In the event of any tax duty or fiscal imposition whatsoever becoming payable in the United Kingdom or elsewhere in respect of the Trust Fund or any part thereof in any circumstances whatsoever the Trustees shall have power to pay all such taxes duties or fiscal impositions out of the Trust Fund or the income thereof and shall have entire discretion as to the time and manner in which the said taxes duties or fiscal impositions notwithstanding that the same shall not be recoverable from the Trustees or the Beneficiaries or other persons entitled hereunder or that the payment shall not be to the advantage of any Beneficiary or other person entitled hereunder.” Regulation 8.[16]The sub-trusts provided as follows: i) Clause 2:
“The Appointors, in exercise of the power of appointment conferred by clause 5(1) of the Settlement and of all other relevant powers hereby irrevocably appoint and declare that from the date of this Deed, the Appointed Fund shall be held by the Trustees upon the trusts and with and subject to the powers and provisions contained in the Settlement, but with the following changes: 2.1 the ‘Appointed Fund’ shall be substituted for the ‘Trust Fund’; 2.2 the ‘Selected Beneficiaries’ shall be substituted for the ‘Beneficiaries’; and 2.3 the provisions of clause 3 of this Deed shall apply.” ii) The relevant definitions are these: The “Settlement” is a reference to the First EBT. The “Settlor” is Insafe. The “Appointed Fund” is defined as that part of the Trust Fund specified in the Second Schedule of the sub-trust Deed. In the case of the Shah sub-trusts those sums are £129,600 and £116,000. The “Selected Beneficiaries” in the Shah sub-trusts are Mr Shah and his family (there is a detailed definition in the Third Schedule). iii) Clause 3: “Exclusion of Settlor 3.1 No discretion or power conferred on the Trustees or any other person by this Deed or the Settlement or by law shall be exercised, and no provision of this Deed or the Settlement shall, from the date of this Deed, operate directly or indirectly, so as to cause or permit any part of the Appointed Fund or income thereof to become in any way payable to or applicable for the benefit of the Settlor. 3.2 The provisions of sub-clause 3.1 shall not preclude the Settlor from exercising any statutory right to claim reimbursement from the Trustees for any income tax or capital gains tax paid by him in respect of income arising to the Trustee or capital gains realised or deemed or treated as realised by them. 3.3 Subject to sub-clause 3.2, the prohibition contained in clause 3.1 shall apply notwithstanding anything else contained or implied in this Deed or the Settlement.”
B. The Loans 17. At the same time as the trusts were established, a loan agreement was entered whereby Insafe as Trustee lent to itself £300,000 at an interest rate of 3% above base rate compounded quarterly (“the Loan Agreement”). 18. Further loans were in due course made by Insafe as Trustee to itself from the EBTs and the sub-trusts. Apart from the Loan Agreement, none of the further loans were documented. By 2010 almost all of the moneys settled into the EBTs and the sub-trusts had been loaned to Insafe. C. The HMRC investigation and the Agreement 19. HMRC wrote to Insafe on 15 June 2009 notifying Insafe of an intention to enquire into the EBT arrangements. On 16 November 2010 HMRC wrote to say that its view was that “the amounts paid into sub-trusts or otherwise allocated to directors and employees by the trustees amount to the payment of earnings and should have been subject to PAYE tax and Class 1 NICs.”[20]On 30 November 2010 HMRC issued Notices of Decision in respect of the NICs and a Determination in respect of the PAYE tax due. On 20 December 2010 PA notified HMRC of Insafe’s intention to appeal. On 15 February 2011 and again on 28 June 2011 HMRC offered Insafe the opportunity of entering into settlement discussions. PA then went into a creditors voluntary liquidation and Mr Powrie offered assistance to Insafe through his new company Kibworth Tax Services Ltd. Negotiations with HMRC continued.[21]On 25 June 2014 Vymans, acting for Mr Shah, sent a formal letter of claim to Anthony Gold, solicitors for Insafe, demanding the immediate repayment from Insafe of the trust monies appointed to the beneficiaries of the Shah sub-trusts and the distribution of those monies to the beneficiaries. By this time, PWC were giving advice to Insafe (I will return to PWC’s role when considering Issue 3 below).