This UK Supreme Court case3 concerns the tax treatment of salary and bonus payments paid through an Employee Benefit Trust arrangement by Glasgow soccer team Rangers F.C. to players and executives.

The Supreme Court upheld the Scottish Court of Session’s 2015 decision that the Employee Benefit Trust payments were taxable “emoluments or earnings”.

Background

Under the Employee Benefit Trust scheme, which was in place from the 2001–2002 through 2008–2009 tax years, Ranger F.C.’s former owners (the employer) made payments of around £50 million to players and executives (the employees) and classified them as tax free loans, thereby not withholding income tax and national insurance contributions (NICs).

HMRC assessed the payments to income tax and NICs as remuneration. Rangers F.C. appealed those assessments to the First-tier Tribunal (FTT). The FTT, while recognising that the scheme was an aggressive tax avoidance scheme, held that the scheme was effective in avoiding liability to income tax and NICs. The FTT considered the steps in the scheme were “not shams and that the employees had received only a loan of the moneys which the employing companies paid to the trusts”. The Upper Tribunal upheld the FTT’s decision, because it “detected no error of law in the majority’s reasoning”.

The Advocate General for Scotland on behalf of HMRC appealed to the Scottish Court of Session and made the argument that the payment of the sums to the trust involved a redirection of the employee’s earnings and accordingly did not exclude those earnings from the charge to income tax. The Scottish Court of Session upheld that argument and allowed HMRC’s appeal in November 20154: Rangers F.C. appealed that decision to the Supreme Court. The case before the Supreme Court was held in March 2017 and the judgement was released in July 2017.

Supreme Court Decision

According to the Supreme Court decision although the payments to the trusts were not sham transactions, there is no statutory basis for exempting them from tax. The decision reads that “the relevant legislation for the taxation of emoluments or earnings is deliberately wide to bring within the tax charge money paid as a reward for an employee’s work. In this case, the trust scheme was designed to give each employee access without delay to the money paid into the trust. Therefore the sums paid to the trustee of the trust for an employee constituted emoluments or earnings”. The decision goes on to states “the employees had no contractual entitlement to the bonuses before their employers decided to give them but that does not alter the analysis of the effect of the scheme. The fact that bonuses were voluntary on the part of the employer is irrelevant so long as the sum of money is given in respect of the employee’s work as an employee”.

The decision repeatedly talks about the “purposive interpretation” and that “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”. “The courts at the highest level have repeatedly warned of the need to focus on the words of the statute and not on judicial glosses” and “the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose”, according to the decision.

The decision goes on to state that in this case, “the players, when accepting the offer of higher net remuneration through the trust scheme which the side letters envisaged, were prepared to take the risk that the scheme might not operate as planned. The fact that the risk existed does not alter the nature of the payment”. Citing previous case law, the decision notes that the fact that bonuses were voluntary on the part of the employer is irrelevant so long as the sum of money is given in respect of the employee’s work as an employee:

The Supreme Court, essentially for the same reasons as the Scottish Court of Session, dismissed the appeal and therefore found in favour of HMRC.

Impact

Following the decision in this case, other companies which ran Employee Benefit Trusts and similar schemes may now be subject to HMRC “follower notices”. If they do not settle their dispute or ‘take corrective action’, such companies will be at risk of a penalty.

Following the Supreme Court decision, David Richardson, director-general of HMRC’s customer compliance group, said: “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.”

At the time of writting, there has been no official guidance from HMRC on the decision.

The Supreme Court decision is published at https://www.supremecourt.uk

3. [2017] UKSC 45

4. Advocate General for Scotland v Murray Group Holdings Ltd 2016 SC 201.