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Rangers lose tax case replay

4th Nov 2015
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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.

Replies (55)

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By JCresswellTax
05th Nov 2015 09:01

who

Is paying the costs to fight this case at the Rangers end?

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By Aln B
05th Nov 2015 11:06

An interesting decision to read through -- legal precedents and case law are quoted at length for the bases of introducing the main, new approach to the case, along with supporting the decision finally reached.

And yet it is "common sense" that is applied to negate the existence of the laws at the time, along with the learned judgements in the previous Tribunals of experts in the area of taxation law.

There are several inconsistencies set out in the Decision, with most of the taxation world incredulous that this Appeal has been granted for the HMRC.

 

Did the EBT scheme provide an unfair advantage between 2001 and 2011 ? Well, Rangers FC in that period won 5 League titles, 4 Scottish Cups and 6 League Cups.

Not exactly overwhelming.  Even more interesting is the fact that in the ten years PREVIOUS to that (1991-2001) they won .... 9 League titles, 5 Scottish Cups and 5 League Cups.

So .... in the period under discussion, Rangers actually won LESS trophies than they did in a similar period before it.  I'd suggest that is hardly evidence of "unfair advantage" !!!

Rob Wilson's suggestion that: "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" means less the more you look at it -- any football fan will tell you that money spent doesn't "safely" equate with success.

 

There's little doubt that this judgement is unsound.

 

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By Stevie D
06th Nov 2015 14:00

Money vs Success: Direct correlation in Scotland?

Aln B wrote:

Did the EBT scheme provide an unfair advantage between 2001 and 2011 ? Well, Rangers FC in that period won 5 League titles, 4 Scottish Cups and 6 League Cups.

Not exactly overwhelming.  Even more interesting is the fact that in the ten years PREVIOUS to that (1991-2001) they won .... 9 League titles, 5 Scottish Cups and 5 League Cups.

So .... in the period under discussion, Rangers actually won LESS trophies than they did in a similar period before it.  I'd suggest that is hardly evidence of "unfair advantage" !!!

Rob Wilson's suggestion that: "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" means less the more you look at it -- any football fan will tell you that money spent doesn't "safely" equate with success.

There's little doubt that this judgement is unsound.

Perhaps at the risk of applying further common sense, does your example above not highlight that there is a direct correlation between the finances available to football clubs (particularly in Scotland) in relation to their competitors and the sporting advantage gained? As you rightly point out, Rangers were extremely successful during the period 1991 - 2001, during which time their potentially biggest competitors (Celtic) were in a state of disarray due to years of financial mismanagement.

Once a more level playing field was established following share issues and other capital raising measures, the funds available to Celtic were much greater and hence they could be more competitive with Rangers. So the decline in Rangers' success that you have highlighted above can be directly linked to the increase in wealth of Celtic over this period.

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By Paul Soper
05th Nov 2015 11:18

Unsound?

I must confess, not yet having read this judgement in full, that it can hardly be any more unsound than the previous judgements in the club's favour.  These are systems for delivering remuneration in a tax advantaged form, no more, no less, and as such could, in the old days, be regarded as a sham.  From these schemes through to PA Systems they all started when the lid was lifted on employer NIC so that it became a payroll tax.

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By Tom Herbert
05th Nov 2015 11:27

Thanks for your perspective Aln B.

I agree that money spent doesn't always guarantee success - Inter Milan spent a fortune in the 90s and just won a couple of UEFA cups for their troubles.

However, although I can't speak for Rob on this I believe the studies they've run at the university on spending in football have found that on average there is a correlation between league position and money spent. It's not without exception, but guess it depends on who is spending the money and how wisely they're spending it!  

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By Justin Bryant
05th Nov 2015 12:36

Analysis of judgment
Having read the judgment, especially para 60, the loan point is irrelevant. HMRC lost on that issue. The court is saying that the contribution to the EBT is taxable under s62 ITEPA 2003 as the individual is re-directing his earnings to be paid to a third party (the trustees). This is Gosh's new point. Earnings are received by employee but redirected. In the case of the footballers they clearly made a direction to their employer to make the contributions to the EBT by way of letters which arguably formed part of their employment contract. But in the case of the executives, contributions to the EBT did not form part of their contract, were entirely discretionary and were based on standard practice/an understanding between them and employer. Worryingly, their contributions were still taxed as earnings under the redirection of earnings doctrine.

Roberts and the recent SC Forde and McHugh case (concerning NIC) were distinguished for conflicting reasons. Seems like a bad judgment to me.