[22]On 13 August 2015 HMRC and Insafe entered into the Agreement, as I have indicated. The terms of the Agreement were as follows: i) The Agreement is between HMRC (defined as “the Commissioners”) and Insafe (defined as “the Employer”). ii) It was agreed that liabilities for PAYE and NICs (defined as “Unpaid Liabilities”) were “unpaid wholly or in part because of the Employer’s failure to meet all its obligations.” iii) On the basis that HMRC would not take proceedings against the Employer for the Unpaid Liabilities or interest thereon, “the Employer agrees to pay £643,302.31 (‘the Settlement Amount’) in full and final settlement of the Unpaid Liabilities.” iv) “In the tax year 2006-7 the Employer made contributions of £1,228,000 to [the EBT] which were the subject of pre-6 April 2011 steps as defined by paragraph 59(1)(c) of Schedule 2 of the Finance Act 2011 (‘the Allocations’) in the tax year 2006-7. Details of the Allocations and the beneficiaries of the Allocations (‘the Beneficiaries’) are show in Appendix A.” v) Appendix A shows that the Allocations are the payments from the EBTs to the two sub-trusts. vi) “The Allocations are the payment of earnings (‘the Earnings’) as defined by section 62 of ITEPA 2003 and section 3 of the Social Security Contributions and Benefits Act 1992 on the dates that the Allocations were made.” vii) The Agreement specified the amount of PAYE, NICs and interest due on the Earnings. viii) The Agreement went on to say that the Earnings were qualifying benefits for the purpose of corporation tax. ix) The Settlement Sum was therefore the amount of PAYE, NICs and interest due on the Earnings less a deduction for the over-paid corporation tax. x) The Settlement Sum was payable within 90 days of the Agreement. xi) The Agreement was expressly not enforceable by any person not a party to it. D. The tax effect of the trusts[23]It will be noted that it was expressly agreed between HMRC and Insafe in the Agreement that the obligation to make PAYE tax and NIC payments arose when monies were allocated from the EBTs to the sub-trusts.[24]On 4 November 2015 the Court of Session handed down its Opinion in the Murray Group Holdings Ltd case (“Murray”). It was held that monies paid via EBTs were taxable as earnings because the monies represented the product of the employee’s work, even though the monies were paid to a third party via an EBT, and that the employer’s liability to make PAYE and NIC payments arose when the monies were paid into the EBTs.[25]Whilst not binding on this court, Murray is persuasive authority and both Mr Shah and Insafe rely on it as supporting their respective cases.[26]The principles set out in Murray are clear and may be summarised thus: i) Income tax is payable on salary, wages, fees, gratuities, benefits, or anything which constitutes an emolument. These are defined in the income tax legislation initially as emoluments (under the Income and Corporation Taxes Act 1988 as amended for the years 2001/2 and 2002/3) and latterly as employment income including earnings (during more recent tax years when the earlier legislation was replaced by the Income Tax (Earnings and Pensions) Act 2003). ii) An employer paying an employee any sum which is liable to income tax must deduct income tax under the PAYE regulations, as well as employee’s NICs. iii) The critical feature of an emolument or earnings is that it represents the product of the employee’s work - his personal exertion in the course of his employment. If income is derived from an employee’s services as employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. iv) It is irrelevant that the redirection of payments is through the medium of trust arrangements. It is equally irrelevant that the trustees who receive the payment exercise a genuine discretion as to what happens to the funds. The funds arc ultimately derived as consideration for the employee’s services, and on that basis they are properly to be considered emoluments or earnings. v) In assessing the liability of a transaction to taxation, it is imperative in every case to determine the true nature of the transaction, viewed realistically. If the payments by the relevant employer into an EBT, and in due course payments from the EBT to a sub-trust, were derived from the employment of the employees in question, they amount to the employees’ emoluments or earnings. vi) When funds are paid to the trustee, they represent consideration for the employee’s services, and are taxable accordingly. It is the making of those