HMRC succeed in Rangers’ employee benefit trust (EBT) appeal

In a significant decision concerning the correct approach to applying tax statutes generally, the Supreme Court has held that Rangers FC employee benefit trust (EBT) arrangements, which resulted in loans being provided to employees via trusts funded by Rangers, resulted in the payment of earnings for tax purposes: RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45. The Supreme Court accepted the argument that the payment of monies by Rangers into the EBT on behalf of employees amounted to the payment of emoluments. As such, questions over the nature of the interest in the monies subsequently received by the employees as loans from EBT sub-funds, which had been the focus in the lower tribunals, were irrelevant to the decision.

Background

The case concerned trust arrangements set up by Rangers FC and other entities. The arrangements involved the creation of an Employees’ Remuneration Trust by Rangers in 2001. A large number of sub-trusts were established subsequently, each in the name of employees in the Rangers group and for the benefit of those individuals’ families. In each case, Rangers would fund the EBT with monies which would then be applied by the trustees of the EBT to the particular sub-fund. In addition, the individual employee could be made a “protector” of the particular sub-fund, with extensive powers resembling trusteeship of the monies. In each case, the funds would then be lent by the sub-fund to the individual employee concerned. No such loans had been repaid and no such loans had been written off.

HM Revenue & Customs (HMRC) contended that the effect of these arrangement was to result in the payment of earnings for income tax and NIC purposes for the employees concerned. Viewed realistically, the arrangements simply amounted to a scheme to put monies from the employer into the employee’s hands via the EBT with no intention that the amounts concerned should be repaid.

The First Tier Tribunal (FTT) rejected that contention by a majority of two to one. The majority held that, whilst the Ramsay principle was relevant and it was necessary to take a purposive construction of the provisions, the arrangements in this case were effective and all that the employees received on the facts were loans. They did not obtain outright ownership of the sums concerned. Moreover, the FTT noted that, based on the decision in Mayes, the Ramsay approach is circumscribed where there is already a detailed scheme of taxation in place. Here, there were already specific statutory provisions affecting loans and benefits in kind of a non-cash nature and regarded that as relevant to their determination. As such, the Tribunal concluded that “even in cases of “aggressive” tax avoidance, such as the present case, the application of the Ramsay doctrine to strike at tax saving arrangements may be fettered in a context where there is already in place a highly prescriptive statutory code and, also, enforceable legal structures in place which are of fundamental practical effect, and not merely incidental or artificial for tax avoidance purposes only”.

The Upper Tribunal dismissed HMRC’s appeal, rejecting the contention that the First Tier Tribunal had not correctly applied the Ramsay principle to the facts of the case. Viewing the decision of the majority of the FTT in the round, the Upper Tribunal concluded that the FTT had not misdirected itself as to the correct approach to the Ramsay principle. The FTT had concluded that the end result of the scheme was that the employees received loans, not earnings, since there was neither a payment of earnings nor an equivalent of earnings in the form of monies being at the unreserved disposal of the employee. The Upper Tribunal considered that was a conclusion that the FTT was entitled to reach.

On appeal to the Scottish Court of Session, HMRC raised an entirely new ground of appeal that the payments made into the EBT amounted to the payment of employee’s earnings which were simply redirected to the EBT. This argument based on “redirection” of earnings was accepted by the Court. Rangers appealed to the Supreme Court.

Construction of tax legislation

The unanimous decision of the Supreme Court was delivered by Lord Hodge, the first part of which focuses on the correct approach to the construction of tax legislation.

Lord Hodge noted that there has been a “definitive move from a generally literalist interpretation to a more purposive approach” to the construction of tax statutes. This modern approach requires the courts to have regard to the purpose of particular provisions and interpret its language in a way that, so far as possible, best gives effect to that purpose. The aim is to decide, on a purposive construction, exactly what transaction answers to the statutory description and then decide if the transaction in question does so. In approaching this task, three factors are important. First, it is important to bear in mind that the tax code may not be a “seamless garment” and as such the existence of provisions imposing specific tax charges does not necessarily militate against the existence of a more general charge which takes priority. Secondly, it is the statutory language which must be interpreted, not subsequence judicial gloss to that language. Thirdly, the courts must adopt a purposive approach and identify and analyse the relevant facts accordingly.

Emoluments / earnings

Rangers argued that the Court of Session had erred in applying the “redirection principle” to the facts of this case. In particular, Rangers argued that the principle could not be applied in circumstances where, although the monies paid arise from the performance of the duties of employment, the employee does not have a right to receive the payment and cannot therefore direct payment to a third party.

However, in a careful analysis of the general provisions dealing with the taxation of emoluments or general earnings, Lord Hodge concluded that the legislation in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) includes no requirement that the employee should receive or at least be entitled to receive the remuneration for the work performed for that reward to amount to taxable emoluments. Nor was there anything in the wider purpose of the legislation which indicated that tax should not be charged on remuneration which the employee is entitled to have paid directly to a third party.

“Thus, 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.”

Whilst the legislation included a number of particular cases which fell outside this specific rule, including the taxation of benefits in kind and “perquisites” (which requires that the perquisite be convertible into money or money’s worth to the employee), these exceptions did not detract from the width of the general rule.

Payments

As regards the existence of an obligation on Rangers to deduct PAYE, it was necessary for HMRC to show that there had been a “payment” from which deductions were required to be made.

