Can someone explain to me why the recent Court of Session judgment in the Rangers - Murray Group PAYE assessments case is considered unsound by some commentators?
I am the first to admit that I am not knowledgeable about legitimate tax avoidance schemes (tax evasion & other criminality is 'my thing').
It seems that at first instance the Tax Tribunal found as a fact that the employer made payments as the "discharge of an employer’s obligation to an employee". The Court of Session noted that the payments were made "in recognition of the work performed by the relevant employee". Is that combination not 'game over' as far as income tax / PAYE is concerned?
What happens to those payments & to whom they are paid then becomes irrelevant.
The judgment refers to earlier decided cases but many of these refer to other issues, such as whether & when the payments were deductible as expenses in the employer's accounts, or whether NIC was due (under old legislation). One can imagine that those cases could, quite properly, have had different outcomes as they were addressing different questions.
What I cannot yet understand is what arguments are put forward by those commentators who regard the Court of Session judgment in this case as "unsound" or "bad" (in the sense of illogical or incorrect - not just unwelcome!).
Could someone enlighten me, please?
David
Replies (54)
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https://www.accountingweb.co.uk/article/rangers-lose-tax-case-rep
I have set out in this link why it is bad. You will recall that you thought Mehjoo at first instance was sound, and I thought it was unsound and I was proved right in the CoA so, with respect, you may not have a good track record there.
In the real world
Nobody would do a normally high paid job without pay (unless they are very generous or charitable and can afford to give their pay away - spouses etc do not count in this regard).
The earnings that were 'diverted' were seen to be taxable, and quite rightly too.
EDIT: maybe it's just the promoters and creators of tax avoidance schemes that want the outcome to be seen by the general public as unsound judgement.
EBTs
I'm with you on this, David. What I can't get my head round is the idea that payments into an EBT, from where loans could be made to employees with no expectation that these would ever be repaid, could be anything other than a disguised form of remuneration. As such, tax should have been due on these sums when paid out. It seems that HMRC only belatedly came to realize that avoidance of PAYE & NIC was happening, judging by amendments to the law introduced long afterwards. It might be that because the advances were loans, nothing could be done because employees might have repaid them. Was that incredibly naive? Hard to believe, so some other explanation has to be involved. As a non expert, I'm just bemused.
Tax on contributions to a fund
As such, tax should have been due on these sums when paid out
If an employer pays a sum into a pension fund, PAYE is applied when the fund pays it out as a pension. Are you suggesting that PAYE should be operated every time an employer makes a payment into the fund? Common sense tells you that the money is a reward of the employment and will be paid out eventually for the benefit of the employee.
Already paid out
Isn't the essence of this scheme that the money had already been paid out in the form of "loans" that were never expected to be repaid? If the employee already has the money then what does that normally mean it is?If an employer pays a sum into a pension fund, PAYE is applied when the fund pays it out as a pension. Are you suggesting that PAYE should be operated every time an employer makes a payment into the fund? Common sense tells you that the money is a reward of the employment and will be paid out eventually for the benefit of the employee. As such, tax should have been due on these sums when paid out
For that matter, if you are saying common sense tells you that the money is a reward of the employment, isn't the normal position that rewards of employment are taxed unless subject to a specific exemption?
Follow the clients
From what I can see, those that are making technical arguments that this decision is unsound are those that earn their shilling in defending people who think they don't need to pay taxes. One prominent new QC who is making a lot of noise about this has a client list that is a like a Who's Who of aggressive tax avoiders.
http://waitingfortax.com/2015/11/06/on-ebts-and-rangers-fc-part-1/
Taking a 'big picture' view, as opposed to the technical view used by the barristers (that apparently allows you to leave your morals at home), is it right that well paid footballers can be paid money as 'loans' that they never need to pay instead of wages, without this being seen as remuneration for their services?
No right thinking person would disagree in my view. I am a 30 year VAT expert and can talk section numbers and EU references all day, but when something stinks, it's usually dead rotten
Don't often support HMRC, but they HAVE to win this case. And the footballing authorities also have to take action too because of the massive advantage Rangers had. Whatever trickery they talk, it's the same football team, owned by different owners.
