Sterling Tax Strategies Limited In Administration (“the ... · Sterling Tax Strategies Limited...

Sterling Tax Strategies

Limited – In

Administration (“the

Company” or “STS”)

Joint Administrators’ Proposals

20 January 2014

Sterling Tax Strategies Limited – In Administration (“the Company” or “STS”)

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Contents

1. Executive Summary 2

2. Background to the administration 3

3. Administration objective and strategy 10

4. Joint administrators’ receipts and payments 13

5. Financial position 13

6. Proposals 14

7. Exit from administration 16

8. Investigations 16

9. Pre-administration costs 17

10. Joint administrators' remuneration 18

11. Outcome for creditors 18

12. Next report 19

13. Meeting of creditors 19

Appendices

Appendix I - Statutory information 20

Appendix II – Receipts & payments account from 18 December

2013 to 31 December 2013 21

Appendix III - Summary of the Director’s statement of affairs of the

Company 22

Appendix IV- Time analysis for the period from 18 December 2013

to 31 December 2013 and pre appointment time costs 23

Appendix V - Charging, subcontractor and advisor information 26


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1. Executive Summary

1. The Company became insolvent due to a number of factors including certain

restrospective government legislation which meant that a number of tax planning

products which had been devised and/or sold by the Company failed and the

associated clients became liable to pay the relevant tax.

2. The incidence of these failed schemes meant that the Company had insufficient funds

to make repayments, under the terms of the client contracts, to all clients who were

due them.

3. Some clients will already know that their tax mitigation schemes have failed, some

will be aware that they are under enquiry by HM Revenue & Customs (“HMRC”) and,

in some cases, the tax mitigation schemes may have been successful. Accordingly,

some clients will already be creditors of the Company, some will be contingent

creditors and others may not be creditors. Clients should be aware as to which

category they fall into due to their correspondence with HMRC either directly or

through B H Tax Limited.

4. The Company purchased insurance cover in order to protect it should it become

necessary to make fee repayments to clients but this cover is not effective for many

clients as it does not cover situations where the repayments become due as a result

of retrospective legislation. The position with regard to this insurance is being

investigated by us at present. In the meantime we cannot provide any assurance to

creditors that any fee which STS is obliged to repay to them is covered by the policy.

However, our current advice is that any monies paid under an insurance policy will

be paid to the Company for the benefit of all creditors, and not directly to individual

clients.

5. The Company raised the possibility of certain class actions with clients as a way of

attempting to appeal the retrospective legislation, thus delaying the need for clients

to pay their SDLT and also therefore the repayment of STS’s fees. Initially, it was

proposed that these appeal procedures would be funded by the Company. However,

the joint administrators’ legal advice is that this approach will be ultimately

unsuccessful (although clients of the Company should take their own legal advice on

this matter) and, in any event, the Company does not have the funds to underwrite

these class actions or a judicial review.

6. The main assets available to the joint administrators are certain VAT and corporation

tax repayments as well as possible valuable claims against any party which might

yield a result which would enhance the return to the creditors of the Company. The

joint administrators’ initial estimates are that if the only assets available to them to

fund a dividend to the creditors of the Company were the tax assets referred to

above then the estimated dividend would amount to no more than 10p in the £

before the costs of the administration are taken into account. Any uplift on this

estimated dividend position would be dependent on any extra recoveries from the

investigations which we are carrying out.

7. The administrators set out their proposals as to how they wish this administration to

proceed within the body of this report and they are calling a creditors’ meeting for

Friday 7 February 2014 to consider those proposals.

8. The details with regard to all of the matters referred to within this executive

summary are contained within the body of this report.


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9. In this report reference is made by the joint administrators to a number of taxation

matters. Readers should note that the joint administrators are not providing tax

advice to any of the clients or creditors of the Company, who should take their own

tax advice.

2. Background to the administration

2.1. Incorporation and structure

The Company was incorporated in November 2009 to trade as a tax consultancy

business, with particular emphasis on selling Stamp Duty Land Tax (“SDLT”) mitigation

schemes (“SDLT Schemes”), Multi Purpose Trusts (“MPT’s”) and capital allowance

schemes (“CAP Schemes”).

The Company, whose sole director is Paul Anthony Bennett (“the Director”), traded from

premises at London Court, London Road, Bracknell. It generated income from fees based

on the percentage of tax which it was hoped would be saved by its clients. It sold its

products through its own sales agents as well as a network of independent

agents/introducers including financial advisers, solicitors and accountants. Over the

course of its trading history, the Company sold tax planning products to over 630 clients.

The Company is inextricably linked with three other tax planning companies: Inventive

Tax Strategies Limited (“ITS”), Bell Strategies Limited (“Bell”) and Professional Advice

Bureau Limited (“PBS”) (together, “the Operating Companies”). From around 2010, the

Operating Companies were managed as an informal group (“the Informal Group”) under

the managerial control of Paul Bennett, with shared office space and staffing at London

Court, London Road, Bracknell.

On 24 October 2013, ITS was placed into administration with Finbarr O’Connell and

Henry Shinners appointed as joint administrators. PAB and Bell were placed into

administration on 3 December 2013 and 18 December 2013 respectively, again with

Finbarr O’Connell and Henry Shinners as joint administrators. The Company itself was

placed into administration on 18 December 2013.

The joint administrators of ITS have already reported on that administration. The joint

administrators of Bell and PAB will report separately on those administrations forthwith.

However, we comment on certain common aspects of the Operating Companies in this

report. We set out below the shareholders and directors of all four companies.

Sterling PAB ITS Bell

Shareholder(s) Jacqueline Bennett

Mark Allen

Paul Bennett

Raj Kapoor Mark Allen

Neil Bowker

Director(s) Paul Bennett Mark Allen Paul Bennett

Raj Kapoor Raj Kapoor


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2.2. Aborted change in business structure

In November 2012, all four Operating Companies (including STS) wrote to their clients

informing them that a new Guernsey registered Company (also called Inventive Tax

Strategies Limited) had been established in order to provide new and improved SDLT

products to clients. The new structure was intended to be set up in order to avoid

having to apply VAT on sales invoices. However, the structure was subsequently

deemed to be unworkable and so this new entity never traded. We are aware that some

clients were under the assumption that this Guernsey-based corporate structure was still

operating, although it never has.

