If you’re gonna do it do it right- insurance policy meant for company protection assessed as director’s benefit in kind

Tue 14 Feb 2017

My apologies to the late George Michael but the case of Macleod and Mitchell Contractors Limited and William Mitchell v HMRC demonstrates the importance of always checking documents carefully and making sure they do what they are meant to do. Failure in this case looks set to cost the Company and director dearly unless they appeal successfully.
The decision contains some oddities and is, of course, open to appeal but the real message of this case is that incorrect execution of innocent arrangements that aren’t tax-driven can cause taxpayers unnecessary expense and trouble.

The background

When William Mitchell (WM) arranged a series of life insurances it was his intention, personally and as director on behalf of Macleod and Mitchell Contractors Limited, that the insurances should be paid for by the Company for its benefit and protection, a fact that they claimed was made clear to the adviser who set up the policies and which was accepted as true by the First-tier Tribunal (FTT) Judges. But what actually happened was:
• the policies were written with WM named as the policy holder, not the Company;
• the Company paid all the premiums as intended; and
• when WM became aware of the potential problem he did not take the necessary steps to ensure that there was no doubt that  the benefit of the policies belonged to the Company except in respect of two specific policies where third party requirements led him to act.
WM had not reviewed the policy proposal forms as sent to the insurance companies: he had in fact signed blank forms and left the adviser to complete them.
HMRC found the discrepancies in an employer compliance review
When HMRC carried out an employer compliance review they found the payments and raised discovery assessments on WM on the basis that the Company had met his pecuniary liability by paying the premiums on insurance policies in his name. WM appealed on the grounds that:
• the policies were not beneficially his but were always intended to be for the benefit of the Company; and
• this was known to the financial adviser who had set up the policies and advised that they were in the correct form to be regarded as Company policies and not personal to the WM.
He also pointed out that he already had other policies that he regarded as his personal insurances, on which he paid the premiums personally.

The First-tier Tribunal case

The FTT Judges found WM and his accountant truthful and credible witnesses but did not accept that they had done enough to establish that the policies were beneficially owned by the Company. The financial adviser was not called as a witness (possibly because he is now subject to litigation by WM) but had previously been spoken to by HMRC who recorded that he had said that the normal procedure in such cases was not only for the policies to be written in the director’s personal name but also for a declaration of trust to be prepared. The Judges accepted that if such a declaration had been made there would have been no benefit in kind.
It was also noted that one policy required by the Company’s bank had been assigned to the Company before the HMRC enquiry, but only when requested to do so by the bank.
The other policies remained in WM’s personal name until HMRC’s compliance review, a delay of over four years. WM’s evidence was that he had not been aware that there was anything untoward about Company policies being written in his name, on the basis of assurances from his financial adviser and that as the arrangement was intended to be made on the Company’s behalf. He claimed that although there was no formal trust arrangement, the intention to create a trust was sufficient to create a resulting trust of the policies for the Company.
The Judges ruled that on the basis of the evidence provided he could not accept that any form of trust had been created. They took into account that WM had had to assign one policy to the bank but had not assigned the others and WM had not executed a declaration of trust.
WM claimed that if the policies were not to be regarded as company assets, WM was liable to make good the premiums paid as loans or ultra vires payments which the Company was entitled to recover from him but the Judges pointed out that they had not. There does not seem to have been any particular argument about whether the payments should have been treated as loans to a participator or the interest forgone as a benefit in kind.
The curiosity is that the Judges put most weight on the fact that the Company had not had occasion to recover from WM the proceeds of any claim on the policies in dispute but seemed to conclude that if the Company had done so they might have concluded that there was an obligation to make good and so a trust might be inferred. This seems odd in the light of the fact that there had been one other insurance policy which had made a payment to WM and that payment had in fact been made good to the Company. Why they could not treat all of the policies alike was not set out in the judgment.

An avoidable problem

The moral of this tale is that if WM had followed up and corrected the deficiency in the arrangements before HMRC had made their compliance review, he and the company would not have found themselves pursuing what seems to have been a pretty forlorn hope before the FTT. It ain’t always what you do, sometimes it’s the way that you do it.