Unpaid Share Capital In The Context Of Tax-Avoidance Schemes: Shareholder Liability In Corporate Insolvencies

Author:Mr Daniel Moore and Tom McLachlan
Profession:Charles Russell Speechlys LLP


Over the course of the past 12 months we have encountered a number of compulsory liquidations where HM Revenue & Customs ("HMRC") has taken proactive steps to notify liquidators in relation to unpaid share capital claims arising from certain tax avoidance schemes.

In the cases that have been identified by HMRC, the unpaid share capital is the result of a specific tax avoidance strategy that a significant number of companies have sought to take advantage of and which HMRC is currently investigating. A number of companies that have implemented the scheme have subsequently been wound up by the Court and in those compulsory liquidations there are significant sums due from shareholders in respect of unpaid share capital.

The tax avoidance scheme may be referred to as an "E-shares scheme" as the scheme creates a new class of shares labelled "E-shares". There may be similar schemes that go by different names.


The schemes which we have encountered are often structured as follows:

The company in question pays an existing employee (who is often a director and a shareholder) say £100,000 on a legally binding condition that at the same time the employee (in his capacity as a shareholder) subscribes for shares in the company (i.e. "E-shares"). The shares in the company that are subscribed for have a nominal value of £100,000 and are set up as a new class distinct from the company's existing share capital. However, only 1% (£1,000) is paid in respect of the share premium. Therefore £99,000 remains unpaid in respect of the new share capital. The tax advisers that offer the scheme explain that of the sum of £100,000 paid to the employee, £99,000 can be deducted from the company's profit and loss account and the company therefore receives tax relief on that sum. Further, the payment of £100,000 to the individual should not be taxable in their hands as it relates to a binding contract to purchase the new class of shares. We understand these purported tax benefits are being investigated by HMRC. Ultimately, the individual holds shares with a value of £100,000 of which only £1,000 has been fully paid up and also receives a cash payment of £100,000. The relevance of this tax avoidance scheme to liquidators of such companies is as follows:

A claim by a liquidator for unpaid share capital is a debt claim and therefore in the absence of a dispute it is not necessary to seek an order of the Court in order to ascertain i)...

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