payments which gives rise to an emolument or earnings; it is a redirection of earnings. The employer must therefore deduct sums due under the PAYE and NIC regimes at the time when the payment is made into the EBT. The obligation to deduct tax under the PAYE and NIC legislation falls on the employer who pays the sum into the EBT. vii). Once payments are made to trustees, they become subject to the trust purposes of the EBT and subsequently the sub-trusts, and are subject to the tax regime applicable to trusts. The existence of the trust arrangements and the loans made by trustees to the employee in question are irrelevant to the question of whether there was a redirection of earnings. The redirection of earnings occurred at the point where the employer paid a sum to the trustee of the EBT, and what happened to the monies thereafter has no bearing on the liability that arose in consequence of the redirection. viii). The payment made by the employer to the EBT is subject to income tax but payments out of the trust will not be so subject. The funds in question will be held by the relevant trustee as trust capital, and any payment of the fund originally received from the employer will accordingly be treated for tax purposes as a capital payment out of a trust. The only liability to income tax is on income earned by the trustees, for example by investment of the trust funds. In these respects, the situation is no different from an employee who uses part of his post-tax income to fund a trust for the benefit of his family. In such a case the amounts that he received as income are transformed into capital in the hands of the trustees, and become subject to the ordinary tax regime governing funds held in trust. There is no double taxation.[27]In my respectful view, the decision in Murray represents the correct position in law and should be applied to this case. I agree with Mr Stuart that the main factual difference between the present case and Murray, that in Murray the sub-trust loaned the money to the employee whereas in the present case the loan was to the company, is not material: see paragraph 26 vi) above.[28]Mr Forshaw for the Defendants reserves his position as to whether the tax charge arises when monies were settled into the EBT (as held in Murray) or when they were paid into the sub-trusts (as set out in the Agreement). However, he says that for present purposes, it does not matter which is correct. E. Discussion[29]Mr Stuart, counsel for Mr Shah, contends as follows: i) The funds were irrevocably appointed from the EBTs to the sub-trusts where they are held for the benefit of the beneficiaries, which (in the case of the Shah sub-trusts) include Mr Shah’s family. ii) As set out in Murray those funds are subject to the tax regime applicable to trusts and not to income tax. After the funds had been paid into the Shah sub-trusts by Insafe, Mr Shah as employee could not be subject to further liability in respect of those monies. iii) The payments by Insafe into the EBTs were subject to income tax and NICs but payments out of the EBTs to the sub-trusts, and from the subtrusts to beneficiaries, are not. The funds are held as trust monies and (again, as was the case in Murray) are to be treated as “post-tax income”. iv) Sums paid to the trustee of the EBT are earned by the employee and the net result is no different from an employee who uses post-tax income to fund a trust for the benefit of his family. v) The whole trust fund of £ 1.25m plus accrued (net of employer’s tax) interest must be distributed as capital, and it is Insafe - not Mr Shah - who must bear the burden of the income tax and NIC payments, which cannot fall on the beneficiaries of the trusts. The fund is the entire £1.25m and not some lesser net of tax amount. vi) The liability to pay tax and NIC pre-dated the decision in Murray and arises from the Agreement. It is thus not a liability determined in accordance with the analysis in Murray. The Agreement is therefore not determinative of what tax and NIC would have been payable in respect of payments made in 2006. vii) In any event, Insafe has not made a claim for reimbursement of the tax paid under the Agreement and the principle in McCarthy v McCarthy Stone [2008] All ER 221, under which an employer who has under compulsion of law made a payment to discharge an employee’s liability has a right to reimbursement from the employee, has no application here. viii) The trustee’s power to pay tax contained in clause 8 of the EBTs is circumscribed by clause 3 of the sub-trusts, which prevents a power from operating directly or indirectly for the benefit of Insafe. The discharge of the Settlement Sum pursuant to the Agreement from the trust monies is therefore prohibited by clause 3. ix) Clause 4(6) of the EBTs does not entitle Insafe to pay the Settlement Sum from the trust monies because, properly construed, it has no application to the facts. x) The trustee must therefore distribute the trust fund without deduction.