2.3. Distribution of profits

Whilst the Director did not draw a salary from the Company he established an incentive

scheme whereby he would be rewarded on a ‘results only’ basis. This was achieved

through a profit-sharing arrangement with PBMC Limited (“PBMC”) which was

established by the Director, and through which he and Jacqueline Bennett were the

ultimate beneficiaries of the profit-sharing agreement. As well as PBMC, profit-sharing

arrangements were set up for the benefit of Mark Allen and Shiv Raj Kapoor, through

companies called Silver Street Marketing Limited (“SSM”) and FTP Consulting Limited

(“FTP”) respectively (together with PBMC “the Service Companies”). We set out below

the shareholders and directorships of the Service Companies.

PBMC FTP SSM

Shareholder(s) Paul Bennett

Jacqueline Bennett Raj Kapoor

Mark Allen

(and other associated parties)

Director(s) Mark Allen Simon Howley Paul Bennett

We understand that no formal written profit-sharing agreement was ever put in place

between STS and the Service Companies. However, we have been informed by the

Director that an informal agrement had been put in place which was calculated on the

monthly net profits generated by the Operating Companies (including STS

). Based on the monthly management accounts, one-third of net profits was retained by

the Operating Companies and two-thirds paid, on receipt of invoices, to the Service

Companies in the following proportions:

PBMC - 45%

FTP - 45%

SSM - 10%

If the monthly management accounts reported a net loss, then the directors of the

Service Companies were to inject monies into the Company.

In addition to the monthly payments, we understand that the Service Companies

invoiced the Operating Companies at the year end for a significant proportion of the

remaining retained profits in order to reduce the corporate tax liablility in the Operating

Companies.


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Company records indicate the following payments were made by STS to the Service

Companies:

Total

(£m)

2013

(£m)

2012

(£m)

2011

(£m)

2010

(£m)

PBMC 0.9 0.1 0.5 0.3 0.0

FTP 0.9 - 0.3 0.5 0.1

SSM 0.2 - 0.1 0.1 -

TOTAL 2.0 0.1 0.9 0.9 0.1

The profit sharing arrangments were suspended in March 2013 following the

announcements in the March 2013 Budget regarding SDLT Schemes (see section 2.5).

We are invesigating the basis of the agreements with the Service Companies, where the

funds paid to the Service Companies ended up and who ultimately got the benefit of

them.

2.4. SDLT products and contractual arrangements

Products

The most common tax planning products sold by STS were SDLT Schemes. The

Company and the Informal Group employed the services of an in-house solicitor who, in

co-operation with external legal tax counsel, would devise SDLT Schemes and prepare a

detailed work ‘step-plan’ to ensure that the various tasks necessary to implement the

schemes were performed correctly.

The names of the products sold over the course of the Company’s trading (and the

approximate number of schemes sold for each scheme) were:

Unlimited Company Scheme (“UCS”) - 369

Husband & Wife (“H&W”) - 12

Crystal - 140

Jovian - 3

Option - 29

3S – 72

Dual Completion (“DC”) – 9

Other Operating Companies also sold the following products:

Commercial

Nominee


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Contractual arrangements

A client would sign a Letter of Instruction (“LoI”) with the Company. Whilst there were

some variations between contracts, the key aspects of a contract were as follows:

Solicitors would be instructed to assist in the execution of the scheme (applying the

‘step-plan’ approach).

A specialist tax adviser (since 2010, BH Tax Limited (“BHT”)) would be instructed to

provide written advice to the client on the appropriate SDLT planning.

The Client was made aware of the risks that:

– HMRC had a nine month and thirty day enquiry window to consider whether the

SDLT Scheme was invalid or not. (The joint administrators’ legal advice is that this

enquiry window could be in effect extended to four years where HMRC asserted

that it had made a “discovery” or to six years if HMRC considered that tax was

underpaid due to carelessness); and

– SDLT (plus penalties and interest) may become payable if the tax planning was

unsuccessful.

If a SDLT Scheme was deemed to be unsuccessful then the fee would be due for

repayment by STS to the client.

The Company had taken out insurance to cover it in the event of a fee having to be

repaid to the client. Further details regarding the Company’s SDLT Scheme

insurance policies are included in Section 3.

The fee applied to the LoI varied dependent on the type of product sold and the

value of the property but was usually in the region of 2% of the purchase price of the

property plus VAT.

2.5. Events leading up to administration

Introduction of Sub-Sale Rules against SDLT Schemes

In recent years HMRC has been very actively challenging SDLT planning and the

Government has made it one of its key policies to introduce legislation in order to

recover tax it considers to be owed by taxpayers.

In 2012, this objective gathered pace with the Chancellor announcing in the Budget that

he was amending the law relating to “sub-sales” which affected most or all of the

Operating Companies planning and he indicated that he would not hesitate to introduce

retrospective legislation on SDLT Schemes. We have been informed by the directors of

the Operating Companies that, having taken legal advice, they considered such

retrospective legislation to be highly unlikely. In addition, SDLT Schemes were brought

more fully within the existing rules that required STS to disclose tax planning products

sold to clients. These made it more likely that parties who implemented SDLT Schemes

would be identified and the SDLT relating to transactions with which they were involved

would be deemed to be payable. Also, a number of First Tier tax tribunals found in

favour of HMRC on SDLT tax planning (albeit none of these related to STS clients).

In the March 2013 budget, the Government announced changes to s45 of the Finance

Act 2013 regarding SDLT Schemes known as the “Sub-Sale Rules” (“the Rules”). These

Rules required the users of SDLT Schemes to pay the outstanding SDLT or submit a

detailed appeal explaining why this amount was not payable. These Rules, which

became law on 17 July 2013, were unexpectedly applied retrospectively to one year


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prior to the budget announcement i.e. on or after 21 March 2012 (“the Retrospective

Date”). They also set a date of 30 September 2013 for the tax to be paid.

The SDLT Schemes which have failed due to the Rules are: Crystal, Jovian, 3S and

Option Planning but only those which were completed after the Retrospective Date (“the

Failed Schemes”) i.e. 21 March 2012 although transactions completed before that date

are potentially still likely to be challenged by HMRC on the basis of what was the existing

law.

