Supreme Court backs HMRC in dispute over Rangers' use of employee benefit trusts

The Supreme Court dismissed an appeal brought by RFC 2012 against a 2015 decision by the Inner House of the Court of Session in Scotland. The case centres on payments made using EBT tax avoidance schemes by Murray International Holdings (MIH), the then owner of Rangers, and other group companies to employees between 2001 and 2009. RFC 2012 went into liquidation in 2012, and the current Rangers Football Club is not a party to the case.

"The decision of the Supreme Court is not altogether unexpected and brings to a conclusion this long-running battle over the taxability of remuneration paid through the use of EBTs," said tax investigations expert Paul Noble of Pinsent Masons, the law firm behind Out-Law.com. "It is a decision that HMRC will be delighted with and will cite extensively in its continued war on tax avoidance."

"What is perhaps more surprising is the clear backing of the judges in taking a purposive view of the relevant legislation rather than the narrower interpretation taken by the taxpayer and its advisers. HMRC will undoubtedly seek to maximise the use of this decision in other EBT cases that are yet to settle. Whilst there had been a feeling that other cases would be able to be distinguished from this one on their facts, the Supreme Court's backing of a purposive view of the legislation makes this far less likely," he said.

Giving the judgment of the court, Lord Hodge said that the trustee of the EBT structure used by RFC 2012 was "the person in receipt of the emoluments or earnings and payment to it should have been subject to deduction of income tax". HMRC would "undoubtedly" argue that this principle could be applied to almost all EBT-style arrangements, Noble said.

"Employers that have used EBTs to remunerate which remain unsettled with HMRC should seek advice on the consequences of this decision for them," 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. EBTs can be used by companies for many purposes, including to support their employee share plans and executive long-term incentives. However, they were also historically used by many businesses, particularly hedge funds and banks that used them to manage tax payments on bonuses, before many of the tax advantages of the structure were removed by new rules on disguised remuneration in the 2011 Finance Act. HMRC has been targeting the abusive use of these structures for a number of years, as it its view that they artificially lower income tax and NICs that would otherwise be paid on employee remuneration.

Steven Porter, a tax disputes expert at Pinsent Masons said: "HMRC will try to use this decision in EBTs, employer financed retirement benefits schemes (EFRBS) and even employer/contractor loan scheme situations so anyone in any of these should take advice on their affairs".

EFRBS are similar to EBTs and are designed to provide retirement benefits but have been used confer benefits or to advance loans to individuals.  Contractor loan schemes involve an individual effectively being paid in the form of a loan from a trust or company.

In 2012, the first-tier tax tribunal (FTT) found in favour of RFC 2012 and the other group companies. It found that the payments could not be classed as 'emoluments' or 'earnings' under the income tax legislation in force at the time, because the players and other employees had no "absolute legal entitlement" to the money and that the trust could demand repayment at any time. Its decision was upheld by the Upper Tribunal. The Court of Session disagreed. The money was earnings derived from employment, and it made no difference that it was redirected to a third party at the request of the employee.

In its judgment, the Supreme Court backed a "purposive" approach to the interpretation of the taxing provisions. Although there was "no suggestion that any part of the transaction, which comprised the tax avoidance scheme, was a sham", that was "not the point", Lord Hodge said.

"Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money's worth," he said. "No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect."

"The scheme was designed to give each footballer access without delay to the money paid into the [EBT], if he so wished, and to provide that the money, if then extant, would ultimately pass to the member or members of his family whom he nominated. Having regard to the purpose of the relevant provisions, I consider the sums paid to the trustee of the [EBT] for a footballer constituted the footballer's emoluments or earnings," he said.

Although, as found by the FTT, there was a chance that the trustee may refuse to loan funds from the trust to a particular footballer, Lord Hodge said that this "does not alter the nature of the payments to the trustee".

"In applying a purposive interpretation of a taxing provision 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," he said. "The footballers, when accepting the offer of higher net remuneration through the trust scheme ... were prepared to take the risk that the scheme might not operate as planned."