[30]In my opinion, these arguments all fail.[31]Payments into EBTs which represent earnings or emoluments of an employee are liable to income tax and NICs. It is agreed - and it is clearly correctly agreed - that the payments into the EBTs in this case were earnings.[32]An employer who pays an employee must deduct PAYE and NICs. The employer’s obligation to do so arose when the EBTs were established.[33]That might not have been anticipated by Insafe and Mr Shah when the EBTs and sub-trusts were set up, but - for the reasons summarised at paragraph 26 above - that is the case in my respectful view, following Murray.[34]It is always the employee’s liability to account to HMRC for income tax. See for example section 13 of the Income Tax (Earnings and Pensions) Act 2003 and sections 59A and 59B of the Taxes Management Act 1970, and McCarthy v McCarthy & Slone at paragraphs 40(4) and 45.[35]The position is the same in respect of NICs: see the Social Security Contributions and Benefits Act 1992, section 6(4)(a) and Schedule 1 paragraph 3(1) and again McCarthy v McCarthy & Stone at paragraphs 46-50.[36]The fact that the employer has an obligation to deduct PAYE and NICs does not detract from the fact that the liability to pay income tax and employee’s NIC is always that of the employee.[37]That is also true of interest. In the case of income tax, late payments of income tax “shall carry interest” (section 86 of the Taxes Management Act 1970) and the same words arc used for the late payment of NICs (paragraph 17(1) of Schedule 4 to the Social Security (Contributions) Regulations 2001, applicable for the period relevant to this case). In both cases, since the ultimate liability to pay rests with the employee, so does the obligation to pay interest.[38]Clause 4(6) of the EBTs is a difficult clause to follow. I have set it out in full at paragraph 15.i) above. In order to understand it, and apply it to the present case, it is necessary to recast it as follows (as Mr Forshaw suggested):
“Where an income tax liability or a social security contribution falls due, whether or not if falls on the employer, employee or some other person, the trustees are obliged to pay it out of the trust fund, provided that one of four conditions are met: i) A payment has been made by way of addition to the trust fund; or ii) Any benefit is conferred; or iii) Any benefit or payment is deemed as arising by a competent fiscal authority; or iv) Any benefit or payment is treated as arising under any relevant legislation.”
[39]Mr Forshaw relies on ii), iii) and iv). He accepts that i) does not apply.[40]Mr Forshaw says that there was a conferment of a benefit under ii) because[41]As to iii), Mr Forshaw says this. The competent fiscal authority is HMRC. As the Agreement states, when the sub-trusts were declared and when allocations of funds were made from the EBTs to the sub-trusts, there was a benefit or payment to both Mr Shah and Mr Bullock. These funds were their earnings. A tax liability fell due. It was on that basis that HMRC issued its determinations and entered into the Agreement.[42]And again, as to iv) Mr Forshaw says that (following the decision in Murray) the payment into the EBTs resulted in a tax liability because it was treated under the relevant tax and social security legislation as a benefit for the employee - namely, earnings - thereby giving rise to a tax liability. If the position under the Settlement was correct, then the payment from the EBTs to the sub-trusts similarly were a payment to or benefit for Mr Shah as they were earnings on which tax arises. Either way, iv) applies.[43]Mr Stuart contends that the position is simply this: the trust fund lent £1.4m to Insafe; the trust’s asset is that loan; Insafe has agreed to pay a sum of money to HMRC, but it still owes £1.4m to the trust fund. What Insafe was actually paying to HMRC was the Settlement Sum pursuant to the Agreement, a settlement to which Mr Shah was not a party, and to which Insafe in its capacity as trustee was not a party (since it is defined and referred to in the Agreement as “the Employer”). The obligation to make that payment is not covered by clause 4(6).