Class Action and Judicial Review on Failed Schemes

Class action in the European Court

In the summer of 2013, the Company wrote to all clients affected by the Rules advising

them of the adverse effect the Rules had on their Schemes (i.e. they rendered them as

failed and so HMRC would be writing to them to seek payment of the SDLT on their

property by 30 September 2013).

With the exception of clients who purchased Jovian SDLT Schemes (see below), the

Company informed those clients affected by the Rule that STS intended to fund (at no

cost to the clients) a class action claim in the European Court (“Class Action”) on the

grounds that the UK Government had failed to adhere to certain principles of European

Law and therefore the retrospective changes were unenforceable and so the SDLT was

not payable.

Clients were asked to agree to retain rather than pay the SDLT (plus accrued interest)

over to HMRC and also to agree instead to participate in the Class Action (funded by the

Company). If they consented, the Company would send a letter to HMRC on behalf of

the client disputing that the tax should be paid. This was hoped to result in a delay in

the payments of tax on the failed schemes and therefore a delay in the repayment of

fees back to clients.

Clients were also advised that, if the Class Action was unsuccessful, then the fee

received by STS would be repaid in full to them. However, no guarantees were provided

to the clients by the Company with regard to the payment of interest or penalties for the

late payment of tax.

The joint administrators have obtained their own legal advice with regard to this Class

Action which concludes that it is unlikely to be successful and, also, it would involve

substantial legal fees being paid. Clients should take their own legal advice with regard

to this matter. In any event, the Company currently does not have the funds to support

the costs of such an action.

Judicial Review (Jovian only)

Separate from the above class action, the Company also wrote to all clients who bought

Jovian SDLT Schemes affected by the Rules (“Failed Jovian Schemes”). We understand

that the Jovian SDLT Schemes were only caught by the Rules when an amendment was

made to s45 of the Finance Act 2013 approximately one month before it became law in

July 2013.

Following legal advice, the Company wrote to the clients who used Failed Jovian

Schemes advising them of the law change and to inform them that they intended to

defend their schemes through a Judicial Review (“JR”) on the grounds that the process

by which the decision to apply the Rules to the Jovian SDLT schemes was not reached

correctly. Consequently, the Operating Companies (including PAB) argued they would

not be subject to the Rules and therefore the tax was not payable. Similar to the Class

Action, the Company committed to funding the application for a JR. The Company did


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not agree to cover any interest or penalties for the unpaid tax should their scheme be

deemed to have failed.

We have been advised by BHT that the courts have accepted the initial application for a

JR. We are awaiting a further update to substantiate the current position.

The Company did highlight the risk that, in the event that the JR was successful, the UK

Government could apply the Rules again in the 2014 budget or still raise an enquiry or

discovery into the clients’ SDLT Schemes within the next four years.

The joint administrators have obtained their own legal advice which concludes that the

JR is unlikely to succeed. Clients should take their own legal advice with regard to this

matter. Notwithstanding the joint administrators’ legal advice, the Company has

insufficient funds to support the JR proceedings.

Status on SDLT Schemes and implications under the terms of client contracts

Failed Schemes

The joint administrators have taken legal advice regarding the Failed Schemes which

concurs with the opinion of HMRC in that the SDLT should be paid. Our lawyers have

also reviewed the legal advice obtained by the Director prior to administration on the

validity of the conditions under which a refund under the various LoIs would be paid.

Their opinion concurs with the original advice in that the fees are to be repaid if a SDLT

Scheme is unsuccessful and that the Failed Schemes fit this category.

Other Schemes

Our legal advice is that SDLT Schemes not affected by the Rules (e.g. UCS and H&W)

would not be deemed to have failed until the client had appealed a request by HMRC for

payment of the SDLT on their property and had lost an appeal at a Tax Tribunal or the

client, STS or BHT were in receipt of counsel’s opinion that SDLT is due. Until such time

as such an event occurs a client is only a contingent creditor of the Company.

However, we are aware that HMRC have undertaken a significant number of enquiries

and discoveries regarding STS clients and are awaiting the outcome of 13 First Tier

Appeal Tribunal decisions relating to clients of the Operating Companies which, if

successful for HMRC, will cause them to issue requests for payment of SDLT to a

substantial number of clients on the basis of the circumstances in the tribunal cases

being identical or similar.

Our tax advisers have informed us that the two main SDLT Schemes sold (H&W and

UCS) either have significant flaws in their step-plan approach or have been implemented

incorrectly i.e. the step-plan approach was not applied correctly. This could result in

further schemes failing and further creditors being recognised in the administration.

Due to the Rules and/or the Schemes being implemented incorrectly or there being

defects in their structure, none of the SDLT Schemes were still being marketed at the

date of our appointment as administrators of any of the Operating Companies.

Steps taken to rectify the Company’s worsened trading position

As STS had effectively ceased trading from November 2012 there was little as regards

restructuring that the Company could do. The staff of ITS, the only company trading

after November 2012, undertook all compliance matters on behalf of the Company

(together with the other Operating Companies).


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BH Tax Limited

Since 2010, BHT, of which Simon Howley is the principal, provided written tax advice to

clients of the Operating Companies (including STS) wishing to use SDLT Schemes. BHT

dealt with any technical queries from clients purely from a tax perspective. As the formal

enquires started to come through from HMRC on the SDLT Schemes, BHT also dealt with

all the necessary information requests (supported by the ITS/PAB enquiry team), dealing

with appeals (up to a First Tier Tribunal) and negotiations with HMRC.

BHT also gave advice and implementation assistance on the MPT product, a product it

developed for ITS. It charged the Operating Companies on a time incurred basis.

In September 2013, faced with an increasing level of formal enquiries from HMRC on

SDLT Schemes and the majority of ITS’s enquiry staff leaving, the Directors took the

decision to extend BHT’s remit to act with regard to all the Operating Companies’ clients’

enquiries. Outside of dealing with some basic client enquiries, clients were required to

sign a letter of engagement with BHT. BHT is currently dealing with over 2,500 live

HMRC enquiry/discovery processes on behalf of the clients of the Operating Companies.