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By Aln B
05th Nov 2015 12:39

Tom, thanks for your reponse.

I'm not wanting to be too hard on Rob here, but as we both seem to agree, "correlation" between expenditure and trophies won isn't exact.  Otherwise ... any "advantage" that Rangers FC gained through this scheme would imo probably have been a lot more obvious.

 

I was listening to Jo Maugham on the radio and he seemed quite bemused at the decision in favour of the HMRC.

The entire Decision is quite riddled with the Judges' references to "common sense", and I suspect there must be some head-scratching going on and people wondering when HMRC ever agreed with that before.

The whole concept of having specialists forensically examining a case in two Tribunals, which is then passed up for Appeal to Judges with little grasp of the subject, to then overturn their determinations, is a real problem.

 

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By Tom Herbert
05th Nov 2015 12:47

An interesting...

... quote from Jo Maugham on Radio Scotland: "It is a brave man/woman who relies on common sense in the construction of tax statutes"

 

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By 0171097
05th Nov 2015 12:48

Squandering an advantage by mis-spending it does not negate the fact that the an advantage existed in the first place. Had they not had the financial advantage over their rivals they may have won even less in the period they operated the scheme.

The latest judgement largely echoes the dissenting opinion of Dr Heidi Poon in the first tier tribunal. Ultimately, the reason Rangers Oldco lost this case is because they failed to operate the EBT scheme within the rules as they stood. 

Are most of the Taxation World incredulous at this decision? Or are many just fearful at the consequences for their own business? I certainly wasn't surprised this time around - I was never in any doubt that these were emoluments masquerading as "loans." And the fact that many of the recipients also had side letters guaranteeing their payments suggests that they too were of that opinion.

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By Aln B
05th Nov 2015 13:21

"They may have won even less"

"They may have won even less"

Or they might have won more.  This is the problem with opinions.

Taxation specialists prefer to deal with the law as it stood / stands, with relevant amendments.

Opinions (and the hopes that some have) don't count.

The law is there to be applied.

 

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By 0171097
05th Nov 2015 14:02

I completely agree that we cannot ascertain what advantage Rangers gained on the pitch from the additional funds available to them. That's by the by.

However, I think we can be fairly confident they didn't abuse the EBT rules by pretending contractual emoluments were loans in the hope of lowering their competitive chances.

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By TMR
05th Nov 2015 13:29

CONFLICT APN'S AND RECOVERY

I must admit I have not read the judgement to this Appeal, but surely a direct conflict now exists between Murray Group and Dextra/ Sempra Metals?

Assuming Murray Group do not intend to appeal then how would HMRC propose to resolve this conflict ? particularly if they wished to issue APN's to those EBT schemes where genuine loans exist? 

There seems to be no distinguishing of a genuine loan from a sham loan and genuine loans resulting from investments made by trustees for the benefit of retirement of staff and executives now appear to be fair game for HMRC to attack.

This seems wholly at odds to those companies who have properly planned a retirement package for employees and executives but wished to maintain control over where investments were directed. The Government now recognise that large pension funds are maybe not appropriate and have given back to individuals a right to manage their own retirement package. 

By back dating this law change to retrospectively attack properly managed EBT schemes that now poses a significant unfairness as decisions taken by a company/trustee according to what was good law under Dextra/Sempra would likely not have been taken had they known the law at the time. This seems entirely unfair on the tax payer.  

As to recovery in the case of Murray Group, I understood that if HMRC failed to recover against the company then individuals who received the benefit of the loan would be attacked as a last resort. Does this mean HMRC will now go after these footballers and executives? 

 

 

 

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David Winch
By David Winch
06th Nov 2015 09:34

Dextra & Sempra

TMR wrote:

I must admit I have not read the judgement to this Appeal, but surely a direct conflict now exists between Murray Group and Dextra/ Sempra Metals?

Both Dextra & Sempra are expressly referred to in the judgment at paras 74 & 75.

In a nutshell the Court of Session concluded that in Sempra the Special Commissioners got it wrong & their decision "should not be followed".  That's lawyer-speak for Sempra is now dead & buried as a legal authority.

The Court of Session decided that Dextra was a case about (i) whether, & particularly when, payments made were allowable as an expense in the accounts of the employer and (ii) whether an employee might be liable to tax more than once on the same payments. Neither of those issues arose in the present case & so the Court of Session decided that Dextra was irrelevant to their decision.

