JTC - Escrow agreement set aside on basis of mistake

In JTC Employer Solutions Trustees Ltd v Ramin Khadem [2021] EWHC 2929 (Ch), the High Court granted rescission of an escrow agreement entered into on the basis of incorrect advice, which would have resulted in a substantial tax charge.

Background

JTC Employer Solutions Trustees Ltd (the claimant) is the trustee of the Inmarsat Employment Company (Ramin Khadem) Pension Plan (the plan). It sought rescission, on the grounds of mistake, of Mr Ramin Khadem’s (the defendant) entitlement to over £6 million (the sum) under an escrow agreement (the agreement) made between the defendant and the claimant’s predecessor trustee, RBC Trustees (Jersey) Ltd, on 24 December 2018. The claimant was substituted in the proceedings in place of its predecessor, but for ease of reference  both are referred to as the claimant in this blog. 

The company referred to in the plan, Inmarsat Ltd, was concerned with satellite infrastructure and employed the defendant as a financial officer based in London from 1981 until his retirement in 2004, by which time he had become its chief financial officer.

The defendant remained resident in the UK for some years after his retirement, but in 2018 decided to move to the UAE to be closer to his daughter and son-in-law.  He was approaching his 75th birthday, at which point the rules of his pension trust required the trustee to begin to make distributions.  

The claimant and the defendant each took tax advice from RSM UK. Written advice was provided to the claimant on 12 December 2018 (the advice). The advice was to the effect that the UAE only provides a tax domicile certificate (the certificate) covering the period up to the date of the application for such a certificate and so it would be necessary for the claimant to pay the defendant’s pension into an escrow arrangement for him and then to apply for the certificate. The claimant and the defendant executed and delivered the agreement on 24 December 2018, the effect of which was that the defendant's entire pension fund was thereafter held for him. Later on the same day, the UAE issued the certificate which covered the period from April 2018 to April 2019. The issue of the certificate was timed at the equivalent of just before 18.00 GMT. There was no evidence before the Court as to what time the agreement was executed but it was likely that that was before the certificate was issued. Accordingly, the advice received from RSM UK as to the timing of the payment to be covered by the certificate was wrong. That would not have been a problem had the defendant remained resident in the UAE as there is currently no personal income tax in the UAE and upon his remaining a resident there he could have applied for relief under the UK-UAE Double Tax Convention, so that no UK tax would be payable. However, while the defendant was visiting the UK in March 2020, the UAE closed its borders due to the Covid-19 pandemic and the defendant thereafter decided to remain in the UK for health related reasons.

The sum therefore became subject to a charge to UK tax under sections 394 and 394A, Income Tax (Earnings and Pensions) Act 2003 (ITEPA).  

The claimant issued proceedings in the High Court seeking rescission of the agreement (the defendant did not resist the order sought).  It argued that had it received correct advice regarding  the UAE's practice in relation to the granting of tax certificates, it would not have entered into the arrangement and would have entered into an alternative arrangement, potentially including the payment of a pension to the defendant over a ten year period, which would have resulted in a deferral of the tax liability and could also have led to less tax being due from the defendant, depending on his circumstances at the time each payment was made.

High Court judgment

The High Court granted rescission of the agreement.

Although not a party to the proceedings, HMRC made representations to the Court in the form of a letter to the Court objecting to the grant of rescission on the ground that UK tax would in any event have been due on the pension payments given the defendant's renewed UK residence.

The Court considered the various grounds relied upon by the claimant. 

Mistake

The Court decided that the claimant had made a mistake of fact, based on the incorrect advice it had received, in acting on the basis that the UAE would only issue a certificate of tax residency retrospectively.  

Effect on claimant

The Court was of the view that if there was a requirement that the arrangement has a negative effect on the claimant, it was met here as there was potential for the claimant to be subject to an action for breach of trust and also reputational damage.

Gravity and causation

The Court considered these grounds together.  The mistake was central to the agreement and it had caused the tax charge to arise.  Had periodic payments been arranged over 10 years, no lump sum, within the meaning of section 394A, ITEPA, would have been paid and consequently no charge to tax would have arisen under that provision.  

Unconscionability 

Finally, the Court held that it would have been unconscionable to leave the mistake uncorrected.  While a charge to tax would eventually have arisen on the pension payments in the event of the defendant's return to the UK, it would not all have arisen at once had it not been for the lump sum payment and therefore the value of the interest on the sums due was significant.  The opportunity to make payments in tranches had been lost due to the agreement being entered into, and the potential for an action for breach of trust against the claimant and reputational damage also had to be considered.  

Comment 

This judgment provides useful commentary on the equitable remedy of rescission and is a timely reminder that such a remedy may be appropriate in a tax context.  It should also be borne  in mind that even where an application is essentially unopposed by the parties, the Court may still take into account the views of interested third parties, in this case HMRC (even though it was not a party to the action), in coming to its conclusion.

The judgment can be viewed here.