No, I am afraid this is not an article about the results of a football match or the merits of a particular team. Rather it is about the implications of Court of Session decision on an Employee Benefit Trust (EBT) enjoyed by both players and executives of Rangers Football Club.
This decision could have far reaching consequences for many of us, not just clients and their advisers involved in EBT schemes.
As is often the case with tax avoidance schemes, the arrangements for this EBT were complex. This led to the First-tier Tribunal decision extending to 186 pages. I am therefore not even going to attempt to outline the structure here.
The basic principle, though, was similar to that in many other EBT schemes. The players and executives had money diverted into a trust which then earmarked that money in sub-funds for the benefit of each member and his family.
The members and their families then took loans from the EBT, paying income tax only on a notional interest on the loans if they were still employed by the club, and paying no income tax at all if they took the loans after leaving employment.
To the surprise of many in the industry, and particularly of HM Revenue and Customs, the First-tier Tribunal decided that the loans were not “earnings or emoluments” and were therefore not taxable. This ran completely counter to the HMRC position on cash-based EBTs outlined in Spotlight 5.
It left many firms that had not taken advantage of HMRC’s settlement opportunity for EBTs feeling rather smug! The settlement opportunity, which closed on 31st July 2015, would have allowed them to settle without any penalties the tax liability claimed by HMRC. Now it looked as though they had the last laugh on firms that had settled, as it appeared they would not have to pay the tax at all.
In November 2015, however, the Court of Session (which, together with other functions, is the Supreme Court in Scotland) ruled that the loans were emoluments or earnings and therefore were subject to income tax and national insurance.
There have been significant changes in tax law since payments into this EBT ceased in 2010. Regardless of the decision in the case of AG for Scotland v Murray Group holdings Ltd (and others), the official name of the Rangers EBT tax case, it would not be possible to set up an avoidance scheme structured like this today. Why, therefore, am I suggesting this is such a landmark case?
Firstly, of course, there are many employers out there who used similar structures and were waiting for vindication which they no longer have. Those firms have lost the opportunity to use the EBT Settlement Opportunity and are therefore now facing huge penalties and interest as well as the original tax liability.
Secondly, there is the rather disturbing way that the Court of Session accepted entirely new arguments which had not been tested in the First-tier Tribunal. The argument was that the employees had re-directed remuneration to a third party. If this had been raised in the First-tier hearing it is very likely the decision would have been made in favour of HMRC. But it was not raised there. The idea that an appeal court can take account of new arguments not originally raised in the original court hearing is a little worrying.
Lastly, and most significantly, the Rangers decision could impact on a number of perfectly innocent arrangements.
For example, an employee directing his or her employer to pay an amount into a pension, i.e. a salary sacrifice pension arrangement, could now be caught by the Rangers decision. This would lose our clients the national insurance benefits they enjoy under salary sacrifice pension arrangements. HMRC have been asked to clarify its position on this but has refused to do so as there is now a further appeal, by the administrators of the club, to the UK Supreme Court.
Not only salary sacrifice pension arrangements could come under fire. The Disguised Remuneration legislation is intended to ensure tax and national insurance is charged when assets are earmarked for the benefit of employees. When the legislation was written there were numerous exemptions to stop tax and national insurance being applied to innocent, acceptable arrangements. For example, share option schemes. The exemptions are worded to stop the earmarking being taxed.
However, the Rangers decision could now mean such schemes are taxable when the third party arrangement (for example a trust) is set up, and before anything is actually earmarked. If so, this would invalidate all of the exemptions.
Hopefully the government will act to prevent the unintended taxation of salary sacrifice arrangements, share option schemes, and other innocent, “non-avoidance” schemes associated with employment. However, at the moment there are more pressing concerns for the government to deal with, so I do not suggest holding your breath! Watch this space!