This case constituted an appeal by HMRC against the First Tier Tribunal (“FTT”) decision that payments into and loans from sub-trusts were not emoluments/earnings subject to PAYE and NIC. The case also examined whether the FTT had erred in law in respect of its application of the “Ramsay” principle.

Analysts of the case are of the view that this decision could have a significant bearing on HMRC’s Employee Benefits Trust Settlement Opportunity. HMRC have recently announced that this opportunity will close on 31 March 2015. It is understood that HMRC are currently considering whether to seek leave to appeal this decision.

Background and key facts

The appellants are HMRC. The respondents are companies in the Murray Group with the fifth respondent (“Rangers”) being part of the group during the years of assessment under appeal, but which, in the course of 2011, was sold outside the group.

The relevant appeals related to the tax years 2001/02 to 2008/09, and concerned a number of assessments for PAYE and NIC issued covering the period up to 5 April 2007 together with additional assessments issued for 2007/08 and 2008/09. The PAYE determinations were raised under Regulation 80 of the Income Tax (Pay as You Earn) Regulations 2003, and Section 8 Notices of Decision for NIC were made under Section 8 of the Social Security Contributions (Transfer of Functions) Act 1999. The Determinations and Notices were served on the respondents and arose out of an Employees’ Remuneration Trust established for the benefit of employees of the Murray Group and their families.

The respondents’ appeals against the Determinations and Notices (heard as one appeal) came before the FTT. The FTT were unable to reach a unanimous view but the majority allowed the respondents’ appeal “in principle”, deciding most of the contentious issues in their favour. A number of matters were left over for later decision in the event of the parties not reaching agreement on them. HMRC appealed against that decision.

The majority at FTT found the key facts of the relevant scheme to be as follows:

By deed dated 20 April 2001 (“the Definitive Deed”) MGM Ltd set up the Employees’ Remuneration Trust (“the principal trust”) which was subsequently amended by deed of variation in two dates in 2002 and by deed of amendment and rectification in 2005.

108 sub-trusts were established subsequent to the date of the Definitive Deed. These were in name of individual employees of companies in the group and beared to be for the benefit of their families individually. The deeds purporting to create the sub-trusts referred to and adopted the terms of the Definitive Deed.

When the possibility of creating a sub-trust in name of an employee was contemplated, the benefits and trust mechanism would be explained to him viz the loan facility providing a tax-free sum, greater than a payment net of tax deducted under PAYE, and repayable out of his estate, so reducing its value for Inheritance Tax purposes.

Further, the employee could also be appointed protector with extended powers which in some respects resembled trusteeship, but without title to the trust assets, and which did not enable the conferring of any absolute beneficial right on the employee himself.

When an employing company decided to propose that a sub-trust be constituted in name of a particular employee, it would have the employee complete a Letter of Wishes (naming the family members benefiting on his death) together with a Loan Application on his own behalf. These would be submitted to the Trustee. A standard form of deed to create the sub-trust would then be provided by the specialist “wealth” adviser to the Group. The employing company would pay a contribution to the principal trust which at its discretion would set up a sub-trust in name of the selected employee.

On these occasions the employing company would advance monies to the Principal Trust and without exception a sub-trust in name of the employee was established. In (almost) all of these cases loans for the full amount advanced for an extended term (10 years) and on a discounted basis were granted by the trustees to the employee. The terms of these loans to date have not expired but the employees’ general expectation is that they will be renewed.

Subject to limited exceptions none of the loans has been waived and none of the nominated employees has obtained an absolute right to any part of the capital value of the loan. Virtually all the sub-trusts continue to date.

In July 2006 the original trustee of the Principal Trust, Equity Trust Jersey Ltd (“Equity”) was succeeded by another trust company. Each trustee was resident in Jersey. Sub-trusts set up before that date had also been administered by Equity. Certain of these were also transferred to the new trust company then. The new appointment made by MGM Ltd was prompted by several instances when Equity had questioned certain loan applications, which had delayed payment.

