HMRC wins final round in Rangers employee benefit trusts case
The EBT arrangements were created in 2001 by Rangers' then owners, Murray Group, and operated between 2003 and 2009. The club paid GBP47.65 million into the EBT and then on into sub-trusts for the benefit of players and senior executives. These trusts then made cash loans at cheap rates to the trust beneficiaries, on the basis that the loans would never be repaid during the player's lifetime, but would be repayable out of his estate on death, thereby reducing its value for inheritance tax purposes.
The legislation then in place indicated that pay-as-you-earn income tax (PAYE) and national insurance contributions that would have been payable on salaries were not payable on these EBT payments. HMRC argued that the payments should be reconstituted and money paid into the trusts reclassified as salary, but, in 2012 and 2013, both the First-Tier and Upper Tax Tribunals disagreed. They upheld the EBT as a valid tax planning scheme, finding that the principal trust and its sub-trusts were valid and continued in existence; they were 'genuine legal events with real legal effects'. The tribunals rejected HMRC's argument that the Ramsay principle applied - i.e. that an artificial transaction conducted only for tax planning purposes should be regarded as ineffective.
This was, however, too late to save Rangers from going into liquidation at HMRC's request in 2012.
In 2015, HMRC took the case to Scotland's Court of Session, which unexpectedly overturned both tribunal decisions and declared the EBT schemes invalid. At that point, Rangers' liquidator, BDO, decided to go to the UK Supreme Court to get a definitive ruling.
A victory for BDO would have significantly reduced the unpaid tax debts claimed by HMRC against Rangers, thus leaving a larger share of the clubs assets for its other creditors. However, the Supreme Court upheld the Court of Session ruling in HMRC's favour.
The court gave three reasons for its judgment: 'First, provisions in the tax code imposing specific tax charges do not militate against the existence of a more general charge to tax which may have priority over or qualify the specific charge. Secondly, it is necessary to pay close attention to the statutory wording and not be distracted by judicial glosses which have enabled the court to apply the statutory words in other factual contexts. Thirdly, a purposive approach to the interpretation of the taxing provisions must be adopted.'
Nothing in the wider purpose of the legislation excludes from the tax charge remuneration that the employee is entitled to have paid to a third party, said the Supreme Court. 'Parliament has sought to tax remuneration paid in money or money's worth. There is no rationale for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party.'
With the club's original owner Murray Holdings in liquidation, HMRC may now try to switch tax liability to the players. 'If that is successful, some may struggle to pay large tax bills coming years after their high-paying playing days are over', said Andrew Watters, partner at law firm Irwin Mitchell.
But the case's main impact may come from the Supreme Court's remarks about interpreting tax legislation, Watters said. 'One has to consider the purpose of the legislation, not just its literal meaning, and apply that to the nature of the transactions involved.' In the Rangers case, that meant looking through trusts and loans and reclassifying the legal consequence as if the players had been paid salaries. 'For HMRC, that is a holy grail of attacking tax avoidance schemes.' It appears, said Watters, that the rules of the tax game have been changed.
The ruling also has implications for many other EBT cases. HMRC will now try to collect the disputed tax in these 'follower cases', using its new power to demand immediate payment through 'follower notices'.
'The unanimous decision of the Supreme Court supports our view that employment benefit trust avoidance schemes simply do not work', said HMRC in a statement. 'This decision has wide-ranging implications for other avoidance cases and we encourage anyone who has tried to avoid tax on their earnings to now agree with us the tax owed.'
- UK Supreme Court
- Scottish Financial News
- Scottish Legal
- Journal of the Law society of Scotland
- Irwin Mitchell
- Glasgow Evening Times
- Accountancy Age
- STEP UK News (5 November 2015): HMRC wins appeal in Rangers employee benefit trust dispute
- STEP UK News (11 August 2014): HMRC fights on in Rangers employee benefits trust dispute
- First Tier Tax Tribunal (Nov 2012, PDF file)
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