The cost of this support from BHT was fully funded by the Company (through a funding

agreement with Minerva Strategies Limited, a company controlled by Shiv Raj Kapoor,

Paul Rae and Paul Bennett).

Provisions to repay client fees due to SDLT Schemes failing

Prior to 2013, the Company made a provision in its statutory accounts for the repayment

of fees on failed SDLT Schemes. We set out below the provisions applied by the

Company in its statutory accounts (for comparative purposes we also include the

turnover for each year):

2012

£

2011

£

Turnover 2,152,051 603,224

Provision 200,000 200,000

Provision (%) 9.3 33.16

The Company accepted that, following the introduction of the Rules, the level of failed

SDLT Schemes would increase and therefore the provision for client fee repayments

would begin to crystallise.

Legal advice obtained

The Director had obtained legal advice which indicated that the Rules could be

challenged by way of a JR and wrote to clients encouraging them to support a Class

Action (totally funded by ITS and the Informal Group) rather than request repayment of

their fee.

However, legal advice obtained on the contractual conditions on all the SDLT Schemes

confirmed that the refund clause in the individual clients’ LoIs was enforceable on

unsuccessful schemes. Consequently, the clients who bought Failed Schemes were

contractually entitled to be refunded the fee paid to ITS. Such liabilities were therefore


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actual and not contingent. The incidence of clients requesting their fees to be repaid

was increasing.

Steps taken to place the Company into a formal insolvency process

The potential impact of the Rules rendered the Company insolvent both on a cash flow

basis (unable to pay its debts as and when they fall due) and on a balance sheet basis

(its liabilities exceed its assets).

Consequently, at the recommendation of the Company’s legal advisers (Pinsent Masons

LLP) the Director approached Finbarr O’Connell on 29 July 2013 for financial and

insolvency advice in order to minimise the detrimental effect the claims for fee refunds

was expected to have on the Company.

The initial strategy explored was that of a Company Voluntary Arrangement (“CVA”) the

terms of which Smith & Williamson would assist the Director in formulating. However, by

December 2013, a formal insolvency process became unavoidable due to creditor

presuure and the complications caused by ITS being placed into administration. To

preserve the value of the Company insofar as possible, the Director resolved to place the

Company into administration.

Finbarr Thomas O’Connell and Henry Anthony Shinners of Smith & Williamson LLP, 25

Moorgate, London, EC2R 6AY, licensed insolvency practitioners, were duly appointed

joint administrators of the Company in accordance with Paragraph 22 Schedule B1 of the

Insolvency Act 1986 on 18 December 2013.

3. Administration objective and strategy

3.1. Objectives

The joint administrators must perform their functions with the purpose of achieving one

of the following objectives, as outlined in Paragraph 3 (1) Schedule B1 of the Insolvency

Act 1986:

rescuing the Company as a going concern;

achieving a better result for the Company's creditors as a whole than would be likely

if the Company were wound up (without first being in Administration); or

Realising property in order to make a distribution to one or more secured or

preferential creditors.

We consider that the second purpose will be achieved.

3.2. Initial strategy

The initial strategy was to continue to trade the business of all four Opertating

Companies (including STS), albeit on a very restricted basis, in order to preserve its

value, sell its business and then exit the administration by way of a CVA. In continuing

to trade, the joint administrators would be able to continue to provide support to the

clients and to enable the tax planning products that were still considered to be viable to

be sold, generating funds for a return to creditors.


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3.3. Support to the clients from BHT

The Company has had over 630 clients, some of which have a Failed Scheme and some

of which could expect their scheme to fail at some point in time in the future (contingent

creditors).

The joint administrators decided that it was appropriate, in the first instance, to retain

the services of BHT to provide continuing support to clients. Not to do so would have

resulted in a significant increase in tax-related enquiries to the joint administrators

which we would have no locus to deal with (as these are matters for the individual tax

payers and their tax advisers to deal with) but would still increase the time burden on

the joint administrators’ staff and therefore the cost of the administration.

The general feedback from clients and introducers has been supportive of this decision.

At some stage it may not be appropriate to continue with the services of BHT. We will

consult with the Creditors’ Committee (should one be established) with regard to the

appropriateness of BHT’s on-going services to clients and the matter of funding such

services.

3.4. Going concern sale of business and assets

The joint administrators are in negotiations with a number of parties interested in buying

all or part of the Operating Companies’ business and assets. One such party is Minerva

Startegies Limited (“Minerva”) although other parties have expressed an interest and we

expect offers to be forthcoming.

The joint administrators intend to seek the approval of the creditors’ committee (or if

one is not established, the creditors) that the terms of the SPA with Minerva or any

other offeror are acceptable before executing a SPA with regard to the business of the

Company.

3.5. Funding of the Company post-administration

In the absence of any substantial funds held by PAB or the other Operating Companies

and in order for the joint administrators to continue trading the Company in order to

effect a going concern sale, Minerva has provided funding to the administrators of the

Operating Companies in the amont of c.£100k. These funds have also enabled the joint

administrators to retain the services of BHT for the purpose of providing valuable

support to a considerable number of clients whose SDLT Schemes the joint

administrators consider have failed or who are subject to an HMRC enquiry or discovery

process and therefore whose schemes could fail at some point in the future.

Furthermore, the retention of some of the workforce has assisted the administrators in

obtaining the information in relation its initial reclaim for VAT estimated to be c.£240k

and also to assist in the recovery of a Terminal Loss Relief claim and general debtor

recoveries.

3.6. VAT refunds

Based on legal advice obtained by the joint administrators we are in the process of

reclaiming VAT of in the region of £240k against credit notes issued to clients relating to

failed SDLT Schemes. It is expected that further VAT refunds will subsequently be

recoverable as further Schemes are deemed to have failed. However, the timing and


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value of these is dependent on the issue of closure notices by HMRC on SDLT Schemes

which have not immediately failed due to the Rules.

3.7. Insurance

ITS took out insurance policies to cover, among other things, the refund of fees to

customers in the event of the failure of clients’ schemes. It is understood from the

administrators’ discussuions with ITS’ insurance brokers that STS was also covered by

these schemes. It is also understood from discussions with the insurance brokers that

the insurer, IICCA, is a Belize registered company which ceased to operate in Europe

around September 2012. The administrators are working to establish the current status

of this insurer.

