Shah v Insafe International Ltd & Anor

Payments into employee benefit trusts representing employment earnings attract income tax and national insurance contributions when the earnings are paid into the trust structure. The employee remains liable for the tax and employee contributions, although the employer must account for them under PAYE. Trust provisions requiring trustees to pay liabilities arising from payments, benefits or relevant legislation may require those sums to be paid from the trust fund. A power to pay tax may also apply where the liability arises because of the trust arrangements. Professional fees incurred by advisers acting for the company and trustees may be charged to the fund where the trust deed permits it.

The claimant, a former finance director and company secretary of the first defendant, was a beneficiary of employee benefit trusts and related sub-trusts established by the company. Following an agreement with HMRC treating allocations as employment earnings, the trusts were to be wound up.

The claimant disputed deductions for PAYE, national insurance and interest paid under the agreement. He also disputed the applicable interest rate on loans from the trusts to the company and the recoverability of professional fees incurred by PricewaterhouseCoopers LLP. The court determined those three issues at first instance.

1. Distribution and tax liabilities. The court accepted the reasoning in Murray Group Holdings Ltd that payments into employee benefit trusts representing the product of an employee’s work are earnings, notwithstanding their redirection through trusts. The employer’s obligation to deduct PAYE and national insurance arose when the trusts were established. The employee remained liable to account for income tax, employee national insurance and interest, while the employer had to make the required deductions and payments. See McCarthy v McCarthy & Stone [2008] All ER 221.
2. Clause 4(6). Properly recast, clause 4(6) required the trustees to pay tax or social security liabilities from the trust fund where a payment, benefit, deemed payment or payment treated as arising under legislation gave rise to the liability. The PAYE and national insurance payments under the HMRC agreement fell within those conditions. Insafe therefore could, and was obliged to, deduct them from the fund.
3. Regulation 8 and clause 3. Regulation 8 separately empowered the trustees to pay tax arising in respect of the trust fund. That power was not defeated by the sub-trust exclusion of the settlor, because the payment discharged Mr Shah’s liability and was not money applicable for Insafe’s benefit.
4. Interest. The evidence, including the signed tax disclosure letters, established an agreement in all relevant years to discount the contractual rate to 1.19% over base rate, compounded quarterly. The reduction was not merely a deferral.
5. Professional fees. Regulation 11 authorised the trustees to employ professional advisers and pay their fees from the trust fund. PWC had advised Insafe in both its corporate and trustee capacities. The relevant costs were therefore properly chargeable to the fund.
6. All three issues were resolved in favour of Insafe. The HMRC payment and Mr Shah’s share of PWC’s fees were deductible before distribution, and the agreed discounted interest rate applied. Counsel were directed to agree the consequential order, with costs to be dealt with separately.

First-instance judgment. No appellate history is stated in the judgment.