David

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By Aln B
06th Nov 2015 16:13

Regarding the recent Decision and their reference to Dextra, I found it odd that the wording stated:

"Nevertheless, we are of opinion that the decision is not relevant because, as explained above, the present case cannot involve double liability to income tax."

I'm not entirely sure that this was the double liability that the respondents in this case were referring to.

 

As for the linkage between financial support in the game and on-field success, there surely has to be some (but not absolutely definite) connection.

As mentioned above, Celtic regrouped financially during the relevant period, but it's worth noting that of the 10 Cups Rangers won in those season, Celtic were the beaten finalists in only three matches.

Connecting finance to on-field success is a tricky and subjective business. A look at the current English Premier league table from the viewpoint of a Chelsea, Newcastle or Leicester fan demonstrates that.

 

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By Fridge Magnet
07th Nov 2015 00:01

So, some commentary on whether Rangers had an unfair advantage, as they won less trophies during the EBT years.

The push by David Murray was European football (since mid 90's) that yielded the club (company!) a better return with a minimum of £10M from participating in the UEFA Champions League - compared to winning domestic trophies.

An unfair advantage where an ex board member of Rangers went on to ply his trade at the SFA, having personally benefited from an EBT of his own, i.e. Mr Campbell Ogilvie.

Without participation in European football RFC would have come unstuck a lot sooner than 2012; just so happens that Administration was on the cards after being knocked out of the Champions League and Europa League at the qualifying stages, in autumn 2011.

David Murray knew the game was up and 'sold' the club (company!) for the princely sum of £1 (one pound!).

So, did RFC have an unfair advantage?

As they say, follow the money........

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By Aln B
07th Nov 2015 08:49

I'm not quite sure how the discussion on this has taken such a turn (although I suspect it will become more obvious as it develops ...), but it's worth mentioning again that big spending doesn't guarantee football success.  Europe included.

Big football clubs have always looked to "mitigate" or assist in avoiding tax for employees (in common with other large-salary employers).

Employees often look for such schemes themselves, whether they were EBTs or the recently highlighted "film company" tax  schemes (Inside Track & Ingenious, etc).  Football clubs look for property development partnerships where they purchase tracts of valuable development land for a solitary pound from a local council.  Football clubs also look to banks for substantial loans at impressively "friendly" terms.

All of the above paragraph has happened in Scotland, but not at Rangers.

All clubs (and employees) are looking for advantages -- the EBT scheme was one of them, with details lodged with both football authorities and HMRC..

The manner of the recent Decision in negating specialist Tribunal assessments as to legality and propriety appears unsound.  Whether the liquidators BDO will go ahead with a further and final Appeal is something else.

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By thehaggis
07th Nov 2015 11:36

Ludicrous

Some here seem to be saying that because the EBT was implemented badly, there was an advantage on the field, but had it been implemented correctly (probably just without the side letters) then there would be no advantage.

How did these side letters improve the footballing skills?

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By WhichTyler
07th Nov 2015 16:14

Marginal effect

thehaggis wrote:

Some here seem to be saying that because the EBT was implemented badly, there was an advantage on the field, but had it been implemented correctly (probably just without the side letters) then there would be no advantage.

How did these side letters improve the footballing skills?

A misunderstanding I think, It's not paying higher wages to the same player that makes the difference, but attracting better players over time because you can afford (or at least are willing to pay) higher wages that helps.And a more tax efficient structure helps that affordability.

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By thehaggis
07th Nov 2015 18:10

So What?

How does that give an unfair advantage?  Tax efficiency is available to all.

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By Aln B
07th Nov 2015 22:20

I understand the position that some may take on this issue -- they believe that somehow this scheme translated to an ability to attract greater talent, unfairly.

The Decision even had the Judge going out of his way to point out that the situation could have had an effect on the players the club attracted.

However, football is nothing like our world of commerce and industry.  Many players are fans of clubs, or wish to have an easier time at a club still with trophy hopes, but in a relatively easier league.

For example, Alex Rae was one such player -- given the choice between a quite lavish contract at Blackburn, or to finally play at the home of his childhood heroes, he chose Rangers.  Several other Scots fell into this category -- fans who would have played whatever the wages.

Other domestic players, such as Marvin Andrews, came to Rangers from far smaller clubs because they were guaranteed first team, top level football.  Something they could never dream of at any other club.

More established (and potential) internationals came to the club because it was a 50/50 every season what European competition it would be playing in.

