HMRC has won its tax case appeal against Glasgow Rangers after judges ruled that payments made by the football club’s former owners under the Employee Benefit Trusts (EBT) scheme ‘were taxable earnings’.
HMRC argued the payments had technically been ‘earned’ by Rangers employees, but had lost appeals at tax tribunals in 2012 and 2014. They avoided a hattrick of defeats as their appeal was upheld by three judges at the Court of Session in Edinburgh yesterday.
The scheme involved payments of up to £48m to various offshore trusts set up for footballers and other staff employed under the umbrella of former Rangers owner Sir David Murray's group of companies. The Murray group contended that the payments - made through the now outlawed EBT from 2001 to 2010 - were loans and not taxable income.
However, in the latest decision on what has become known as the ‘big tax case’, Court of Session judges ruled that if income was derived from an employee's services in their capacity as an employee, it was an emolument or earnings and “thus assessable to income tax”.
‘In accords with common sense’
Delivering the opinion of the court, Lord Drummond Young said HMRC’s argument “accords with common sense.
“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…
“The funds are ultimately derived as consideration for the employee's services, and on that basis they are properly to be considered emoluments or earnings.”
An unfair sporting advantage?
The judgement will not impact financially on the current Rangers setup, as the club went into administration in 2012, and then liquidation. The club then reformed in the Scottish third division in 2012 as a ‘newco’ consortium initially led by businessman Charles Green.
The tax liability falls on Rangers ‘oldco’, and will be considered by liquidators BDO alongside claims from other creditors from the club's 2012 financial collapse.
However, it remains unclear whether the verdict will lead to any sporting sanctions, as opposition fans have argued that the scheme allowed Rangers to gain an unfair sporting advantage by attracting players who otherwise may have not come to the club.
Analysis from Rob Wilson, Sport Finance Expert, Sheffield Hallam University
“Four or five years ago HMRC made a clear statement that they were going after professional sport teams that, in their opinion, were reusing money that was being deducted as national insurance contributions. This was being used to prop up various football clubs with short term cashflow problems and countless clubs got into trouble.
“Rangers were in trouble before their most recent takeover, and were served a winding-up petition from HMRC as well, so it’s fair to say it’s not new, but they should have known better.
“In terms of gaining an unfair advantage, absolutely they have. They’ve been able to use money that isn’t officially theirs, which has allowed them to field a more competitive squad. How much of an advantage we’ll never know, but I think we can safely say that the evidence points to clubs that spend more money being more successful.
“In terms of punishment, it’s more likely the Scottish Football Association (SFA) will take action rather than any government body. Although HMRC has been posturing about winding clubs up we haven’t seen them follow through on that for one reason or another – normally because someone comes in and saves the club, pays the bill and off they go again.
“Between them the regulatory bodies will look to take some sort of action, assuming the case is proved. Sanctions could be anything from a transfer embargo to a points deduction or refusal of entry to the league above if they were to be promoted.
“If the SFA were to sanction Rangers that would have an impact on the football club’s financial position moving forward. If they didn’t get promoted they wouldn’t receive greater revenue in the next season and that would damage their future financial prospects. We talk about off and on-field performance being inextricably linked, and again all the evidence we’ve turned up at the university supports that.
HMRC ‘will always challenge’ avoidance schemes
Commenting after their appeal was upheld a HMRC spokesperson said: “HMRC has a responsibility to make sure people pay what they owe and will always challenge tax arrangements where we do not think they work.
“As supported by the decision in this case, HMRC’s view is that Employment Benefit Trust avoidance schemes do not work.
“HMRC has collected over £1.3bn in tax through 1,500 users of similar schemes.
“HMRC will continue to settle appeals by agreement where appropriate but will if necessary continue to litigate cases where settlements cannot be agreed.”
Rangers fan groups have criticised HMRC's approach to the tax case, accusing them of wasting taxpayers money chasing a 'phantom debt' from a company that no longer exists.
Ruling gives HMRC ‘confidence’ to issue APNs for EBTs?
In a follow-on from the case, AccountingWEB user James Green commented on an Any Answers thread that the ruling has apparently given HMRC “confidence to issue APNs for EBTs.
“We inherited a batch of clients from a firm who merged with us who had undertaken extensive EBT planning”, commented Green. “The providers have been informed this afternoon – and have then informed us and the clients – that HMRC now believe that the issue of APNs is appropriate for EBT planning, whereas they had held off from this before today’s decision.
“The effect of the APN is tantamount to the case losing at this stage (although I understand that it may go to the UK Supreme Court) despite a couple of half-hearted suggestions of further JRs.”
The verdict may still be challenged in the UK Supreme Court by Sir David Murray or Rangers ‘oldco’ liquidators BDO.