David
I would have to charge you a fee for going into more detail on why it's a bad decision, but I note that the barrister in the link below seems to agree with me (and this barrister agreed with me that Mehjoo at first instance was a bad decision https://www.pumptax.com/barrister/oliver-conolly/):
http://waitingfortax.com/2015/11/08/on-ebts-and-rangers-fc-part-2/
HMRC and Taxpayer
I would have to charge you a fee for going into more detail on why it's a bad decision, but I note that the barrister in the link below seems to agree with me (and this barrister agreed with me that Mehjoo at first instance was a bad decision https://www.pumptax.com/barrister/oliver-conolly/):
http://waitingfortax.com/2015/11/08/on-ebts-and-rangers-fc-part-2/[/quote]
I see Mr Oliver swings both ways, so to speak. An advisor I know keeps a record of barristers who don't work for HMRC, and it is a short list indeed. They refuse to use such a person. I have heard of pressure being brought to bear on such barristers by HMRC to argue/not argue points in other cases. All hearsay of course...
Justin
I can't afford to pay you, but are you of the view that loans advanced to the players should be entirely tax free, even though they will never be repaid, and despite the existence of the side letters of agreement.
Links
For future reference, comment titles automatically become links to the comment itself. It is therefore no good putting a link to somewhere else in a comment title.
As for the blog by linked to, I think this sentence alone illustrates quite clearly what makes this sort of tax planning an issue.
. So the magic of Employee Benefits Trusts from an employer’s point of view is that they enable the employer to reduce the amount of tax it has to pay to the taxman. And they enable the employer to keep his employees happy.
The "magic" of EBTs is that the employer gets a tax deduction but the employee is kept happy (which, in the context of earlier paragraphs means they get as much money as possible). This "magic" sounds like claiming a payment is two different things for tax purposes to me. I applaud the court deciding that such a thing is not possible.
Agree
Well said Stephen
There are leeches everywhere unfortunately when you have people who thinks they should pay no tax.
Forum
A forum is no place to start pompously talking about charging fees. The whole industry that pervades a certain section of business in society is sickening, the industry of avoiding paying your way by avoiding looking at the big picture or morals.
Bottom line here - these footballers were not advanced loans by use of clever tricks.
Without asking for a fee (can't believe you had the cheek to say that) please answer the question.
As I said before, look at an advisors track record and you will see the kind of train they drive.
Assets
Not a footballing man these days, but the assets are the same, the jerseys are the same (OK, not the exact ones, but you get the point, the trophy cabinet is the same. Legal ownership can't avoid the basic fact it is Rangers FC, the same one as before. This isn't a legal issue as far as football rules are concerned I believe, but a footballing rule, namely not being allowed to get favour by paying too much.
Focus on the big picture (this works with almost everything), and the answer is clear.
The worrying thing about the judgement ...
... is that it (as David has highlighted) seems to create a new rule that is based on common sense.
Since when has tax had anything to do with common sense? There are just as many situations where the application of the law gives rise to an adverse tax effect (that is equally an affront to common sense) as there are the other way around.
If this judgement goes unchallenged HMRC won't use it just in EBT cases - it will be much more widespread. Including what we all think of as legitimate diversion of income from salary to dividend and to spouses. That is what really worries me.
BTW - I'm no apologist for the peddlars of tax avoidance scheme. My firm actively discouraged clients from EBTs as we didn't see them working. But I read every line of the Rangers judgement twice and was left with the distinct feeling that the judges decided what they wanted the outcome to be and then set about justifying it. Overall, compared to some of the very well argued judgements one reads, it is a poor piece of work.
So the judges were wrong
and the ebt should have worked. Loans would never be taxed and that's a satisfactory outcome? Is it even possible to legislate to tax a 'loan' such as this. That seems to be what the critics are saying.
Read the Judgement
and the ebt should have worked. Loans would never be taxed and that's a satisfactory outcome? Is it even possible to legislate to tax a 'loan' such as this. That seems to be what the critics are saying.
