Football lessons for trustees

01 May 2013 Robert Clifford

Football lessons for trustees

Robert Clifford examines Murray Group Holdings PLC v HMRC and argues that changes to law, regulations and best practice mean the trust industry has to alter its behaviour.

The decision of the First-tier Tribunal in the case of Murray Group Holdings plc v HMRC finally cleared the Murray Group and Rangers Football Club in relation to an alleged tax-avoidance scheme using employee benefit trusts (EBTs).

Murray Group set up an employees’ remuneration trust in 2001, which, eventually, had more than 100 sub-trusts – 81 for Rangers FC players and the balance for other employees. Total contributions were just under GBP60 million.

The employee, the subject of the arrangements, was the protector of a sub-trust and was able, by way of a letter of wishes, to change trustee and nominate the ultimate beneficiaries (normally their spouse and children). The employee could take a loan, at a commercial rate with an initial discount, that avoided regular interest payments. The loan term could be extended at the discretion of the trustees. An outstanding loan would represent a debt on death of the employee for inheritance-tax purposes.

The original trustee operated these arrangements until 2004. After the original trustee raised concerns about the lack of security for the EBTs on loans made to employees, the new trustee in Jersey replaced the original trustee as trustee. As the tribunal noted, the new trustee was prepared to be more amenable to requests to advance unsecured loans to the ‘recommended beneficiaries’.

Although the Murray Group won its argument, Rangers Football Club Ltd went into liquidation and the 2011 disguised remuneration rules – and associated HMRC ‘settlement opportunity’ – meant wholesale change for everyone.

In this case, the representative of the trustee was heavily criticised. As the trust industry evolves, with increasingly complex structures against a background of new laws, burgeoning regulation and a competitive drive for cost efficiency, the case holds important lessons for trustees.

Take-on is critical

One of the biggest decisions for a trustee is the decision to take on a piece of work. In Murray Group Holdings, the way the trustees acted in advancing the sums as loans meant the trustees had been acting in breach of trust. It was found that: ‘The evidence suggests that the [trust] was intended to be operated in breach of trust, and that the scheme required such breach to achieve its purpose.’

Further, the loan structure had been criticised by the Jersey Financial Services Commission as not being ‘commercial’; it was designed not to be commercial to achieve its purpose; no security was ever requested; no interests were ever required to be paid; there were no expectations of repayment from employees; there were no intentions of enforcement for repayment by the trustees.

One of the tribunal judges, Dr Heidi Poon, said in her judgment: ‘[The] circumstances leading to [the original trustee’s] removal were firmly in the foreground for the incoming trustees to understand what the appellants would be expecting from the conduct of the new trustees.’

Perhaps the new trustee felt it could manage these issues. If so, the take-on process should have highlighted them and should have resulted in the relevant information, concerns and guidelines being apparent to anyone who looked at a Murray Group EBT in future. Those guidelines should have been connected to future reviews and decisions at take-on, so every relevant issue would be immediately apparent to every decision-maker before a trustee decision was made. The lessons learned at take-on must not live independently on a separate system that is not immediately accessible to everyone.

Too often trust companies manage a multitude of different systems in different ways, with different people having access to different pieces of information. It is no wonder that key data slips through the cracks over time.

Trust business is first and foremost about the quality of decisions

Decisions drive fiduciary structures. Without decisions nothing can be achieved.

The system should have ensured that every person participating in a decision was in a position to see the key documents, understand relevant relationships and make an independent judgment.

In this case the tribunal found: ‘There was no evidence of any questions ever being asked to ascertain the circumstances of the borrowers for the exercise of discretion in the granting of a loan. On the contrary, the evidence indicates that the role of the trustees was essentially passive… It was a “process” in which the trustees’ principal function was to process the loans; they did not seem to exercise any discretion.’

Further, the tribunal made the point that while Mrs Crimson, who supervised the administration of the trusts and maintained records of decisions, was insistent that the granting of loans, and the extension of any loans, were made strictly on a discretionary basis and assessed individually, the criteria by which this was determined remained unclear.

Kenneth Mure QC and Scott Rae WS said in their judgment: ‘The [intended] criteria do not appear to be reflected in any records relating to the grant of loans with no specific information on the debtors’ remuneration, means and future prospects.’ The employees were specifically excluded as beneficiaries of the EBT arrangements, yet soft, non-commercial loans were granted to them in breach of trust.

Of course, trust documents containing trustees’ reasoning need not be disclosed to beneficiaries. Consequently, some trustees may consider that having clear, recorded reasons for decisions is not the priority. They may even be advised that recording reasons for decisions (which might, if challenged, be improved with hindsight) is counter-productive. These trustees would be wrong. It is better to ensure that the discipline of recorded reasoning is embedded in a trust management system and is available to all. To do so facilitates transparency, challenge and learning. It also puts the present in the context of the past, aids consistency and ensures that all relevant information is captured.

As Mrs Crimson admitted, what happened was ‘processing’, without individual consideration. Excellent administration is a fundamental part of the trust equation. However, the product of that administration will be valuable only if management has the time and the information to understand the big picture and then to provide clear, comprehensive and auditable written instructions. Decisions, and auditable instructions to administrators, should be at the core of every trustee support system.

There is a need for greater transparency about what trust businesses are doing, and why

Counsel for the Murray Group was resigned to criticisms being made of ‘lax administration’. On the evidence he could not argue against it. The failure, however, seems to have been one of understanding rather than administration: of decision-making rather than implementation. No trust business wants to find itself in that position. From the outset the business needs to be able to see and assess what is happening with as many eyes as possible.

Trust management needs to ask the question: can I see easily the important things that are happening in my team, my office and/or my jurisdiction? Managers need to be clear about what those important things are. Too often they are all over the place, from personal email inboxes to compliance records and even archived files. Support functions for risk, legal, tax, compliance, investments and others all need access, from their own desks, to the entirety of every structure. Only then can directors and managers support each other. Information in silos and people’s heads is not good information.

The trust landscape has changed. Transparency is a large part of the required response. Greater transparency will be challenging, but will be the hallmark of competence and ambition. Ultimately, if a trustee is confident, why not allow advisors, protectors or even settlors to log on and see what is being done and how? As Ronald Reagan said, ‘Trust, but verify.’

Trust systems need to support trusteeship as well as administration

In Murray Group Holdings the administration was done. However, checklists are no substitute for thought. The thrust of cross-examination was that loans were issued automatically, without any objective assessment or proper exercise of discretion. The tribunal felt that, while compliance files were kept as a matter of course and World-Check was used, what was missing was evidence of understanding of what was happening – a more important ingredient than any other risk-management process.

To support trusteeship, trust companies need to make all relevant information, from the purpose and shape of every structure to assets, take-on, review history, reasons and relationships, immediately available to decision-makers. Compliance needs to live in the same system and be owned by everyone involved in management. Conflicts must be quickly apparent. The understanding on which every action should be based needs to be distilled at take-on, reviewed continually and made apparent to every person involved in trust management.

No trustee could possibly want to find itself in the shoes of the trustee in this case. The consequent obligation of management is to ensure that trust companies work in a way that supports both thoughtful, transparent trusteeship and efficient administration. These are not the same thing. At stake is the type of trust world we wish to be part of.


Robert Clifford

CPD Reflective Learning