On this point, Lord Hodge was critical of certain earlier decisions where the courts had focused on “judicial gloss” rather than on the language of the legislation itself. In particular, Lord Hodge noted that in Garforth v Newsmith Stainless Ltd, the court held that the crediting of sums to a director’s company account amounted to a “payment” without any withdrawal of those monies by the director. The court held that “when money is placed unreservedly at the disposal of directors by a company, that is equivalent to payment”. This “gloss” was a practical and sensible one in the context of this case. However, Lord Hodge emphasised that this gloss was “no basis for establishing a general rule or “principle” that a payment is made for the purposes of PAYE only if the money is paid to or at least placed unreservedly at the disposal of the employee” as had subsequently been the case.

In particular, Lord Hodge indicated that the earlier case of Sempra Metals Ltd v HMRC had, on this basis, been wrongly decided. In that case, employees could choose to take bonuses either in cash or have them paid into an EBT from which the employees received loans. The Special Commissioners held that the discretion of the trustee and existence of the loans meant that the employees were not free to do whatever they liked with the funds allocated to them under the EBT. Therefore, the payment of monies to the EBT did not result in such monies being placed unreservedly a the disposal of the employees and there was not a “payment” for PAYE purposes. It was clear, however, that this conclusion was at odds with the Supreme Court’s decision that a payment need not be made to an employee at all.

In summary, Lord Hodge concluded that the relevant principles were that: 

• income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee
• there is no requirement that the employee himself or herself must receive the remuneration; and
• in this context the references to making a relevant payment “to an employee” or “other payee” in the PAYE Regulations fall to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee or as arranged by the employee, for example by assignation or assignment.

Decision on the facts

Turning to the facts, Lord Hodge was clear that payment of the monies into the EBTs was a component of the remuneration of the footballers and other employees.

In relation to footballers, the payment resulted from the side-letter agreement entered into on commencement of the contract of employment, which provided for discretionary trust payments. The Court considered it self-evident that the obligations under the side-letter were part of the employee’s employment package and provided additional remuneration. The amount of the payment was negotiated for securing the footballer’s services. Again, the fact that they were paid to the EBT rather than the employee did not change their character from earnings. Equally, the fact that there was a chance that the trust company might not agree to set up a sub-trust or that the trustee of the sub-trust might refuse to make a loan to the footballer, did not alter the nature of the payment to the EBT. In any event, in applying “a purposive interpretation of a taxing provision in the context of a tax avoidance scheme it is legitimate to look to the composite effect of the scheme as it was intended to operate”.

In the case of employees (other than footballers) who received payments of discretionary bonuses into the EBT, Lord Hodge held that the fact that the employees had no contractual entitlement to the bonus before their payment made no difference. The fact that bonuses were voluntary on the part of the employer was irrelevant so long as the sum of money is given in respect of the employee’s work as an employee, which was the case here.

Accordingly, the Supreme Court dismissed Rangers appeal, holding that the payment of monies by Rangers to the EBT amounted to a payment of emoluments which were simply redirected at the employee’s wishes. Since it was accepted that the NICs treatment would follow the income tax treatment, this finding determined the liability of the payments for NICs too.

Comment

It may seem surprising that the Higher Courts have decided the case on an entirely different (and much simpler) basis to the earlier tribunals. However, the Court of Session itself addressed this saying that the redirection principle “is ultimately simple and straightforward - indeed, so straightforward that in cases where elaborate trust or analogous relationships are set up it can easily be overlooked. That, it seems to us, is what happened before the First-tier and Upper Tribunals in this case.”

More generally, the comments of the Supreme Court on the correct purposive approach to statutory construction of tax legislation further highlight the need for a holistic approach to statute and facts. Of particular importance may be the court’s rejection of the suggestion that the existence of a “highly prescriptive statutory code” curtailed the application of a purposive approach to the legislation in this case. Lord Hodge emphasised that the existence of a specific charge on employment related loans did not mean that the primary charge was not wide enough to tax the situation. Equally, the fact that the Government has since legislated in detail to counter avoidance schemes using EBTs cannot affect the interpretation of prior tax legislation.

Certainly, the Supreme Court appears to have taken a very broad view of what amounts to earnings. In essence, the Court seems to have been content to recognise that the source of the payment was the employment package. Accordingly, it is possible that the decision may have wider implications for tax planning in non-employment circumstances. Will HMRC seek to argue that the decision marks a wider approach, which entitles them to tax amounts moving through structures in the “correct” fashion without regard to the legal steps and parties involved, for example in cases involving personal service companies?

As regards the potential impact of this case on other taxpayers with EBTs, it is most likely to be limited. Most taxpayers have sought to settle their EBT arrangements with HMRC following the introduction of the EBT settlement opportunity (which potentially allows taxpayers with funds in EBTs the opportunity to take those funds out without triggering a charge under the disguised remuneration rules, in return for the payment of certain tax liabilities in relation to the original funding of the EBT, assuming HMRC issued assessments in time). Additionally, Finance Act 2017 introduced a tax charge on employee loans that are not repaid by 05 April 2019, which is expected to result in most such outstanding EBT loans to be repaid in the near future.

Finally, it might be noted that the decision begs the question whether the (hugely complex) disguised remuneration rules introduced in Part 7A of ITEPA to counteract such schemes were ever actually necessary (or necessary in the form enacted). Nevertheless, it seems highly unlikely that HMRC will countenance their repeal as a result of this decision.