The Court did not find that the loans were income: quite the reverse. What it did find was that the payment into the primary trust was employment income, not the payment to the players out of the sub-trusts. This was the "new" argument. If not introduced at the 11th hour, the appeal would have failed.
It may be that the so-called "side-letters" gave the footballers entitlement to the income, but that was not the case with the other staff who had no such letters. Yet the Court did not distinguish between them, and did not say as much in their judgement.
I do get the point
that the court found that the loans were not taxable, and made the startling judgment that the payment into the ebt was when the player 'got' what they deemed taxable pay. This has upset the critics because it seems to be a novel interpretation. I'm struggling with the idea that such payments would escape tax if the court had not decided as it did. It just seems too simple to avoid tax and, frankly, upsetting. And I don't think anyone has actually answered David's original question
Common sense vs technical analysis
This is an offensive scheme. By that I mean, if it somehow works, it offends against the principle that employees work for wages not loans. History shows that the Lords in their day and the Supreme Court now will usually find a way to defeat a scheme that offends this basic principle and he one that says you should ignore the wider picture and look only at the individual steps.
That kind of thinking may have worked in 1990 in the bad old days, but these days, in the present avoidance climate and with all the fuss generally over how much footballers are paid and how much tax they pay, this scheme is even more offensive.
Shame on those who argue a line by line, step by step analysis should apply so as to not tax income. Without these people with no moral responsibility, the greedy buggers who believe they are above paying tax would I suspect begrudgingly pay their way.
Just spotted that 1D have paid £8m in CT last year - well done to them I say and those that advise them, like Simon Cowell who pays a TON of tax to the UK.
Nonsense
it offends against the principle that employees work for wages not loans.
Better start taxing DLAs then.
1D have paid £8million CT? That can't be right because common sense says that it is not a Ltd Company that sings on stage. Common sense tells me that the members of 1D should be paying income tax (at 45%), not corporation tax (at 20%). Maybe they have a tax efficient structure set up to reduce their liabilities?
Missing the point
But the footballers were not companies, right?
Re: 1D, if the lads take out the money as wages, it will be PAYE-able then at up to 45%.
Back to the point, these footballers were individuals playing football for money. It's as simple as that and no amount of trickery can disguise that
Agreed
Back to the point, these footballers were individuals playing football for money. It's as simple as that and no amount of trickery can disguise that
Agreed.
And the money they received was taxed.
@thehaggis re pensions
Sorry but I can't show your actual words.
Surely the only reason some payments are not subject to PAYE as they go into the fund is because specific legislation was enacted to make it so?
Yes, But
Sorry but I can't show your actual words.
Surely the only reason some payments are not subject to PAYE as they go into the fund is because specific legislation was enacted to make it so?
Yes, But "common sense" apparently now trumps legislation.
Interestingly
I was at a recent tax conferenece and all the tax barristers there (except Julian of course) agreed it was a rather bad decision. Where salary/bonus for which an employee is aleady entitled has been re-directed to an EBT by the emloyee then of course it is taxable at that employer to EBT payment point (regardless of subsequent EBT loans etc.) as the employee's income, but that is totally obvious (to any decent tax lawyer at least) and is nothing new and merely points to poor implementation (re the footballer's side letters etc.) and everyone would agree with Julian about that. That is Julian's "don't pay me, pay my mum" s62 entitlement argument and has always been correct, as the employee in that case has actual power to direct payment of his bonus/salary to the EBT, so it's obviousy his money with his name on it already and is taxabale on payment into the EBT for that simple reason alone (even if the EBT might decide later not to pay him or his family anything at all nor make any loans etc.). Perhaps one should ask David & The VAT Doctor why, where there has been no prior entitlement to the EBT money as a salary/bonus, it should be taxable as income on payment into the EBT (c.f. salary sacrifice schemes, where the above "pay my mum" argument equally does not work and HMRC accept that of course and is why P7A was introduced re earmarking etc.). The Murray case actually confirms that that kind of EBT payment is not taxabale "in hindsight" or otherwise on payment to the EBT, hence the rather odd conclusion of the court re the executives, where the implementation was better and there seemed to be no prior entitlement to the money (in most cases at least). I would need to charge fees to go into details on why the court was wrong as it would take many pages of case law and legislative analysis. The nub is that the executives (in most cases at least) did not "obtain" the money for the purposes of s62(2)(b) when the cash was paid to the EBT and it is very odd that that section is not even set out in the decison. In any event, this case is only of persuasive authority in English courts, so you can argue it was wrong in a tribunal and the CoA certainly don't need to follow it (and almost certainly wouldn't).
