Yesterday, the highest court in the land passed down its decision in the Rangers case. Having trundled its way through the First-tier Tribunal, Upper Tribunal and Court of Session under the name of Murray Group Holdings, the case reached the Supreme Court in the name of RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45 (the different legal system in Scotland means that in Scotland it’s the Advocate General who appears as litigant on behalf of HMRC).
The Supreme Court found unanimously in favour of HMRC.
We predict that there will be much muttering on the terraces: HMRC changed the rules: the referee was biased and the linesman (sorry – assistant referee) was unsighted: HMRC were offside: the ball never crossed the line: we were the better side by a mile.
Actually, uncomfortable though it may be to be wearing the only green scarf in a sea of blue, we think that this was the right decision.
Enough football metaphors already. What was the case about and why was the Supreme Court right?
The facts, the decision and the reasoning are all fairly simple. A group of companies established a trust. When an employing company wished to benefit one of its employees (mostly footballers) it paid cash to the trust, recommending the trustee to resettle the sum onto a sub-trust and asking that the income and capital of the sub-trust should be applied in accordance with the wishes of the employee. The trustee had discretion whether to comply with those requests but in fact did so in every case. The employee was “protector” of the sub-trust and as such had extensive powers over it.
In every case bar one the employee promptly asked for a loan to be made to him of the entire fund, which loan was duly made. Although the loan was in principle repayable, both the employer and the employee expected that the loan would continue in existence throughout the employee’s life and would be repayable out of the employee’s estate on death, thereby reducing its value for Inheritance Tax purposes.
The arrangements were used both for footballers and for senior executives of the group. There was a slight difference between the two in that in the case of footballers all of this was laid out and explained as part of the negotiation for the footballer’s engagement (so the payments were in effect guaranteed bonuses); for the executives the payments were effectively discretionary bonuses.
The key issue was whether, as a matter of statutory construction, an amount of money paid not to the employee but to someone else could nonetheless be charged to tax on the employee. The taxpayer asserted that to be taxable “it is not sufficient that the payment of money arises from the performance of the duties of an employment” – it was not taxable “unless the employee already has a legal right to receive the payment and it is paid at his direction to a third party”.
The Supreme Court said no: what mattered was whether the amount paid could fairly, on a purposive view of the legislation, be regarded as earnings from the employment or office held by the employee. If it was, the employee was liable to pay tax on it.
Earlier cases which had said otherwise – in particular Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062 – were wrongly decided. “If an employee enters into a contract or contracts with an employer which provide that he will receive a salary of £X and that as part of his remuneration the employer will also pay £Y to the employee’s spouse or Aunt Agatha, I can ascertain no statutory purpose for taxing the former but not the latter.”
Once you establish that principle, it remains only to decide whether the amounts paid over were “earnings”. They were: “The scheme was designed to give each footballer access without delay to the money paid into the Principal Trust, if he so wished, and to provide that the money, if then extant, would ultimately pass to the member or members of his family whom he nominated. Having regard to the purpose of the relevant provisions, I consider that the sums paid to the trustee of the Principal Trust for a footballer constituted the footballer’s emoluments or earnings.” They were therefore taxable.
It’s important to recognise the limitations of the decision. The Supreme Court did not say that every payment made to anyone in connection with an employment is automatically taxable as income of the employee. To take an extreme example, the amount of a genuine loan, genuinely intended to be repaid, whether made to the employee or to a member of the employee’s family, would be not taxable as income (though it might give rise to a benefit). Why not? Because the amount of such a loan would not itself be earnings.
What the Supreme Court did say was that if a payment does represent earnings, it does not escape taxation by being paid to someone other than the employee. Many people will find that analysis uncomfortable. We have to say that we aren’t among them.
Because the taxpayer is now in insolvent liquidation, the effect of the decision in this particular case is that HMRC will simply take a bigger slice of the available assets, and the cost will effectively be borne by the other creditors. We have seen it suggested that HMRC may also seek to collect tax from the employees themselves: but we think that that will be difficult under the present state of the law.
More widely, we now expect to see HMRC start to issue follower notices in a significant number of Employee Benefit Trust (“EBT”) cases (many of them going back many years) in which the facts are comparable to those of Rangers. In such cases we might even see disappointed taxpayers looking to recover their losses from some of the organisations that have historically promoted the use of EBTs in this way with such confidence and enthusiasm. The game is over: now the recriminations start.
For more information and assistance with specific EBT cases, please get in touch with your usual BKL contact or use our enquiry form.