Neither the Company nor ITS had the original signed policies on its files, so these have

been requested from the Company’s insurance broker (although they still have not been

provided at the date of this report). From the insurance documents available, it is clear

that the policies do not cover schemes which fail due to retrospective legislation and

therefore the Failed Schemes are not covered by any insurance policy held by the

Company. In addition, many SDLT schemes appear to have been covered by policies

that only insured fees paid for a period of 9 months and 30 days. It appears that such

policies were used up to July/August 2012 and then some time thereafter a 48 month

and 30 day policy applied. The administrators are seeking confirmation of the precise

date. This means that such insurance will have expired before the Company’s

administration in respect of SDLT schemes entered into earlier than this.

Therefore, whether other SDLT Schemes are covered by the policies will depend on a

number of factors, including:

the status of HMRC’s enquiry on each SDLT Scheme; and

the date on which the SDLT scheme was entered into; and

whether the individual clients’ schemes were notified to the insurer by the Company.

The administrators have been liasing extensively with the Company’s insurance brokers

for the various policies in order to ascertain to what extent there is insurance cover in

place in respect of the fees paid for schemes not affected by retrospective legislation. In

particular, we hope to be able to shortly ascertain which SDLT Schemes were covered by

which of the two policies.

The Administrators will update the Creditors’ Committee and/or the creditors when more

information is available. In particular, the administrators intend to publish the relevant

insurance policies and supporting dcouments on the Company’s website once the

appropriate documentation has been provided by the Company’s insurance brokers.

Further updates on the terms and validity of the insurance will be uploaded onto the

website as and when appropriate. In the meantime we cannot provide any assurance to

creditors that any fee which STS is obliged to repay to them is covered by the policy.

However, it should be noted that although the fees paid by individual customers were

insured, and would be repaid accordingly in the Company had funds to do so, the

insurance policies were in the name of the Company. Therefore, given the Company’s

insolvency, any payments made by the insurer would flow to the Company for the

benefit of all creditors as a whole and not directly to the individual clients concerned.


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3.8. Discussions with HMRC

Whilst the responsibility to pay SDLT rests with the individual taxpayers (i.e. the

Company’s clients), to the extent that it is considered to be in the best interest of

creditors, we have made enquiries as to whether HMRC would consider any form of

settlement with regard to SDLT payable by clients.

Any such potential settlement is entirely dependent on HMRC and individual clients

accepting it. We have commenced discussions with HMRC with regard to this matter. If

HMRC do agree to a proposal it is not expected to be received for a few months. We will

update the creditors’ committee (and/or the creditors) if and when we have further

information. We will provide any updates regarding settlement proposals on the website.

Clients who are being asked to pay SDLT by HMRC should be taking their own

independent advice in this respect. We are aware that BHT is advising a very large

number of clients in this regard.

4. Joint administrators’ receipts and payments

A summary of receipts and payments for the Administration period from the date of

appointment to 31 December 2013 is attached as Appendix II. No receipts or payments

have been made during the reporting period.

5. Financial position

A summary of the Director’s Statement of Affairs (“SofA”) as regards the Company as at

the date of the appointment of the joint administrators is shown at Appendix III.

The Director did not provide ‘estimated to realise’ values on the signed copy of the SofA

but these were provided separately and are as follows:

Assets Book value (£) Estimate to realise (£)

Office equipment, computers and desks

1,569

1,000

Bank account

1,067

1,067

Inter-company debtors 128,000 Nil

Trade debtors 10,676 Nil

Total assets 141,312 2,067


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We would make the following observations in regards to these amounts:

Assets

The Director has not included VAT recoverable from HMRC as a result of the

aforementioned credit notes . It is anticipated that £240k is recoverable on the VAT

applicable to the currently failed VAT schemes, after Crown set-off has been applied.

Further substantial VAT refund claims are anticipated as and when other schemes are

deemed to have failed.

The Director has not included a Terminal Loss Relief claim recoverable from HMRC.

We believe that such a claim exists but the value of this claim is currently unknown.

Liabilities

Liabilities Amount (£)

Unsecured creditors

Trade creditors 1,560

Total liabilities 1,560

6. Proposals

The following are the administators’ proposals pursuant to paragraph 49 of Schedule B1

of the Insolvency Act 1986 with regard to this administration:

1. It is proposed that the joint administrators will continue to manage the affairs of the

Company in order to achieve the objective of the administration.

2. The joint administrators propose that the sale of the Company’s assets be ratified by

the Creditors’ Committee (should one be established) or by the creditors.

3. The joint administrators will consult with the Creditors’ Committee (should one be

established) with regard to the appropriateness of the on-going services of BHT to

clients.

4. It is proposed that the joint administrators continue to liaise with HM Revenue &

Customs in order to convey to creditors (both actual and contingent) proposals which

may be made by HMRC regarding the settlement of any tax which is deemed to be

payable on failed SDLT Schemes.

5. If, having realised the assets of the Company, the joint administrators believe that a

distribution will be made to the unsecured creditors, they propose filing a notice with

the Registrar of Companies which will have the effect of bringing the appointment of

the joint administrators to an end and will move the Company automatically into

Creditors’ Voluntary Liquidation (CVL) in order that the distribution can be made. In

these circumstances, it is proposed that the joint administrators will become the joint

liquidators' of the CVL and that the acts of the joint liquidators may be undertaken by

either or both of them.


15

6. Alternatively, the joint administrators may consider making an application(s) to court

to seek permission to make a distribution(s) to the unsecured creditors in the

Administration. If permission is sought and granted, the Company will exit into

dissolution once the distribution(s) has been made and the administration concluded.

See Section 7 below on exit routes from administration for further information on this

process.

7. If the joint administrators think that the Company has no property which might

permit a distribution to its creditors, they will file a notice with the Court and the

Registrar of Companies for the dissolution of the Company. See Section 7 below on

exit routes from administration for further information on this process.

8. The joint administrators shall do all such other things and generally exercise all of

their powers as contained in Schedule 1 of the Insolvency Act 1986, as they consider

desirable or expedient to achieve the statutory purpose of the administration.

