HMRC Thrash Rangers In Epic ‘EBT’ Final!

Peter Rayney explains why the game is finally up for ‘employee benefit trust’ arrangements.

The Glasgow Rangers employee benefit trust (EBT) case (RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45) must go down as the defining tax avoidance case of the current decade. 

Over the past few decades or so, EBTs and similar structures have been widely used. Such arrangements generally relied on a literal construction of tax law (as it then stood) to avoid PAYE and National Insurance contributions (NICs) on directors’ and senior managers’ pay. Of course, to the layman (and indeed almost all tax professionals) these arrangements look like an ‘offensive’ tax dodge. It was therefore left to the courts to decide whether they were legitimate tax planning or (unacceptable) tax avoidance.

HMRC won the case with comparative ease, with all five judges finding in its favour. The Supreme Court judgment confirms the developing jurisprudence that the courts have firmly moved away from a ‘generally literalist interpretation’ of tax law to a more purposive and realistic approach. 

Between 2001 and 2008, the club’s parent company made contributions of £55.5 million and €5.3 million to its employees’ remuneration trust. This was referred to as ‘the Principal Trust’, which had all the characteristics of a typical EBT. 

Where the company wished to benefit a particular player/employee, it made a ‘pre-agreed’ cash contribution to the Principal Trust (‘the EBT’) in respect of that employee. The company also recommended to the EBT trustee that the amount be resettled on a sub-trust, to be applied in accordance with the employee’s wishes. 

When new players were recruited, the discussions focused on the ‘net of tax’ pay they would receive and the existence of the sub-trust mechanism. They were told that a loan from the sub-trust would enable them to receive a greater amount than if they received pay net of normal PAYE/NIC deductions!

In addition to their employment contract (recording an agreed ‘lower’ salary), the company provided each player with a ‘side letter’ under which it undertook to carry out the relevant ‘sub-trust’ arrangements, referring to the sums that had been agreed in prior negotiations. The player also completed a loan application, which was always made for the agreed amount. 

The judges of the Supreme Court (upholding the Scottish Court of Session’s thinking) unanimously concluded that the ‘redirection principle’ must be applied. This says that any payment that derives from an employee’s work must be taxed as earnings, even where the employee directs or agrees that it should be paid to a third party. The payments/contributions made to the EBT in respect of a player/other employee constituted their taxable earnings, and therefore should have been subjected to PAYE and NICs. 

Lord Hodge emphasised that the general ‘earnings’ charging provisions in ITEPA 2003, s 62 (and its predecessor) do not contain any specific requirement for the earnings to be received by the relevant employee. Consequently, payments deriving from an employee’s labour fall to be taxed as earnings, even where they are assigned (with the employee’s agreement or acquiescence) to a third party. 

It was perhaps inevitable that Lord Hodge had to conclude that the Special Commissioners had previously incorrectly decided Sempra Metals Ltd v HMRC ([2008] STC (SCD) 1062) and Dextra Accessories Ltd v Macdonald [2002] STC (SCD) 413). 

HMRC will now be able to use its follower notice and accelerated payments notice weapons to collect the relevant tax from those EBT users who have not ‘paid-up’. They really have very little option but to ‘throw in the towel’ and settle with HMRC. 

The Supreme Court ruling serves as a useful reminder to us all that contrived, abusive, and egregious tax avoidance schemes will not be tolerated by HMRC or the tribunals/courts.