Common sense is good
I imagine those making the laws would find it difficult to predict all the imaginative ways that tax dodgers 'find' to circumvent the law.
Income is taxed. Calling income something different to avoid income tax, and every other tax, is an artificial transaction purely to avoid tax and common sense says it is artificial and is done purely for tax avoidance.
If the income was taxed before being invested in the trust, or taxed when it was withdrawn, then there wouldn't be a problem. Tax would be paid on the income at some point.
The comparison to pensions was a red herring, as although money can go into pensions tax free (mostly), the resulting income is taxed when the pension pays out.
And Justin seems clear
that the payments are not taxable when paid into the ebt and were certainly not taxable when paid out of the ebt as loans, even though these were planned in advance, presumably because the trustees were completely independent. They just happened to make loans that were not to be repaid. This is clearly offensive to most people.
David
No. It is more basic than that. As I said above, have a think about how salary sacrifice works in practice i.e. HMRC expect that you should have no right (entitlement) to the salary beforehand for that to work (i.e. you should not have "obtained" it under s62 and so have no power to redirect it to tax free vouchers or pensions etc.), hence there is no scope for Julian's redirection argument there (if implemented properly) and the same should apply to EBT planning that has been implemented properly (without side letters indicating there was prior entitlement to the money as salary/bonus) and the Murray decision actually confirms that (yet makes a seemingly contradictory decision re some of the executives at least).
Work for free?
Justin. Are you saying that these employees had no expectation of payment (in one form or another) for their efforts? I don't believe that for one moment. If they had an expectation of payment then it is income based on their employment.
Salary sacrifice is limited in it's scope, as it should be, otherwise every man (and his dog) would be jumping on the bandwagon.
This sort of income relabelling should be illegal, if it isn't already. If it's a reward for the duties of employment, then it's income (or taxable benefits), unless some law specifically allows it, eg. pension contributions.
not written down
I agree with you, ShirleyM. Is it the fact that nothing was written down that means you can't prove they had an expectation of payment? I wonder if the tax lawyers rely on this, and why common sense can't be used to rule the payments as taxable
Imagine the dialogue ....
Employer: We would like you to work for us, and normally we would offer £25,000 per week, but instead we would like to give you a loan via a trust.
Employee: a loan? Why can't I get paid like normal people?
Employer: this way, we avoid employers NIC, and you avoid tax and NIC.
Employee: but a loan is a loan so the money will never be mine. What if I spend it and then you want it back?
Employer: the trustees wouldn't ask for it back.
Employee: you want me to just take your word for it? Will I get something in writing to guarantee that, else I could be working for absolutely nothing.
Employer: No. We can't put it in a written contract, else it will be seen as employment income.
Employee: so I will have nothing in writing? I have to trust your word that I will be recompensed for taking zero salary/pay instead of getting £25K per week?
Employer: Yes.
Employee (with brain and morals): Get lost! Is this a scam?
or Another employee: OK, but be warned, me and my mates will come gunning for you if I don't get paid!
Tricks and scams
Employer: We would like you to work for us, and normally we would offer £25,000 per week, but instead we would like to give you a loan via a trust.
Employee: a loan? Why can't I get paid like normal people?
Employer: this way, we avoid employers NIC, and you avoid tax and NIC.
Employee: but a loan is a loan so the money will never be mine. What if I spend it and then you want it back?
Employer: the trustees wouldn't ask for it back.
Employee: you want me to just take your word for it? Will I get something in writing to guarantee that, else I could be working for absolutely nothing.
Employer: No. We can't put it in a written contract, else it will be seen as employment income.