9. The joint administrators may continue to investigate the conduct of the Director and

any shadow directors, and continue to assist any regulatory authorities with their

own investigations into the affairs of the Company.

10. The joint administrators may continue to investigate the affairs of the Company and

if appropriate pursue any claims the Company may have under the Companies Act

1985 or the Insolvency Act 1986.

11. The joint administrators will agree the claims of preferential creditors if it is believed

that there will be funds available to effect a distribution to these creditors.

12. The creditors may consider establishing a Creditors' Committee and if any such

Committee is formed they be authorised to sanction the basis of the joint

administrators' remuneration and disbursements and any proposed act on the part of

the joint administrators without the need to report back to a further meeting of

creditors generally, to include any decision regarding the most appropriate exit route

from the administration.

13. That the costs of Smith & Williamson LLP, or any of its associated companies or

entities, in respect of tax and VAT advice to the joint administrators, be based upon

time costs and shall be paid out of the assets of the Company.

14. In accordance with Statement of Insolvency Practice No 9, issued by the Association

of Business Recovery Professionals, the joint administrators be authorised to draw

Category 2 disbursements as and when funds are available, in accordance with their

firm’s published tariff. Details of Category 2 disbursements charged by the firm can

be found in Appendix V.

15. That the basis of the joint administrators’ remuneration be approved by reference to

the time properly spent by the joint administrators and their staff in attending to

matters arising in the administration.

16. The joint administrators be authorised to draw remuneration as and when funds are

available.

17. The joint administrators will be discharged from liability under Paragraph 98 of

Schedule B1 to the Insolvency Act 1986 immediately upon their appointment as joint

administrators ceasing to have effect.

18. That if deemed appropriate by the administrators’ a Company Voluntary

Arrangement (CVA) may be proposed to the creditors as an exit from the

administration.


16

19. Separately to the proposals, the joint administrators are seeking consent to pay the

following pre administration costs of:

£4,214.00 in respect of pre-administration time costs plus disbursements plus

VAT for Smith & Williamson LLP

£2,150.00 plus disbursements plus VAT for Pinsent Masons LLP (Smith &

Williamson’s pre-appointment legal advisers)

£13,000 plus VAT for BHT (for providing support and tax advice for the

Company’s clients).

£1,537.50 plus VAT for Entrust IT Limited (for maintaining and providing access

to the Company’s electronic information).

7. Exit from administration

Should it transpire that there are sufficient funds with which to enable a dividend to

unsecured creditors, which is the current expectation of the joint administrators, it would

be appropriate to place the Company into CVL, as outlined in the proposals. Creditors

have the right to nominate alternative liquidators of their choice. To do this, creditors

must make their nomination in writing to the joint administrators prior to these

proposals being approved. Where this occurs, the joint administrators will advise

creditors and provide them with the opportunity to vote on the matter. In the absence

of a nomination, the joint administrators will automatically become the joint liquidators

as regards the subsequent CVL.

Whilst it is not their current opinion, if the joint administrators conclude that the

Company has no property which might permit a distribution to its unsecured creditors, it

is proposed that they file a notice together with their final progress report at Court and

with the Registrar of Companies for the dissolution of the Company. They will send

copies of these documents to the Company and its creditors. The joint administrators'

appointment will end following the registration of the notice by the Registrar of

Companies.

8. Investigations

Profit-sharing arrangements

As referred to in Section 2 of the report, the Service Companies have received c.£2.0m

from the Company in respect of a profit-sharing arrangement.

We and our legal advisers, Pinsent Masons LLP, have commenced our investigation into

these payments including with regard to:

1. The exact basis upon which these payments were made.

2. Whether the Service Companies should have, under the terms of the agreements

between them and the Company, refunded these monies once the Company started

to make losses, and

3. Which entities ended up with the funds


17

Due to the sensitive nature of these investigations we propose to only report our

detailed findings to the Creditors’ Committee (should one be established at the

forthcoming creditors’ meeting).

Actions against professional advisors

We have been made aware of situations where professional advisors may have

incorrectly advised clients as regards the appropriateness of taking out a SDLT scheme

or have incorrectly implemented the step-plan for the scheme. The administrators are

investigating this further. However, as clients engaged with these advisors directly they

may need to pursue their own actions against any of these parties.

9. Pre-administration costs

Smith & Williamson LLP have incurred pre-appointment time costs of £4,214.00, which

equates to approximately 13.05 hours at an average rate of £322.91 per hour. Time

spent can be broken down as follows:

Meetings with the Director and providing advice regarding the Company’s financial

affairs.

Advising the Company on a proposed Company Voluntary Arrangement (“CVA”),

including collating and reviewing Company information necessary to formulate our

advice to the Company with regard to the CVA proposal and comparing it to

alternative options (e.g. liquidation); reviewing heads of terms for the sale and

purchase agreement which may have formed part of the CVA proposals; and drafting

the necessary documentation to be approved by the Directors and to send out to

creditors. (All of this work became very relevant when the Company proceeded into

administration, with a CVA as a proposed exit route).

Assisting the Director in placing the Company into administration including preparing

the necessary documentation.

Ensuring that Smith & Williamson LLP’s client identification requirements were

satisfied.

The payment of unpaid pre-administration costs, as set out above, as an expense of the

administration is subject to the approval of creditors, separately to the approval of the

joint administrators' proposals. In accordance with Rule 2.67A of the Insolvency Rules

1986, approval is sought in respect of payment of the following costs:

£4,214.00 plus disbursements plus VAT payable to Smith & Williamson LLP

It is proposed that payments to B H Tax Limited totalling £13,000 plus VAT be

approved as an expense of the administration.

Our legal advisors, Pinsent Masons LLP pre appointment costs of £2,150.00 plus VAT

in respect of advising on the SDLT position, reviewing various contracts (including

the insurance policies) and preparing the administration documents to appoint joint

administrators, be approved.

The pre appointment costs of Entrust IT Limited who maintained the Company’s IT

systems (critical for the continuation of the business and maximising recovery for

creditors) be approved of £1,537.50 plus VAT, subject to the amount being properly

allocated over the Operating Companies.