[44]Mr Stuart accepts that Mr Shah will at the end of the day have to account to HMRC for income tax and NIC on the sums he is paid from the trust fund, as these sums are to be regarded as earnings, but says that he is not bound by the calculation set out in the Agreement and in any event the trustees may not deduct what was paid to HMRC from the trust fund before making a distribution.[45]In my judgment, Mr Stuart’s contentions are wrong. The trustees have an obligation, under clause 4(6), to make the PAYE and NIC payments out of the trust fund for the three reasons put forward by Mr Forshaw and which I have summarised immediately above. I do not agree with Mr Stuart’s argument that the obligations under the Agreement are not, and are not intended to be, covered by clause 4(6). It is in my view clear that the obligation on Insafe under the Settlement to pay the Settlement Sum is in relation to a payment deemed as arising by HMRC, the competent fiscal authority, whereby Insafe as employer is required to account for PAYE and NICs. Equally, it is clear that the payment of money which is treated as earnings is a payment treated under the relevant legislation as resulting in a tax liability. Finally, it is equally clear that the payment of earnings, whether into the EBTs (following Murray) or into the sub-trusts (as set out in the Agreement), was a benefit to Mr Shah which gave rise to a tax liability.[46]It follows, in my judgment, that Insafe as trustee can and indeed must deduct the sums paid to HMRC from the trust fund.[47]Although that finding is sufficient to dispose of Issue 1, I need also to deal with Regulation 8, which gives the trustees the power (as opposed to imposing an obligation) to pay tax.[48]I have set out Regulation 8 at 15.iii) above. Mr Stuart says that the trust fund is not itself subject to the employee’s income tax - see Murray. The obligation is on Mr Shah as employee to pay income tax and NICs on his earnings, and on Insafe as employer to deduct it. The sum payable under the Agreement is not payable “in respect of the Trust Fund”, which is the requirement of Regulation 8. However, I agree with Mr Forshaw’s submission that the liability to make the PAYE and NIC payments are “in respect of the Trust Fund” because that liability arises because of the establishment of the EBTs and the sub-trusts and the payment of earnings into those trusts. It does not, to my mind, matter whether the payment by Insafe is triggered by the payment to the EBTs or the payment to the sub-trusts.[49]Clause3.1 of the sub-trusts prevents the exercise of a power (and Regulation 8 is a power) where it causes or permits any part of the fund “to become in any way payable to or applicable for the benefit of’ Insafe as Settlor. Mr Stuart says that clause 3.1 prevents the trustees from using Regulation 8, and clause3.2 makes the position even clearer, because that states that Regulation 8 does not preclude the Settlor from recovering from the trust fund any tax paid by the Settlor which arises on income generated by the trust fund for the trustees. All other payments for the benefit of the company are prevented by clause 3.1. Attractively as this point was argued, in my judgment it is wrong. Under the Agreement, there is nothing payable to Insafe. The liability to tax is that of Mr Shah. The money has been paid by Insafe to discharge his liability. It is not money applicable for the benefit of Insafe, but money which has been paid for and is applicable to the benefit of Mr Shah. In my view, therefore, the trustees are entitled to exercise their Regulation 8 power, notwithstanding clause 3 of the sub-trust.[50]Finally, Mr Shah said in his witness statement that he intended to be remunerated “in the same way as Mr Bullock”, so that his pay and benefits were calculated as a net sum and then tax added to achieve a gross sum, with the company “carrying the risk of the EBT”, but since he accepts that this was never discussed with Mr Bullock, there could not have been an agreement to that effect. Such an agreement would in any event have been the opposite of how he was actually paid, according to his payslips.[51]My conclusion on Issue 1 is therefore that the amount to be distributed to Mr Shah and the other beneficiaries of the Shah sub-trusts is the amount after deducting the sums paid to HMRC under the Agreement.