Employee: so I will have nothing in writing? I have to trust your word that I will be recompensed for taking zero salary/pay instead of getting £25K per week?
Employer: Yes.
Employee (with brain and morals): Get lost! Is this a scam?
or Another employee: OK, but be warned, me and my mates will come gunning for you if I don't get paid!
Very good. VAT is often referred to as a Fiscal Themepark, where realities are suspended. The tax avoiders friends are thumb-on-the-scale merchants of the highest order, working the magic cup stand at the fairground no doubt.
No amount of trickery or smart talk can change the fact that these footballers and managers worked for money and that money is taxable. Agreeing to pay your salary to someone else is fine, post the tax bill.
Having a common sense approach seems a brilliant idea.
We are all seeing the reports of footballers etc owing millions to the taxman having taken far too trusting an approach from these charlatans. Perhaps now many will agree, if it sounds too good to be true, it is.
Every single dodgy scheme I have seen has been 'signed off' by a barrister, often a QC. The Queen should remove that title from these people if they assist aggressive avoidance
No
That's not correct and you have misunderstood what I have said and I note you are not a tax specialist, so that is understandable and I cannot go on giving you free tax advice I'm afraid. Have a read of what John Avery Jones said in Dextra first instance, which is still good law and if you still don't understand I suggest you give up trying to do so and simply wait to see if this is appealed.
http://www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKSPC/2002/SPC003...
Not very community minded
Belittling other members and not willing to give any explanation as to why the detailed analysis given by others is wrong. Given you have also had the gall to suggest, in a free forum, that you would need to charge to provide an explanation and one wonders why you are a member here at all. Simply to defend such schemes when they are called into question, albeit in a vague and unhelpful manner? That's not correct and you have misunderstood what I have said and I note you are not a tax specialist, so that is understandable and I cannot go on giving you free tax advice I'm afraid.
I've now read the judgment, Justin.
I'm not a tax expert, but the decision seems perverse. It is so obviously a tax avoidance scheme, and the loans were so clearly remuneration. The so called independence of the trustees is ridiculous, when you see how tied in they were to E &Y. That's how the big Four make their name, with schemes like that. Makes you proud to be an FCA, doesn't it?.
I prefer the words ...
......... It is so obviously a tax avoidance scheme, and the loans were so clearly remuneration. .........
..... FAILED tax avoidance scheme. Another promoter ('ripper offer' of the country and its taxpayers) shown up for what they really are, which is selfish and greedy and feeding off the greed of others. I don't doubt some of the punters were naive, but it's the greed of the promoters that start the ball rolling.
These schemes always have a QC sign them off. Of course the QC always signs them off without quibble. They are being paid by the people that came up with the scheme!
This type of setup is no different to the “working wheels” scheme in that it’s artificial.
In the Rangers case, if it looks like a duck, waddles like a duck, and sounds like a duck, it’s argued that it’s actually a tiger.
Failed?
Justin says that Dextra is still good law! He can't be wrong about that, can he. He's an expert
It is what it says on the tin
An employee benefit trust is a trust set up for (surprise upon surprise) the benefit of the employees. They have been in existence for countless years: George Cadbury set up a trust for his employee in nineteen oatcake. When a person is hired, they will be told about the existence of the trust and that the employer will make contributions the trust. They will be told that they may benefit from the trust. So of course, when the employer makes payments into the trust he is doing so out of an obligation to the employees. But that obligation is to the employees as a whole, not any individual employee. That is how the EBT should work. Now Rangers may have got it all wrong with their side-letters, but that does not explain the decision in relation to those who had no such letters. And Shirley, the benefits from the trust are in addition to the wages, not instead of. Argumentum ad absurdum is not usually helpful.
All EBT's? or maybe just some EBT's?
The employee would be appointed protector of the sub-trust, and the trustee of the sub-trust would then lend the employee the money that had been advanced to the sub-trust from, ultimately, his employer.
The set up described above (extracted from the Court of Session judgement) does not compare to the benevolence of the Cadbury family.
EDIT: I am aware that wages were paid. Minimum pay is a legal requirement. However, if the going rate was being paid through payroll then this failed scheme would never have been necessary in the first place, would it?