The problem with stating that players came only for the wages is that if that were so, they would all be playing in Turkey or England or in the MLS in America.  Players sign for and stay at football clubs in certain countries for a multiplicity of reasons, and the Judge's statement in the Decision on this matter is so simplistic as to show naivety or maybe just plain ignorance.

 

A major issue that I also have with this is ... have the players concerned ever actually been ASKED about this ?  "Did EBTs determine why you signed for / stayed at Rangers ?"

We know that Alex Rae and Artur Numan have already stated that EBTs played no decisive part in their reasons for being at the club.  If the other players haven't been asked, why not ?

 

 

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By 0171097
09th Nov 2015 13:18

I'm sure players, managers and club officials et al will tell all kinds of fantastic tales when looking for a favourable write up in the Daily Record. I would too.

However, this is what Mr Black (who I believe to be David Murray - happy to be corrected on this) said in evidence to the FTT: As for Mr Black, he denied that the scheme was for tax avoidance in cross-examination, though he went on to describe the scheme as  ‘a method of us acquiring, especially football wise, better players in a more cost effective manner than we would be able to do so’;  that the club had been ‘very ambitious at that time’;  and ‘it was seen as a correct and proper way for us to proceed’;  that Rangers ‘have been very successful, because we’ve been able to attract players of a certain standard that, perhaps, we may not have been able to otherwise’ 

As I've already said, they didn't do this with the intention of lowering their competitive chances.

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By Aln B
09th Nov 2015 15:42

It's easy enough to smear individuals and suggest that players, if asked about whether EBTs were the main determination of their time at Rangers, wouldn't tell the truth.  Easy enough to say such a thing about the very people who would (we are told) benefit from the scheme.

Equally, it's easy enough to suggest that the former owner of a club who was on the point of being linked to an investigation into a fraudulent takeover of the club, and who in any case rather left that club in the lurch by patently giving it away to an obvious crook; he himself might not be an entirely trustworthy source of evidence to base a case upon.

Rangers certainly didn't do this all with the intention of lowering their competitive standards, but one thing IS true -- it was commonly accepted that it was legal at the time.

As legal as all the other things that clubs do (not Rangers in this instance) in getting amazingly low-interest interest rates for multi-million pound loans, three streets cleared of residents and demolished for development to be sold to a club by a local authority for £1, or employees and club officials being caught using tax evasion schemes like Ingenious and Inside Track.

Although to be fair, the last one isn't legal, so maybe something should be done about that, with that other club ?  After all, players who were receiving tax benefits illegally were able to play for a team that could pay lower wages -- that other club associated with that wheeze has obviously had the benefit of not paying enough wages to players it attracted who were cheating the tax system ?

This is the type of contortion that the amateur tax specialist goes through it seems.

It is enlightening for many non-Scottish readers on here to see the angst that this issue raises when Rangers FC are involved (even peripherally).  It's educational perhaps to consider that Arsenal never faced any such statements of "they couldn't afford them", "cheats", or "strip their titles" !  Neither did Chelsea or Liverpool.  Newcastle and Leeds were never branded in such a manner.

It seems that Rangers FC have become a special case, even though an Appeal may still be made, and most tax specialists appear to agree that the Decision is unsound.

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By 0171097
09th Nov 2015 16:30

You're not suggesting Sir David Murray lied under oath are you? Now that is a smear.

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By Aln B
09th Nov 2015 19:11

I'm suggesting that Mr Black, who seems to be David Murray (who also mentioned that he was not actually involved in any of the actual contract decisions, yet was the biggest beneficiary of this entire EBT scheme at Rangers!) is as credible a witness as the man he sold the club to.

I doubt if you'd find many people in Scotland (on any side of a fence) who would believe a word he said.

It doesn't alter the fact that most tax jurisdictions offer opportunities to redirect income to tax free or tax deferred vehicles -- payments into qualified pension funds being the obvious example. As such, properly constituted payments into an EBT may very well be legal (which is what most tax specialists consider is likely to be decided by any Appeal to the Supreme Court).

IF such an Appeal goes ahead.

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By TMR
11th Nov 2015 08:44

Aln B wrote I'm suggesting that Mr Black

Bringing us back to the legal/tax issue rather than vitriol between Rangers and non Rangers supporters which is I believe the main forum of this web site, I don't think there is any doubt that payments in to an EBT scheme are legal, it is the disguised remuneration angle of payments out that seems most relevant, at least from a common sense aspect.