Issue 2: Interest

[52]As has been noted at Section B above, the Loan Agreement provided for interest on the first loan to Insafe at 3% above base rate compounded quarterly. Minutes of a meeting dated 17 November 2006 record an agreement to lend money at that interest rate.[53]None of the further loans were documented but it is common ground that the terms agreed and authorised by Insafe as trustees of the EBTs and the subtrusts applied to the later loans (subject to any later reductions in the interest), and that by 2010 all the money save for a small residual amount had been lent to Insafe at the originally agreed interest, 3% over base rate.[54]It is common ground that in the tax year 2009/10 there was an agreed reduction in the interest rate.[55]On 23 December 2010, Mr Peasley emailed Mr Shah with the draft accounts. He noted:
“2) Figures show that the EBT loan due within one year at the same £552k as in the 09 finals - this will no doubt need revising as technically it’s repayable on demand and therefore a current liability but didn’t want to show £1.4m in current liabilities as this would reduce net current assets substantially - have you been able to progress the EBT position with Powrie Appleby/Trustees - is there a formal repayment schedule so we can correctly analyse the debt in the accounts. 3) Consolidated figures show £29k loss after tax and consolidated goodwill ...” 56. On 10 January 2011, Mr Shah replied as follows: “EBT - The trustees of EBT have agreed to discount the interest charges for period 30th September 2010 by £30,000. This would increase the profit at Insafe International. As far as the EBT loan goes the capital repayment of the loan has been deferred for a period of 2 years to 30th September 2012. Hence the whole loan outstanding on EBT is a long term loan with the initial payment commencing after 30/9/2010 and the capital sum repayable will then be agreed by the trustees in the ensuing period.” 57. Insafe’s tax disclosure letter 2009/10 was dated 12 January 2011, and paragraph 18 of the letter reflected Mr Shah’s email: “We confirm that the trustees of the Employment Benefit Trust formally agreed that a further £552,935 be advanced to the company during the financial period and the Trustees have agreed to discount the 3% over base rate interest rate by £30,000. Furthermore, we also confirm that having made enquiries of the Trustees of the EBT Loan, capital repayments are deferred for a period of 2 years to 30/9/2012.”
The letter was signed by Mr Bullock and Mr Shah as director and secretary respectively.[58]The effect of discounting the interest by £30,000 was that the applicable interest rate for that year was not 3% over base but 1.19% over base. That was the mathematical result of deducting £30,000 from the interest due when calculated at 3% over base.[59]Mr Shah said in his witness statement that the agreed reduction was for that year only, whereas it is Insafe’s position that there was also a reduction in the interest rate (to 1.19% over base) in all subsequent years. Moreover, Mr Shah said that there was a deferral of the interest due at the full rate of 3% over base.[60]For the years 2010/11 and 2011/12, there was again a reduction in the interest rate. The tax disclosure letters for those years were also signed by Mr Bullock and Mr Shah, and contained paragraphs in similar terms recording that “the Trustees have agreed to discount the 3% over base rate interest rate to 1.19% over base rate i.e. 1.69% with interest compound.”[61]For the years 2012/13 and 2013/14, the tax disclosure letters also record that “the Trustees have agreed to discount the 3% over base rate interest rate to 1.19% over base rate i.e. 1.69% with interest compound.”[62]The only difference in wording is that the 2013/14 letter uses the wording “the Trustees have continued to agree ...”[63]Those two letters were signed by Mr Bullock and Ms Easterling as directors; Mr Shah was not involved in the finalising of the accounts for those two periods as he had left the company in January 2014; both sets of accounts for those periods, and both letters, were prepared and signed after he had left.[64]In his witness statement, Mr Shah said this:
“It has been alleged that I agreed to the interest rate being 1.19% above the base rate as from September 2009. This is factually incorrect. I had agreed with Mr. Bullock to the interest rate being ‘reduced’ to 1.19% for one year only in order to facilitate production of a positive balance sheet to maintain the confidence of one of Insafe’s major customers... However, that was in reality not a reduction in the interest rate, but rather that the interest rate at 3% above the base rate ... would be deferred for that year with recovery made in subsequent years. However, it appears that Mr. Bullock did not ever put the rate back up the accounts.”