PAYE salary levels-clarity?
The employee would be appointed protector of the sub-trust, and the trustee of the sub-trust would then lend the employee the money that had been advanced to the sub-trust from, ultimately, his employer.
The set up described above (extracted from the Court of Session judgement) does not compare to the benevolence of the Cadbury family.
EDIT: I am aware that wages were paid. Minimum pay is a legal requirement. However, if the going rate was being paid through payroll then this failed scheme would never have been necessary in the first place, would it?
Just to be clear, vis a vis the players, the wages through payroll would have been a considerable amount over minimum wages, they would have been paid at "footballer pay level" probably well above Hibs or Hearts pay level but possibly below Celtic pay level (If they were reduced because of EBT payments, as suspected) The fact that nobody at the league caught on they were "light" until knowledge of the EBTs emerged suggests they were not particularly low.
It is interesting that what was "going rate" for Rangers, and for that matter Celtic, really the reason they both collected the better players from the other Scottish clubs, was far more than that paid by the other clubs (in the main); anyone examining the respective turnovers of the clubs can see why this was possible, so there really was a two (or three) tier wage structure within the Scottish Premier . Rangers could well (and likely were) paying on average far more outwith EBT payments to their playing staff than the wages paid by the other Scottish clubs, there was a significant financial gulf between Rangers/Celtic and the rest-still is.
Re what was necessary to be paid , there is always the issue with Rangers and Celtic that better players will only sign with them for more than they might demand from a lesser club- agents sniff out what the clubs can afford and players are aware that one of the risks signing for a Rangers or Celtic may be more bench time so a "premium" is required to induce signing. (Think Scott Allan, how many starts since leaving Hibs?)
Whilst I suspect none of us know what the wages through payroll were I really cannot see Rangers having exhibited the contract of their star striker to the league showing he was earning say £20,000 per year (Per week possibly) without a few raised eyebrows from the league.We know that Oldco Rangers exhibited their contracts to the league as they were fined by the league because the contracts they exhibited were not the full picture- the EBT payments were not included.
The EBT payments were obviously top up/additional to these salaries paid through PAYE and declared, maybe the EBT payments included say "discretionary" win bonuses/performance bonus payments, who knows, but I think "Going Rate" as a concept when considering Rangers or Celtic is a pretty hard thing to measure as it appears to have little bearing on what the rest of the league paid in wages!
They
The employee would be appointed protector of the sub-trust, and the trustee of the sub-trust would then lend the employee the money that had been advanced to the sub-trust from, ultimately, his employer.
The set up described above (extracted from the Court of Session judgement) does not compare to the benevolence of the Cadbury family.
EDIT: I am aware that wages were paid. Minimum pay is a legal requirement. However, if the going rate was being paid through payroll then this failed scheme would never have been necessary in the first place, would it?
The EBT payments were obviously top up/additional to these salaries paid through PAYE and declared, maybe the EBT payments included say "discretionary" win bonuses/performance bonus payments, who knows, but I think "Going Rate" as a concept when considering Rangers or Celtic is a pretty hard thing to measure as it appears to have little bearing on what the rest of the league paid in wages!
I think Shirley has a point in that the "Going rate" on the payslip was not enough to entice the player to play for Rangers, otherwise Rangers would not pay this "additional" amount, or were they just very generous employers, more like benefactors? Then maybe the former shareholders could go against the former directors?
They would need to join the queue- Rangers old and new appear to be keeping the legal profession in Scotland in employment all by themselves. Not sure when the fraud etc trials are due to start re Messrs Whyte, Green and the Accountants etc. (sounds a bit like Reservoir Dogs) but if this bit is currently on the back burner we always have the EBT case or Whyte's bankruptcy or Mike Ashley seeking a review of whether Dave King is a fit and proper person to be a director etc etc etc
I am going to wait for the musical.
Loans -really
How can you say that loans to the executives which are never going to be repaid should not be taxed. How truly independent are the ebt trustees in practice, if not in theory. It's completely artificial but certain contributors aren't willing to accept this.