18

10. Joint administrators' remuneration

The joint administrators' time costs at 31 December 2013 were £2,306.00 excluding VAT

and disbursements. This represents approximately 9.30 hours at an average rate of

£247.96 per hour. As noted in the proposals section above, the joint administrators are

seeking to fix the basis of their remuneration upon time costs.

Appropriate approval will be sought as outlined in section 6 of this report.

A copy of “A Creditors’ Guide to Administrator’s fees is available on request or can be

downloaded from http://www.icaew.com/~/media/Files/Technical/Insolvency/creditors-

guides/creditors-guide-administrators-fees-final.pdf If you would prefer this to be sent

to you in hard copy please contact this office.

Attached as Appendix IV is a time analysis which provides details of the activity costs

incurred, by staff grade, to the above date.

Attached as Appendix V is additional information in relation to my firm’s policy on

staffing, the use of sub-contractors, disbursements and details of our current charge-out

rates by staff grade.

11. Outcome for creditors

11.1. Secured creditors

The Company does not have any charges registered at Companies House and therefore

does not have any secured creditors.

11.2. Prescribed Part

Due to there not being a qualifying floating charge, there is no requirement in the

Insolvency Act or Rules to set aside a prescribed part for the benefit of unsecured

creditors.

11.3. Preferential Creditors

The Company has no preferential creditors.

11.4. Unsecured Creditors

Subject to the anticipated VAT and Terminal Loss Relief recovery from HM Revenue &

Customs, it is anticipated that there will be a small dividend available to unsecured

creditors. At this stage in proceedings it is not possible to accurately quantify the

estimated dividend amount. However, if there are no recoveries other than from VAT

and Terminal Loss Relief claims, then it is not anticipated that the dividend to unsecured

creditors will exceed 10p in the £, before costs.

http://www.icaew.com/~/media/Files/Technical/Insolvency/creditors-guides/creditors-guide-administrators-fees-final.pdf

http://www.icaew.com/~/media/Files/Technical/Insolvency/creditors-guides/creditors-guide-administrators-fees-final.pdf


19

12. Next report

The joint administrators are required to provide a progress report within one month of

the end of the first six months of the administration. Creditors will receive further

updates from the joint administrators by way of communications posted on appropriate

websites.

13. Meeting of creditors

Pursuant to Paragraph 51 of Schedule B1 of the Insolvency Act 1986 and Rule 2.25 of

the Insolvency Rules 1986, an initial meeting of creditors will be held on Friday 7

February 2014 at 1.00PM.

Formal notice is enclosed on form 2.20B, together with a form of proxy which to enable

a creditor to vote must be lodged, if appropriate, (by post, email or fax) with a

statement of claim at this office no later than 12.00pm on 6 February 2014. Individual

creditors attending the creditors’ meeting in person do not need to lodge a proxy form.

Creditors who are not individuals or individual creditors who are not attending the

creditors’ meeting need to lodge a proxy form if they wish to vote at the creditors’

meeting.

Please note that the creditors will be bound by the proposals if they are approved at the

creditors’ meeting by the requisite majority of creditors. Creditors may put forward

modifications to the proposals to be considered at the meeting.

For and on behalf of

Sterling Tax Strategies Limited

Finbarr O’Connell

Joint Administrator


20

Appendix I - Statutory information

This appendix to the joint administrators’ progress report provides additional information

required by Rule 2.33 of the Insolvency Rules 1986

Company Name: Sterling Tax Strategies Limited

Date of Incorporation: 25 November 2009

Relevant Court: High Court of Justice

Chancery Division

Companies Court

Court Reference: 8800 of 2013

Registered Office: 25 Moorgate

London

EC2R 6AY

Registered number: 07086727

Joint administrators: Finbarr O’Connell & Henry Anthony Shinners

Smith & Williamson LLP

25 Moorgate, London EC2R 6AY

All functions are to be exercised by the administrators jointly and severally

Date of Appointment: 18 December 2013

Appointed by: The Director

Company Director: Paul Anthony Bennett

Company Secretary: None

Authorised & issued share capital: 100 shares of £1 each

Shareholders: Jacqueline Bennett (100%)

EC Regulations – Since the Company’s centre of main interest is in the UK we

are of the opinion that the EC Regulations will apply. These proceedings will be

main proceedings as defined in Article 3 of the EC Regulations.


21

Appendix II – Receipts & payments account from 3

December 2013 to 31 December 2013


(In Administration)

Joint Administrators' Abstract of Receipts & Payments

Statement From 18/12/2013

of Affairs To 31/12/2013

NIL

REPRESENTED BY

NIL

22

Appendix III - Summary of the Director’s statement of

affairs of the Company

Provided as a summary in Section 5 to this report.

23

Appendix IV- Time analysis for the period from 18

December 2013 to 31 December 2013 and pre

appointment time costs

Classification of work function Partner

Associate

director

Manager/

Assistant

Manager

Senior

Administrator/

Administrator

Assistants &

support staff

Total

hours Time cost

Average

hourly rate

Administration and planning

Other 1.00 1.30 3.00 4.00 0.00 9.30 2,306.00 247.96

Investigations

Total 1.00 1.30 3.00 4.00 0.00 9.30 2,306.00 247.96

Pre-Appointment

AML, Conflict & ethics checks, engagement letters 0.00 0.00 1.25 2.25 0.00 3.50 622.50 177.86

Company searches and background checks 0.00 0.00 0.00 0.45 0.00 0.45 67.50 150.00

Appointment formalities 0.00 1.70 0.00 0.00 0.00 1.70 629.00 370.00

Preparation of pre-appointment documents 0.00 0.50 0.00 0.00 0.00 0.50 185.00 370.00

Job planning 3.50 0.00 0.00 0.00 0.00 3.50 1,680.00 480.00

File and information management 0.00 0.00 0.00 1.35 0.00 1.35 220.00 162.96

Other 1.50 0.00 0.15 0.40 0.00 2.05 810.00 395.12

Total 5.00 2.20 1.40 4.45 0.00 13.05 4,214.00 322.91


Breakdown of time spent by Smith & Williamson LLP employees

for the period ended 31 December 2013

Hours

24

A description of work undertaken in the administration to date is as follows:

Administration and planning

This section of the analysis encompasses the cost of the administrators and their staff in

complying with their statutory obligations, internal compliance requirements, and all tax

matters. This work includes the following:

