HMRC has won its Supreme Court battle with Glasgow Rangers over the club’s use of Employee Benefit Trusts in a verdict that experts believe could have a ‘profound effect’ on similar avoidance schemes. Reacting to the verdict HMRC called for users of similar schemes to come forward.
In RFC 2012 Plc (formerly Rangers Football Club Plc) v Advocate General for Scotland five Supreme Court judges ruled that payments via employee benefit trusts (EBTs) are taxable income.
The long-running saga known as the ‘big tax case’ began when HMRC argued that around £47m paid to Rangers players, managers and directors between 2001 and 2010 in tax-free loans should have been taxed as earnings. The football club disputed this, and several tribunals found in their favour. However, yesterday the Supreme Court’s dismissal of Rangers’ latest appeal brought the curtain down on the case in the Revenue's favour.
A statement accompanying the judgement said: “The sums paid to the trustee of the Principal Trust for a footballer constituted the footballer's earnings. The risk that the trustee might not set up a sub-trust or give a loan of the sub-trust funds to the footballer does not alter the nature of the payments made to the trustee of the Principal Trust.”
The court's decision is unlikely to have any financial impact on Rangers now, as the club went into liquidation in 2012 and is now under new ownership.
The tax liability instead falls on Rangers ‘oldco’, and will be considered by liquidators BDO alongside claims from other creditors from the club's 2012 financial collapse.
Former Rangers chairman Sir David Murray said he was “hugely disappointed” with the verdict.
“The decision will be greeted with dismay by the ordinary creditors of the club, many of which are small businesses, who will now receive a much lower distribution in the liquidation of the club,” said Murray.
EBT schemes ‘do not work’
In a statement released after the judgement David Richardson, director general of HMRC’s customer compliance group, called for companies or groups who have paid staff via EBT to come forward.
“The unanimous decision of the Supreme Court supports our view that Employment Benefit Trust avoidance schemes simply do not work,” said Richardson. “This decision has wide-ranging implications for other avoidance cases and we encourage anyone who’s tried to avoid tax on their earnings to now agree with us the tax owed. HMRC will always challenge contrived arrangements that try to deliver tax advantage never intended by Parliament.”
The ruling gives HMRC the freedom to pursue other football clubs that have operated similar schemes across the UK, and experts predict that there could be dramatic implications both in the world of football and beyond.
Employee Benefit Trusts
The scheme involved tax-free loan payments of up to £47m to various offshore EBTs set up in Jersey for footballers and other staff employed under the umbrella of former Rangers owner Sir David Murray's group of companies.
The EBT payments were agreed in ‘side letters’ – separate agreements to employment contracts – that were hidden from the taxman and the football authorities (these side letters proved to be a key plank of yesterday’s Supreme Court judgement).
The Murray group contended that the payments - made through the now outlawed EBT from 2001 to 2010 - were loans and not taxable income. HMRC argued the payments had technically been ‘earned’ by Rangers employees, but the Revenue lost tax tribunals in 2012 and 2014 and was accused of ‘moving the goalposts’ and applying rules retrospectively.
At the Court of Session in November 2015 judges decided in HMRC’s favour, ruling that the payments made under the Employee Benefit Trusts (EBT) scheme ‘were taxable earnings’. In March last year, Rangers oldco liquidator BDO won the right to appeal against the Court of Session ruling, but yesterday’s verdict seems to have blown the final whistle on the ‘Gers.
For tax QC Jolyon Maugham the verdict is a profoundly important decision as a matter of principle.
“It confirms something that everyone knows anyway,” Maugham told AccountingWEB, “namely that the courts are now extremely hostile to what they regard as tax avoidance.
“The Supreme Court could have decided this in quite a fact-specific way but they didn’t. There are certainly comments [in the judgement] that will trouble all of those who have entered into EBT arrangements which they haven’t settled.
“HMRC will also be pleased because they’ve established that the desired tax treatment of EBTs is very difficult to obtain. It’s a big blow for those relying on their EBT treatments succeeding.”
In a comprehensive reaction to the verdict, AccountingWEB member Justin Bryant labelled it “a bit of a joke”.
“They are overruling Sempra by eliding a properly administered EBT subfund/loan arrangement with an obviously employment-taxable payment to your aunt instead of you at your request (see para 39) [of the judgement], combined with a fudge argument that just because the person is not defined as the employee in s62 that makes all the difference.”