[65]Mr Forshaw criticised this evidence as disingenuous, and I agree, because it is clear that in the years subsequent to the 2009/10 period, whilst Mr Shah was still at Insafe, a discounted rate of 1.19% was agreed by Mr Shah as Finance Director on behalf of Insafe, and that discounted rate was set out in Insafe’s tax disclosure letters for the years 2010/11 and 2011/12.[66]As I have set out above, once Mr Shah left the company, Insafe appeared to have maintained the agreement to discount the interest rate at the same level, as can be seen from Insafe’s tax disclosure letters for the years 2012/13 and 2013/14.[67]At the start of the trial, Mr Stuart conceded that the interest rate should be reduced for the three years to 2012 in which (as the evidence I have referred to above shows) Mr Shah authorised there to be a discounted rate, but he maintained that for the period post-2012 the rate should have been 3% above base rate. Mr Shah no longer contends that the discount was in fact a deferral.[68]Mr Stuart says that the original discount of £30,000 was a temporary one (at least, the email from Mr Shah did not say that it was permanent) which Mr Shah agreed to ensure that the company did not show a loss in its accounts. He accepts that in the two subsequent years there was also an agreement to discount the rate. However, he says that after Mr Shah left, there was no evidence that there was an agreement, for the years 2012/13 and 2013/14, to discount the interest rate, and indeed no need to do so as there had been in earlier years because the performance of the company had improved. Mr Stuart points to Mr Bullock’s evidence that he did not recall making such an agreement after Mr Shah left, and to Mr Peasley’s evidence that there were no discussions or exchange of emails which could amount to such an agreement for those years.[69]Despite this, I find as a fact that there was an agreement, in all the relevant years, to discount (and not to defer) the interest rate to 1.19% over base rate. In my view, the tax disclosure letters amount to such an agreement, which was a continuation of the discount which had been agreed in the first three years. The letters were signed by the directors of the company, and the trustee was also the company. The schedule of interest put forward by Insafe have always calculated interest at that discounted rate. I therefore find for the Defendants on Issue 2. The interest rate has at all times properly been discounted to 1.19% over base rate compounded quarterly.

Issue 3: PWC’s fees

[70]Can the professional fees of PWC be deducted and paid from the trust fund or should they be paid by Insafe on its own account and from its own resources?[71]PWC were instructed to assist Insafe in sorting out the tax position with HMRC in relation to the EBTs (and in relation to another matter known as the Gilt Futures scheme). There was no letter of instruction and the correspondence does not state, in terms, who PWC’s client was - Insafe on its own account, Insafe as Trustee, or both.[72]PWC’s involvement is first recorded in a letter from Vymans, solicitors for Mr Shah, on 25 June 2014, which is the formal letter of claim. Paragraph 10 records that Mr Tibber (Insafe’s solicitor) was meeting with PWC “in connection with PAYE and NIC liabilities. In this respect we do not accept your suggestion that if the Company is liable for PAYE and NIC, that should have the effect of diminishing the value of the EBT fund which is appointed in favour of our client. Such liabilities are the liabilities of the Company and not liabilities which should be borne by the trust fund or its beneficiaries.”[73]Mr Tibber’s reply on 8 July 2014 was that “our client has been taking advice from PWC in connection with the ongoing claims by HMRC in respect of the EBT and the Gilts Futures scheme. Our client has taken specific advice on your letter of 25 June 2014 and we enclose a copy of a letter from PWC dealing with the taxation implications of a distribution from the EBT.”[74]The PWC letter referred to is dated 7 July 2014:
“Further to our discussion, we have now reviewed the letter from Vyman Solicitors dated 25 June 2014 regarding the Insafe EBTs. We provide our views on the taxation implications of a distribution from the EBTs below. As you are aware, Insafe have instructed [PWC] to review the tax position of the company’s two EBTs ... We are currently in discussions with Insafe about the potential historic and future tax liabilities for both EBTs and also the options for settling any liabilities with [HMRC]. ... Ordinarily it is our experience that contributions to an EBT structure of this nature would have been made as a tax efficient reward mechanism for employees or directors. As such, we would not ordinarily expect the amount contributed to the EBT to represent a net entitlement. We understand that the trustees of the EBTs are entitled [to] settle any PAYE or NIC liabilities arising on a distribution to a beneficiary in accordance with clause 8 of Schedule 1 to both trust deeds. We would therefore expect any distribution to be paid to a beneficiary net of PAYE and NIC.”
