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Roadchef compensation tax battle goes to mediation

Extracted from newspad September 2021

An independent mediator is to be appointed in an attempt to resolve the impasse between HMRC and the Roadchef EBT trustee over the tax status of the compensation pot, which c. 350+ former Esop employee participants have been trying to get their hands on for seven and a half years to date.

This was revealed in a confidential letter to beneficiaries from trustee Mr Christopher Winston Smith, director of Roadchef (Employee Benefits Trustees) Ltd, who accused HMRC of, seemingly, attempting to tax the EBT almost out of existence.

Mr Winston Smith is angered by years of fiercely contested and still on-going negotiations with HMRC over whether the former Roadchef motorway service station chain employees should be treated as participants in a tax-protected scheme or not.

The trustee told the estimated 3,500+ beneficiaries, who include more than 350 ex Esop participants, that they could be forgiven for suspecting that HMRC was trying to deprive them of their court awarded compensation.  He told them that HMRC already had tried to charge tax on the individual compensation pots three times since the High Court ruling in their favour in January 2014 and that HMRC was considering whether to impose further tax charges.

Mr Winston Smith insisted that the Roadchef EBT had advice from a leading QC that no tax should be paid by either the Trust, or the beneficiaries. The trust’s advisers, the beneficiaries and MPs from across the party spectrum want the Roadchef Esop to be declared a tax-advantaged all-employee scheme, partly on moral grounds. MPs argue that the ex-employees’ 23 year wait for compensation (since the 1998 sale of Roadchef) is a judicial disgrace and that the injustice they have suffered must end now.

Roadchef EBT1 had repeatedly asked HMRC to enter formal mediation in an attempt to resolve the dispute quickly. Until recently, HMRC had refused to do so, but months ago it had suddenly agreed to initial discussions to explore mediation. HMRC had been using one of its own employees as the mediator and it had been difficult to make any progress. HMRC had told the trust that it would mediate on some aspects of the taxation issue, but not on others. It almost seemed as though HMRC, by default, was widening the issues between the two sides, the trustee alleged,

However, there was some good news to report: “I am pleased to be able to say that following several requests, HMRC has now agreed to the appointment of an independent mediator who is knowledgeable in both trust and tax law, to help break the impasse.”

Subsequently, Mr Winston Smith wrote to HMRC suggesting the basis for mediation of all tax matters concerning the compensation payments owed to the long-suffering Roadchef employees. He said he hoped very much that HMRC would respond positively to the trustee’s suggestions, adding – “If they do, mediation should take place later this year.”

Newspad asked HMRC to confirm the mediation development. An HMRC spokesman told us: “Due to taxpayer confidentiality, we cannot comment on the specifics of the case, but are working to bring it to a conclusion.”

Background:  Former Roadchef md Patrick Gee devised a scheme to give hundreds of qualifying employees 20 percent of the company’s equity. He had negotiated with HMRC to set up one of the UK’s first tax free Esops, but he died before he could do so and Tim Ingram Hill took over.

Staff who had worked at Roadchef for at least three years were allocated shares in proportion to their years of service in 1986. Mr Ingram Hill later encouraged them to sell their shares back to him. In 1995 he transferred millions of unallocated shares to a new ‘performance shares’ trust which he had set up, giving himself the option to buy those shares. In 1998 he sold all the shares, including his own, to Japanese investors for more than £80m – at £1.31 per share, though the deal was complex and in the end his overall gain was c £28m. Had the employees’ shares remained in the Esop trust they would have made tens of thousands each from the sale, but as it panned out, many received scarcely £2,000 each from Ingram Hill to cover the sale of their Esop shares. 

It took more than a decade to get the Esop participants’ case to court because the trust had insufficient funds to pursue it. However, after a change in the law, the trust, advised by Capital Law, retained a litigation funding firm to put up risk capital to fund court action against Ingram Hill. This, added to years of still accruing legal fees, has proved very expensive for the beneficiaries.

In late January 2014, High Court, Mrs Justice Proudman ruled that Mr Ingram Hill had breached his fiduciary duty to Roadchef employees by transferring Esop shares from EBT1 into Roadchef’s executive performance trust, which he controlled, but there was no suggestion that he had acted illegally. Her ruling revealed that the Esop trust was claiming £29.6m in compensation, plus compound interest, whereas Ingram Hill’s lawyers claimed that the true maximum claim that could be brought against their client was £13.5m because many of the shares he sold were his own.

The judge voided that transaction and ordered Ingram Hill to pay compensation to the beneficiaries, which he did after an out-of-court confidential settlement, but the amount he agreed to pay has never been published.

Because the definition of ‘beneficiary’ in the main Esop trust document was loosely worded, Mrs Justice Proudman, in her ruling, focussed on the compensation rights of Roadchef EBT (encompassing the employees as a whole), rather than exclusively those of the former Esop participants, who were the only employees who actually lost money (because they didn’t receive the increase in the value of their Esop shares).

To his credit, Mr Ingram Hill then said he would not pay any compensation unless he had assurances that the former Esop participants would get the lion’s share of the compensation pot.

Later, in the out-of-court settlement, the parties agreed that former Esop participants would qualify collectively for 61 percent of the net compensation pot, while contemporary Roadchef employee Esop ‘refusniks’ and ineligibles would get nine percent of the pot. The remaining 30 percent would go to more recent Roadchef employees, even though they had no connection whatsoever with the Esop.

Mr Winston Smith then told HMRC that because the judge had voided the shares transfer, the so-called ‘tax’ payment Mr Ingram Hill had made to HMRC in respect of his capital gain from selling Roadchef to Japanese investors was in law no tax payment at all. The trustee convinced HMRC that it was obliged to return the faux tax payment to the beneficiaries, which, ultimately, it did so. Although the size of that payment has never been disclosed, it is believed to have exceeded £5m.

HMRC refuses to accept that the Esop trust was tax-advantaged. The trustee claims that HMRC’s counter-proposals would leave beneficiaries with next to nothing when, according to some estimates, the net total compensation, which should have been distributed, was c. £10m. Christine Slack 69 worked for 16 years as a cook in Roadchef Sandbach services station and got a one-off payment of only £2,300 after her shares were sold, reported the Sunday Times.

Esop beneficiaries had written to the trustee, asking that they should be allowed to settle any tax payments themselves from their compensation, admitted Mr Winston Smith. However, this was impossible because the High Court would not give Roadchef EBTL permission to distribute the money until all taxation issues for both the trust and the beneficiaries had been resolved fully, he informed them.

The ranks of the Roadchef Esop beneficiaries are thinning out as the years roll on and dozens have died, never having received a single penny of the compensation that was due to them.

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