Both HMRC and the Courts seem to have extreme difficulty in deciding what constitutes a loan and what constitutes remuneration. This applies as much to trusts as to simple corporate only structures.

One would think after all this time they could get their act together so that we as tax payers/tax advisors could make the necessary right decisions in conducting our affairs and affairs of our clients in order to legally and morally minimise tax liabilities.

What becomes even more incredulous in this whole sorry saga is that it has taken some 14 years to get to this point and yet it still remains unclear, furthermore the fact a government body can not only change what was 'good' law in the past, but can apply it retrospectively,is quite rediculous.

I don't think it takes a lot of intelligence to conclude on the 'basic principles' of what is a loan and what is remuneration, and as previously mentioned in this blog, no one of common sense can be particularly surprised that these loan payments turned out to be judged disguised remuneration. The main problem of the judgement is it now leaves so many properly constituted and managed EBT schemes at the mercy of HMRC individuals who, contrary to their own internal statements only want tax payers to pay the 'fair amount of tax' take the view the tax payer must pay the maximum amount of tax, fair or otherwise.

The judgement may help to bring an end to Rangers should no appeal be forthcoming, but as for the rest, well I suppose it's just more money for the lawyers and continued argument as it all remains 'as clear as mud'.

 

 

 

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David Winch
By David Winch
11th Nov 2015 13:08

@TMR
It seems the Court of Session concluded that the payments made by the employer were perfectly legal - but PAYE should have been applied by the employer when the payments were made (initially to the first trust).

So EBT or not doesn't come into it - the payments made by the employer were remuneration from Day 1.

I guess that if the employees had also been shareholders & the payments had been dividends on their shares then PAYE would not have applied to them.

David

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By TMR
12th Nov 2015 09:37

The charge to Paye and Nic

David, thank you for pointing out the Court of Session conclusion regarding first payment in to the trust as the point at which the company should charge paye and nic. And yes I understand this argument which HMRC have often raised, however it seems to me this is like throwing mud in to an already muddy pool.

 

If it's the first contribution that is the root of the argument then why through this case and so many others before it, is the "loan" issue by the trust to the individual argued over to the extent it is? Let alone the practicality of a company being able to calculate the paye and nic it should pay never appears to be considered. A holding company making a contribution in to a trust for the future benefit of thousands of individuals some of whom maybe foreign and work on foreign soil for a foreign subsidiary and some of whom may not yet have even been employed, is simply impossible. Or am I missing something ?

 

I can quite clearly see that the contribution itself should not be expensed by the company and chargeable against its taxable profits. That seems logical and where the company has adopted this approach as well kept the Trust asset on its balance sheet as an uncontrolled asset it would seem a fair and reasonable approach.

I can't see the logic, if a company is well aware of the rules, as to why it would ever consider making contributions in to such a trust in the first instance, and surely it's only fair a tax payer is afforded knowledge of the tax effect of his actions so he can take appropriate decisions?

In this situation 14 years have lapsed where successive governments and HMRC have stirred the muddy pool in order to entrap the taxpayer. Logic would dictate where such an important issue as this has arisen and where endless governments bemoan taxpayers for their attempts to legally "avoid" tax,  a simple and early enactment that contributions to trusts are treated as earnings for paye and nic via legislation, would have allowed many people who are now faced with uncertainty (let alone potential bankruptcy of many unsuspecting companies) to take a different and far more appropriate approach. 

 

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By Aln B
11th Nov 2015 14:49

Nice to see a return to taxation discussion rather than otherwise.

I noted on Jo Maugham's twitter his tweet on "Even HMRC must wonder whether the Rangers case is correctly decided ...", where he has a screenshot of S.62 from EIM42785, on an "example of a successful salary sacrifice".

I have to say that it does look very similar in style.

 

btw, TMR's point on the worrisome aspect of HMRC's ability (and increasing willingness) to apply legislation retrospectively is one that could also be approached with a veering moral compass.

If modern-day taxation laws were applied to (for example) incomes, transactions and capital gains over the last twenty, fifty (a hundred ?!) years -- it would certainly bring in a barrowload of revenue.

Where does it stop ?  Or ... when will it start !

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David Winch
By David Winch
11th Nov 2015 18:08

@Aln B
Isn't the key difference that in any event a contribution to a recognised pension scheme would not attract PAYE because of express statutory provisions relating to pension contributions (whereas there is no corresponding statutory exception for contributions to a trust such as that in the Rangers case)? See EIM42755.

