Rangers loses employment benefit trusts tax appeal
Rangers Football Club has lost its appeal to the UK Supreme Court against a ruling that players’ wages paid via employment benefit trusts remained liable to income tax under PAYE, and to national insurance contributions.
Lord Neuberger, Lady Hale, Lord Reed, Lord Carnwath and Lord Hodge unanimously upheld a ruling of the Court of Session that income derived from an employee’s work was assessable to income tax, even if the employee agreed that it be redirected to a third party.
The case involved a trust known as the Remuneration Trust (“the principal trust”) set up by Rangers’ parent company, Murray International Holdings Ltd. When a group company wished to benefit an employee it made a payment to this trust, asking the trustee to resettle the sum on to a sub-trust of which the income and capital would be applied in accordance with the employee’s wishes. The trustee of the principal trust had a discretion whether to comply with those requests, but, in practice, the trustee without exception created the requested sub-trust. The employee was appointed as protector of the sub-trust with the power to change its beneficiaries. The trust fund would be held for the beneficiaries of the sub-trust, being members of the footballer’s family whom he specified.
A prospective player or employee would be told that he could obtain a loan of the sum paid to the sub-trust from its trustee which would be greater than a payment net of tax deducted under PAYE if he were to be paid through Rangers' payroll. The loan was to be repayable on an extended term of 10 years on a discounted basis (no annual interest but only a grossed up sum being repayable). The mutual expectation was that the loans would not be repaid at term but would be renewed. On the footballer’s death, the loans and interest would be repayable out of his estate, thereby reducing its value for inheritance tax purposes. The club used the same mechanisms in paying discretionary bonuses to its senior executives.
HMRC determined that Rangers had failed to pay income tax and NICs on the sums paid to the trusts as remuneration. The First-tier Tribunal and Upper Tribunal held that the scheme was effective in avoiding liability to income tax and NICs because the employees had only received a loan of the moneys paid to the trusts. The Inner House allowed HMRC’s appeal.
Lord Hodge, with whom the other Justices agreed, said three aspects of statutory interpretation were important in determining the appeal. First, provisions in the tax code imposing specific tax charges did not militate against the existence of a more general charge to tax which might have priority over or qualify the specific charge. Secondly, it was necessary to pay close attention to the statutory wording and not be distracted by judicial glosses which had enabled the court to apply the statutory words in other factual contexts. Thirdly, a purposive approach to the interpretation of the taxing provisions had to be adopted.
As a general rule, the charge to tax on income extended to money that the employee was entitled to have paid as remuneration irrespective of whether it was paid to the employee or to a third party. The relevant statutory provisions did not restrict the concept of earnings by requiring payment to a specific recipient, unlike the charge on perquisites and profits. Nothing in the wider purpose of the legislation excluded from the tax charge remuneration which the employee was entitled to have paid to a third party. Parliament had sought to tax remuneration paid in money or money’s worth. There was no rationale for excluding remuneration in the form of money which the employee agreed should be paid to a third party.
He added that “misplaced reliance" on judicial glosses in relation to the concept of “payment” was evident in the case law leading up to the appeal. There was no basis for establishing a general rule that a payment was made for the purposes of PAYE only if the money was paid to or at least placed unreservedly at the disposal of the employee. The risk that the trustee of the principal trust might not set up a sub-trust or give a loan of the sub-trust funds to the footballer did not alter the nature of the payments made to the trustee. Discretionary bonuses to employees through the same trust mechanisms also fell within the tax charge, as these were given in respect of the employee’s work. As the sums paid into the principal trust were earnings in the first place, the specific provisions of the tax code which deemed the benefit of loans to be earnings could not apply.
In a statement HMRC commented: “The unanimous decision of the Supreme Court supports our view that employment benefit trust avoidance schemes simply do not work. This decision has wide ranging implications for other avoidance cases and we encourage anyone who’s tried to avoid tax on their earnings to now agree with us the tax owed. HMRC will always challenge contrived arrangements that try to deliver tax advantages never intended by Parliament.”