Preparing the documentation and dealing with the formalities of appointment

Statutory notifications and advertising

Dealing with routine correspondence

Maintaining physical case files and electronics case details on IPS (case

management software)

Calculating the Bonding requirement

Case planning and administration

Maintaining and managing the administrators’ cash book and bank accounts

Collection of books and records

Creditors

Work under this section includes correspondence and other contact with the creditors of

the Company. The work includes the following:

Communicating with HMRC regarding Crown debts

Uploading and updating creditors’ information on IPS (our case management

system)

Attending to creditor enquiries by phone, email and letter (the Company has in

excess of 630 creditors (actual and contingent) and the volume of communication

received has been extremely high

Meeting and/or calling introducers (who are also creditors)

Preparing updates to creditors to be sent by email, letter and/or for inclusion on

the Company’s website

Devising and communicating a process for recording and retaining information sent

by clients regarding their claims (real and contingent)

Meeting with HMRC regarding investigations, enquiries and potential settlement for

clients

Realisation of assets

This section is in relation to the realisation of the Company’s assets. Part of the time

charged against this category was spent in relation to the sale of the assets of the

business. The work includes the following:

Liaising with prospective purchasers and our legal advisors in relation to drafting

Sale and Purchase Agreements

Discussions with our VAT advisors in relation to reclaiming the VAT on the Failed

Schemes

Obtaining advice on which SDLT schemes had failed and therefore ascertaining the

VAT refund on the consequential credit notes; controlling the process of preparing

VAT returns/voluntary disclosures; preparing and submitting those returns/

voluntary disclosures

Discussions with our Corporation Tax advisors in relation to a Terminal Loss Claim

Liaising with Marriott & Co in relation to realising the office equipment and furniture

Liaising with the Company’s pre appointment Bankers to recover the cash balance

held on the date of administration

Liaising with the Company’s insurance brokers and our own legal advisors to

ascertain the position regarding the Company’s insurance policy.

25

Trading

Detailed below is a breakdown of time spent in relation to trading:

Liaising with key suppliers to arrange on-going suppliers (where appropriate)

Updating and formulating the clients’ spread sheet in relation to the status of

individual schemes

Liaising with BHT in relation to providing clients with an update in relation to their

Schemes

Dealing with office related issues

Investigations

Our Forensic department has been assisting with securing and maintaining the

Company’s electronic records

Interviewing the Director and other parties with regard to the failure of the

Company.

Gathering information with regard to the Service Companies and the monies paid

to them by the Company.

Discussions with our legal advisors with regard to various investigation matters

Pre appointment time

As per section 9 of the report.

26

Appendix V - Charging, subcontractor and advisor

information

INFORMATION IN RELATION TO THE JOINT ADMINISTRATORS’ USE OF STAFF,

SUBCONTRACTORS AND ADVISORS, THE RECOVERY OF DISBURSEMENTS, AND DETAILS

OF THE JOINT ADMINISTRATORS’ CHARGE OUT RATES

Policy

Detailed below is this firm’s policy in relation to:

staff allocation and the use of sub-contractors;

Professional advisors; and disbursements.

Staff Allocation and the use of Sub-contractors

The general approach to resourcing our assignments is to allocate staff with the skills and

experience to meet the specific requirements of the case.

The constitution of the case team will usually consist of staff at the following grades:

Partners, Managers, and Administrators or Assistants. The exact constitution of the case

team will depend on the anticipated size and complexity of the assignment and the

experience requirements of the assignment. Our charge out rate schedule below provides

details of all grades of staff and their experience level.

Professional Advisors

On this assignment we have used the professional advisors listed below. We have also

indicated alongside the basis of our fee arrangement with them, which is subject to review

on a regular basis.

Name of Professional Advisor Basis of Fee Arrangement

Pinsent Masons LLP (legal advisors) Hourly rate and disbursements

BHT (tax advisors for clients) Monthly fee of £13,000 plus VAT

Marriott & Co (valuation agents) Hourly rate and disbursements

Our choice was based on our perception of their experience and ability to perform this

type of work, the complexity and nature of the assignment and the basis of our fee

arrangement with them.

27

Disbursements

Category 1 disbursements do not require approval by creditors. The type of

disbursements that may be charged as a Category 1 disbursement to a case generally

comprise of external supplies of incidental services specifically identifiable to the case,

such as postage, case advertising, invoiced travel and external printing, room hire and

document storage. Also chargeable will be any properly reimbursed expenses incurred by

personnel in connection with the case.

Category 2 disbursements do require approval from creditors. These are costs which are

directly referable to the appointment in question but are not payments which are made to

an independent third party and may include shared or allocated costs that can be

allocated to the appointment on a proper and reasonable basis such as internal room hire,

document storage or business mileage.

We have not incurred Category 2 disbursements to date.

Charge-out Rates

London office Regional offices

£ £

Partner 480 350-375

Associate Director 370 295-325

Managers 235-310 190-285

Other professional staff 150-235 100-170

Support & secretarial staff 85 28-75

Notes:


1. Time is recorded in units representing 3 minutes or multiples thereof.

2. It may be necessary to utilise staff from both regional and London offices,

subject to the requirements of individual case.

3. The firm's cashiering function is centralised and London rates apply.

Charge out rates as at 1 July 2013

Restructuring & Recovery Services

28


£

Partner 330-365

Senior Manager 190-200

Manager 175-200

Network Analyst 135

Assistant 80-95

Secretarial and support staff 75-85


Charge out rates listed by staff classification

Forensics

£

Partner 470-535

Associate Director 350-360

Senior Manager 295

Manager 175 -245

Senior 85 -155

Tax Trainee 80-100

Support & secretarial staff 50-60


Corporate Tax

Charge out rates listed by staff classification


www.smith.williamson.co.uk

Principal offices: London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Jersey, Manchester, Salisbury, Southampton and Worcester.

Smith & Williamson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. Registered in England at 25 Moorgate, London EC2R 6AY No OC369871.

Nexia Smith & Williamson Audit Limited is registered to carry on audit work and regulated by the Institute of

Chartered Accountants in England and Wales for a range of Investment business activities. A member of Nexia International.

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