In the case of the Group’s employees other than footballers, they had no contractual right to a bonus. However, a practice had developed within the Group to pay on a discretionary basis annual bonuses depending on the work performance of the employee and the profitability of his employing company.

In the case of certain footballers the terms of engagement were commonly recorded in two documents, one being a contract of employment, the other being described as a side-letter. The latter would provide ordinarily for the constitution of a sub-trust in the name of the footballer. While the Scottish Football Association required players’ contracts to be registered with it, Rangers did not consider it appropriate to have side-letters registered.

Evidence was also taken on the basis on which loans were granted. In particular the following observations were noted from the evidence of one of the professional trustees:

An explanation was made as to how the new trustee company allayed any reservations it might have about the granting of loans.

Generally the football players and senior employees were highly paid and with substantial capital assets. Thus, loans appeared to be issued automatically, without any objective assessment or proper exercise of discretion.

Compliance files were kept as a matter of routine on individuals who were settlors, protectors and beneficiaries. Identification and copy utility bills were preserved to satisfy money-laundering and banking (“know your client”) practice. A “World Check” verification was carried out and though this seemed to produce only negative results, suggesting only a limited value, this only focused on potential fraudulent activity or politically sensitive involvement by the applicant and was not a credit check.

Client profiles were reviewed regularly depending on a “risk” rating.

While the professional trustee was insistent that the granting of loans (and in due course) the extension of any loans was made strictly on a discretionary basis and assessed individually, the criteria by which this would be determined remained unclear.

That criteria did 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. No considered decision about a loan recorded in a formal Minute was produced in the course of the hearing.

In the event of a borrower defaulting then the interests of those individuals identified in the Letter of Wishes (ordinarily the employee’s family) would be prejudiced. The professional trustee acknowledged that liability for any breach of duty could result if a beneficiary sustained loss. It was the company’s policy to ensure that loans could be repaid in the interests of those persons entitled to the Trust capital.

The First Tier Tribunal Decision

The majority FTT opinion contained the following key points:

The FTT was conscious that a footballer’s career, in particular, is precarious and inevitably limited in term.

Essentially the key issue was whether the term “earnings” (or emoluments for 2002/03) extends to the “loans” made to the Murray Group executives and Rangers footballers under the Trust arrangements with a resulting charge to tax under PAYE and a liability to National Insurance Contributions.

It was accepted (and this was viewed as significant) that both the trusts and loan arrangements were not “shams” (although certain criticisms were made) but, rather, required viewing these structures in a broader context i.e. a practical and commercial reality in which payments were made by the companies in the Murray Group, and where these were invariably received by the favoured employee/footballer and enjoyed in effect absolutely by him.

HMRC did not attack the principles affecting the primary interpretation of earnings and emoluments and the tax and NIC charges in respect of these as set out by the appellants. Rather, HMRC submitted, as this was a scheme devised purely for tax avoidance purposes, an extended sense including monies advanced into trust and then lent, should be adopted.

Crucially the difference between the appellants and HMRC’s arguments was whether the anti-avoidance principles set out initially in Ramsay and other related decisions could be invoked here to extend the charges on earnings to the loans.

The FTT agreed that it should adopt a purposive interpretation of earnings in it’s approach.

In relation to statutory interpretation it noted the comments of Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd at para 35:—

“The driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

However, that approach, taking one view, was circumscribed as there are already specific statutory provisions affecting loans (Sections 173–175 and 188–189 ITEPA) in addition to more general charging provisions in respect of benefits-in kind of a non-cash nature. Further, the legal effect of the trust structure and loans (all of which, it was conceded, were not in law a sham) reinforces these constraints.

In short it would seem 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 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.

In Ramsay and a sequence of decisions following shortly thereafter the “rule” was considered to strike at any non-commercial elements in a tax avoidance scheme. That rule was reviewed by the House of Lords in Mawson and that interpretation was considered there to be too sweeping.