The reference to “clause 8” is in fact to Regulation 8 which I have already set out above.[75]In its letter to HMRC dated 29 July 2014, PWC refer to Insafe as “our client” and say that “Our client is keen to establish HMRC’s view of: The employment tax treatment of contributions to the EBT sub trusts, The treatment if any loans made by the trustees of the sub trusts, The Inheritance Tax treatment of amounts paid out of the funds.” The Inheritance Tax treatment of amounts paid out of the funds.”[76]PWC provided a report entitled “Insafe International Limited — Historic Tax Planning - Employee Benefit Trusts” dated September 2014. The covering letter accompanying the report states that it was “prepared solely for the purposes of our engagement with our client Insafe International Ltd and is not intended to be relied upon by any other party.”[77]Finally in relation to the documents, PWC produced a calculation dated 30 March 2016 apportioning sums due from the trusts on the basis that the sums paid by Insafe under the Settlement Agreement were to be deducted from the trust funds.[78]Mr Shah’s evidence was that PWC told him that they were not acting for him. I accept that is what he was told. Mr Stuart says that if PWC were acting for Insafe as trustees (as opposed to and in addition to Insafe the company) PWC could not have said that, as Mr Shah was a beneficiary of the Shah sub-trusts. Mr Stuart contends that the evidence, such as it is, shows that PWC was acting for Insafe the company, and not for Insafe as trustees.[79]Mr Forshaw says that PWC were instructed to advise Insafe in the knowledge of the claim being made against Insafe as trustees (PWC’s involvement having started at the time of the letter of claim, and the first PWC letter addresses issues raised in the letter of claim), and the advice given by PWC was that the fund should be paying the net amount.[80]Taking all of this into account, my conclusion on Issue 3 is that PWC were advising Insafe in both capacities - as a company and as a trustee.[81]Regulation 11 of the EBTs provides:
“... the Trustees shall have power to employ and take advice from any professional advisers or agents. The professional fees commissions and disbursements of all such advisers or agents including legal counsel shall be payable out of the Trust Fund or the income thereof as the Trustees shall think fit.”
[82]In my view, Mr Forshaw is therefore right when he says that the instruction of PWC falls within Regulation 11.[83]PWC’s costs attributable to advice in relation to the EBTs have been split by PWC between the Shah sub-trusts and the Bullock sub-trusts on a pro rata (20/80) basis. The Bullock sub-trusts have incurred costs of £12,634 and the Shah sub-trusts have incurred costs of £3,158.[84]Issue 3 is in my judgment to be resolved in favour of Insafe.

Conclusion

[85]For the reasons set out above, all three Issues are to be resolved in favour of Insafe. The payment under the Agreement and Mr Shah’s share of PWC’s fees are to be deducted from the fund before distribution to Mr Shah (on his own behalf and for the other beneficiaries of the Shah sub-trusts) and the correct interest rate was at all times 1.19% over base rate compounded quarterly.[86]I would like to thank counsel for the careful and thorough way In which the respective parties’ cases were argued. Counsel should now agree a form of order consequent upon my judgment, and I will then deal separately with the question of costs. (End of judgment)