Rangers tax appeal a 'resounding success' for HMRC, says expert

The Court of Session said that it was "common sense" that payments made by the club into employee benefit trusts (EBTs), set up on behalf of players and executives, were earnings, and should be taxed as such.

"If the law were otherwise, an employee could readily avoid tax by redirecting income to members of his family to meet outgoings that he would normally pay: for example to a trust for his wife … or to trustees to pay for his children's education or the outgoings on the family home," Lord Drummond Young said.

"[I]t is irrelevant that the redirection is through the medium of trust arrangements. It is equally irrelevant that the trustees who receive the payment, at whatever remove, exercise a genuine discretion as to what happens to the funds. The funds are ultimately derived as consideration for the employee's services, and on that basis they are property to be considered emoluments or earnings," he said.

The decision overturns that of the First-tier tax tribunal, which found that the arrangements were genuine. Its decision was upheld by the Upper Tribunal. Both tribunals found that employees, who were able to draw down money from the EBT in the form of a loan, had no "absolute legal entitlement to the monies", and that the trust could demand repayment of the loan at any time.

Tax expert Paul Noble of Pinsent Masons, the law firm behind Out-Law.com, said that the decision was an "important victory" for HM Revenue and Customs (HMRC), which had challenged the legality of the arrangements through the tribunals and courts.

"To date, the tribunal had not looked favourably on HMRC's arguments, but this decision represents a resounding success in tackling EBT arrangements," he said.

"The decision will be used by HMRC to encourage settlement in a host of other EBT arrangements. The basis of the decision was not the result of a small technicality: rather, the judges' interpretation that 'common sense' should prevail and money received as a result of employee services should be taxable," he said.

He added that the tax authority would be "emboldened" by the decision. "Ultimately it will now look to litigate other EBT cases and use the other weapons in its anti-avoidance arsenal, such as Accelerated Payment Notices and Follower Notices," he said.

An EBT is a legal structure which is usually set up by an employer for the benefit of its employees and directors or their family members. They were historically used by many businesses, particularly hedge funds and banks that used them to manage tax payments on bonuses. HMRC has been targeting the abusive use of these structures for a number of years, as it sees them as a means of artificially lowering income tax and national insurance charges on remuneration to employees.

So-called 'disguised remuneration' rules took effect from 6 April 2011. They were introduced to tackle the use of trusts or other structures by employers as a way of avoiding, deferring or reducing tax liabilities. The rules created a charge to income tax where third party arrangements are used to provide payments in connection with an employee's current, former or future employment. Where this is the case, the amount will usually be deemed employment income which is taxable through pay as you earn (PAYE).

The payments in this case were made by Murray International Holdings (MIH), the then owner of Rangers, and other group companies to employees between 2001 and 2009. The current Rangers Football Club, which was set up after RFC 2012 went into liquidation, is not a party to the case.