As now refined, the rule emphasises that it is a principle of interpretation: where a commercial concept is introduced into the legislation, then any non-commercial aspects in the transaction may possibly be ignored; and where the legal nature is of the essence, then the legal effects should prevail.

In applying the charging provisions regarding “earnings” to the monies advanced here, the FTT considered that the employees benefiting did not obtain an absolute legal entitlement to the monies. Having regard to the legal effect of the trust and loan structure, the employees’ entitlement or, rather, expectation was to no more than a loan.

Further, the FTT did not consider that that was altered by the employee’s status and powers as protector of his sub-trust: the fundamental structure could not be revised by the employee qua protector to confer absolute rights.

While it was accepted that there was a degree of orchestration in the arrangements made with employees, the FTT was satisfied that these fell short of enabling an absolute transfer of funds to the employee. The trust management by both trustee companies came under close scrutiny and both operated within the same trust framework.

The terms of the Appellants’ internal memos and communications had been a major feature in HMRC’s case. While these were suggestive of “aggressive” tax avoidance, the FTT was conscious that they were composed by lay persons without specialist legal experience. Thus they cannot on any view override the legal effect and tenor of the constituting documents.

In the course of evidence the FTT was invited to consider several cases in which footballers had left Rangers. The sub-trust/loan arrangements subsisted. Only with the consents of those interested in the capital of the sub-trust concerned, could the legal framework be “unscrambled”, so enabling the player to receive an absolute right to the monies put into trust.

No instances of a contrasting approach, with an uncomplicated system for payment were noted, and the FTT had no reason to consider that the cases cited were contrived.

In several instances players (and their professional advisers) had sought further expert specialist advice on the trust/loan arrangements. On such independent referral, it seems, these arrangements had been viewed as enforceable in law.

The trust/loan scheme is essentially straightforward. It does not include a complicated sequence of stages. The extent of the employer’s obligation is to make a payment into trust. The trust structure and loans bear to be of legal effect. Loans were discretionary although in fact they were (almost) invariably granted. But that was the extent of the employee’s benefit. Whether the arrangement is viewed commercially or legalistically, the inexorable conclusion, in the FTT’s view, is that the payments into trust became a loan and no more. They were not paid over absolutely and so do not become earnings or emoluments. The FTT did not regard the liability to make repayment as a remote contingency which might in the context of a purposive construction fall to be disregarded as too remote for practical purposes?

The FTT was unable to make further Findings-in-Fact in support of there being an orchestrated scheme extending to the payment in effect of wages or salary absolutely and unreservedly to the employees involved.

The following Findings of Law were made by the FTT as affecting the general arrangements and confirming in Law as well as in Fact the trust structure and loan arrangements –

The principal trust purportedly constituted in 2001 was valid and subsisting and continues.

The sub-trusts purportedly constituted by the relative declarations of trust were valid and subsisting and continue.

The sums advanced to the employees of the Appellants by way of loan in terms of the relative loan documents, were made in pursuance of discretionary powers and remain recoverable and represent debts on their estates.

The sums advanced by the Appellant companies into the principal trust, whether on payment thereto, or on payment to a sub-trust, or thereafter on being advanced by way of loan to the employee, were not at any time held absolutely or unreservedly for or to the order of the individual employee.

As a result the FTT held that the assessments made by HMRC fell to be reduced substantially. It was conceded that advances in favour of certain players were taxable and liable to NIC, and in certain other limited instances, there may be a similar liability. To that extent the assessments should stand. In these circumstances the FTT allowed the appeal in principle.

Decision of the Upper Tribunal

The Upper Tribunal (“UT”) agreed that the relevant question was whether, in each case, there has been a payment of earnings (or emoluments) by the Appellants to the relevant employee. Both parties to the case made substantial submissions and relied on the principal authorities in a number of cases.

