The legality of employment benefit trusts: The Supreme Court’s decision in Rangers FC / Murray Group
On 5 July 2017, after a two-day hearing in March, the Supreme Court finally published its judgement in the Rangers FC/Murray Group case. In a decision that it not entirely surprising in the current political climate, the Supreme Court reaffirmed the findings of the Court of Session, ruling in HMRC's favour and dismissing the taxpayer's appeal.
A summary of the case can be found in the author’s previous LawInSport article, available here. However, by way of reminder, the case involved the establishment of an employee benefit trust by the Murray Group for the benefit of the group's employees. Payments were then made to the trust along with a recommendation that the monies be used to establish a sub-trust for the benefit of a particular player or employee and his or her family. The payments to the trust corresponded with payments promised to players in accordance with side letters agreed when they were recruited, also with discretionary bonus payments that would otherwise have been paid to senior executives. Once the funds were in the sub-trust, individuals could then request a loan for the full amount from the trust. HMRC challenged the treatment of the payments into trust asserting that Pay As You Earn (PAYE) income tax and National Insurance Contributions (NICs) should have been accounted for.
The Supreme Court’s reasoning
Despite some initial success before the First Tier and Upper Tribunals, HMRC's new argument concerning the redirection of earnings principle found favour in the Court of Session and the Supreme Court. In its published decision, the Supreme Court ruled that:
- the payments to the principal trust were emoluments or earnings of employment;
- those payments should have been subject to PAYE;
- tax legislation does not require emoluments or earnings be paid directly to the employee for income tax or PAYE to arise; and
- it did not matter that some of the employees did not have a contractual right to the payment when it was redirected to the trust.
In its determination, the Court paid particular attention to the following:
- the documentation clearly demonstrated that the payments were remuneration for employment;
- the scheme was specifically designed to give each individual access to the money paid into the trust without delay;
- the fact that individuals were prepared to take the risk that the scheme might not work as operated (e.g. the trustee might not agree to set up the sub-trust) did not alter the nature of the payment to the principal trust; and
- trust administration was lax – large sums were loaned without consideration of the need for security and when the initial trustee began to take its obligations more seriously, that trustee was replaced with a more compliant trustee.
The Supreme Court also made some interesting observations with regards to the meaning of payment. Prior to this decision, the generally accepted view was that a payment is made for PAYE purposes only if the money is paid to or placed unreservedly at the disposal of the employee. The Supreme Court commented that the "judicial gloss" placed on the meaning of payment in Garforth (and followed in Sempra Metals) should not establish a hurdle or absolute rule as to the meaning of payment. Accordingly, the Supreme Court stated its belief that the Special Commissioners decision in Sempra Metals was incorrect. For practitioners attempting to advise their clients on the correct operation of the complex PAYE legislation, this element of the judgement is disappointing
As to the question of possible double taxation under Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (as explained in the author’s previous article), the Supreme Court did not address this issue specifically. The Supreme Court did however address the question of the ongoing benefits charge relating to the loans made. Describing the legislative code as a "patchwork of provisions" as opposed to a "seamless garment", the Supreme Court ruled that the legislative code for emoluments or earnings took primacy over the benefits code. The only comment in relation to Part 7A is the statement that these later provisions cannot affect the interpretation of prior tax legislation.
Employers who implemented similar planning arrangements, but did not take up the opportunity to resolve these with HMRC before the settlement opportunity closed in July 2015, will likely receive follower notices from HMRC in the future. These will probably be followed by advance payment notices requiring the disputed tax to be paid pending a final resolution of their individual case. Affected employers should start thinking about their potential exposure and how this will be funded, taking into account the added cost of interest and penalties which could significantly increase the final cost.
Employers who have already settled with HMRC will no doubt be breathing a sigh of relief right now that they took the opportunity to settle on the most favourable terms.
- Dispute Resolution Employment Finance Act 2011 Finance Act 2017 Football HM Revenue & Customs (HMRC) Income Tax (Earnings and Pensions) Act 2003 Scotland Supreme Court Tax United Kingdom (UK)