The relevant submissions

The main thrust of HMRC’s submissions was that the FTT had misdirected itself in law in relation to the proper interpretation and application of the Ramsay principle. It had not approached matters correctly.

What it ought to have done was to ask whether, construing each of the relevant statutory provisions purposively, and viewing the facts realistically, the composite transaction fell within the scope and intendment of the provision.

The respondents submitted that the appeal to the UT was a restricted one -it had to be on a point of law arising from the decision of the FTT and it was submitted that the FTT had not erred in law. In large part the appeal demonstrated a refusal by the appellants to accept that the FTT had not agreed with their view of the facts. There had not been payment of earnings. The payments to the sub-trusts and the subsequent loans were not earnings. They were benefits in kind but were not taxable. They were not money or money’s worth.

It was wrong to suggest that the FTT had misunderstood and misapplied the Ramsay approach. The majority had clearly identified the applicable law, had applied a purposive construction to the relevant statutory provisions and had taken a realistic view of the facts. In addition there had not been a failure to find facts. The FTT had not erred in holding that for there to be payment of earnings the employee had to have unreserved disposal. On a fair reading, the FTT’s decision was not that absolute legal title to the monies was needed for there to be unreserved disposal. It was that for the test to be satisfied the employee had to be able to obtain such an absolute right if he chose to.

The scope of the appeal

The UT stated clearly that an appeal from the FTT to the UT lies only on a point of law. Thus, the question for the UT is: as a matter of law, was the FTT entitled to reach its conclusions? Unless the FTT has erred in law, or made a finding which on the evidence it was not entitled to make, the UT is bound by the FTT’s findings in fact (Edwards v Bairstow).

Consideration and application of Ramsay principle

The FTT’s approach to Ramsay appears to have been influenced to some extent by observations which were made in Mayes - that the steps under consideration there “were genuine legal events with real legal effects”; and that similar principles to those which applied in Mayes might constrain the application of the Ramsay approach in the present case.

It was common ground that the statutory provisions which were being construed in Mayes were of a very different sort from the provisions which fell to be construed in the present case. They did not lend themselves readily to purposive construction. In the present case the relevant provisions are more open to purposive construction.

On a fair reading of the decision as a whole, the UT was not persuaded that the majority had fallen into any material error in their consideration and application of the Ramsay principle. The criticism that they did not have regard to the composite transaction as the parties intended it to operate was unfounded. They approached matters having regard to all the circumstances as they saw them, which must include all the facts they found. Those circumstances included findings as to how the scheme was in fact operated. They were fully aware of the appellants’ contentions in this regard. They made specific reference to the fact a transaction might involve consideration of a number of elements intended to operate together.

They drew a distinction between enforceable legal structures which were of fundamental practical effect and legal structures which were “merely incidental or artificial for tax avoidance purposes only.” Having done that they held that the end result was that the employees received loans, not earnings. There was neither payment of earnings, nor was there an equivalent of payment in the form of monies being at the unreserved disposal of the employee. The employees could not, without the intervention and co-operation of beneficiaries, obtain absolute entitlement to the monies.

The FTT majority held that the loans were recoverable, and that recovery was not a remote contingency of the sort that ought to be ignored. They did not accept the appellants’ invitation to find that the trustees were ciphers. They had regard to the fact that the terms of some internal memos and communications were suggestive of “aggressive” tax avoidance, but they were cautious about attaching weight to them.

The FTT had indicated at a number of points that a “purposive”, “commercial”, and “realistic” approach was being taken. They concentrated on whether there was more than a loan: whether there was there some further arrangement. They accepted there was an element of orchestration between employer and employee but they held that such orchestration as there was did not result in it being within the employee’s power to obtain anything greater than a loan. The UT agreed with that conclusion.

The appeal was dismissed except in so far as it related to the termination payments.

The full judgement of the case is available from http://www.bailii.org