With regard to retrospective legislation I think that the courts would say this is not retrospective legislation, it is merely a new & corrected understanding of the legislation which was on the statute book at the relevant time.

I appreciate that such an explanation may not be very attractive to a taxpayer particularly if in the light of this new & corrected understanding HMRC 'discover' an underpayment of tax & NIC!

David

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By Aln B
11th Nov 2015 19:40

Fair points David.

I always worry when the situation of a "new" understanding of pre-existing legislation comes about -- it's something that must concern many people across all walks of life.

We can now only wait to see if BDO (or another ?) will go to the final Appeal.

I'm not sure what the balance of pressures upon BDO will be at this point -- I'd be surprised if they weren't approached by a few outside (but interested !) parties with a view to funding any such move.

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David Winch
By David Winch
12th Nov 2015 09:33

A couple of thoughts

More generally in relation to interpretation of the law, it may come to pass from time to time that there is a new & 'corrected' interpretation of what the statute law means.

In relation to criminal law this happened a few years ago when the Supreme Court interpreted confiscation law in a way which made it in some respects less severe than had previously been thought.  Of course defendants who had been dealt with in accordance with the previous (mis)understanding of the law then sought to appeal. 'No dice' said the Court of Appeal.  You were dealt with in accordance with the law as it was understood at the time & even though that now appears to have been unjust the finality of court decisions must be respected. We cannot entertain an appeal simply on the grounds that the understanding of what the law means has changed since your case was dealt with.

There is a logic to that, even though it may appear harsh.  If it were not so our appeal courts could be overwhelmed with re-hearing old cases every time there was a reinterpretation of some statute or another.

But I am not at all clear as to whether in similar circumstances in tax matters HMRC might be permitted to make a 'discovery' & raise new tax assessments simply because their understanding of the law had changed.  Perhaps one of the tax experts on here could clarify that?

On a different point, in the Rangers - Murray case I understand the First Tier Tribunal made findings of fact which, in the event, have proved unhelpful to the taxpayers - for example that certain payments were in discharge of an "obligation" to the employees.

So it seems to me that if an appeal is to be taken to the Supreme Court in relation to EBTs it might be better if it were not this appeal.  Just a thought!

David

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By TMR
13th Nov 2015 08:18

A couple of thoughts

David 

You make a very good point that maybe this case is not the right one to go all the way through to the Supreme Court. It's interesting to note that HMRC did not pursue previous EBT cases and by failing to appeal those decisions which went against them is indicative that they too were not convinced of their own position at the time.

By waiting so long to take a 'weak' case (for the taxpayer) through the appeal procedure and not appealing those earlier decisions, is not HMRC guilty of entrapment?

Of course they will say they have always believed Trust contributions are effectively remuneration but their actions belie such statement.There is probably not one singe company with an EBT arrangement today who would have carried out the transaction had Dextra gone through the whole Court  process and had it ultimately lost.

Of course to be successful in such a charge against HMRC the tax payer would need to have a complete review of documents, minutes and testament as well cross examination of HMRC personnel at the time to fully understand the motives behind their decision not to appeal those earlier cases.That may be an interesting court case.

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David Winch
By David Winch
12th Nov 2015 10:14

Wood & trees

I think the Court of Session are saying that in the Rangers - Murray case the First Tier Tribunal & Upper Tribunal had 'lost the plot' & could not see the wood for the trees.  There was, in the Court of Session's view, no need for the Tribunals to closely ponder the terms of the trusts since, by that stage, a PAYE liability had already been triggered by the 'redirection' of employee remuneration.

To consider that the payments into the (first) trust were anything other than employee remuneration would be an 'affront to common sense' thought the Court of Session.

But, as you say, an awful lot of time & energy has been spent on the construction of EBTs & the consideration of the tax implications of them.  At a stroke the Court of Session has (apparently) made all of that irrelevant.

Of course there has been further legislation in the 14 years to which you refer.

I would query the point you make about the payments NOT being allowable expenditure for the employer.  If they are employee remuneration then surely they are allowable expenditure?

But, yes, perhaps this area would best be described as a melange of muddy pool & quicksand!

David

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By TMR
12th Nov 2015 11:52

Wood and Trees

Thank you again David, the point was that even if there had been clear legal interpretation a long time ago, and even if there had been clear and early legislation and we as taxpayers all knew that contributions to trusts would explicitly trigger a paye/nic liability upj contribution, and even taking this all in to account were we stupid enough to still make that decision, how on earth could it be calculated when the recipient is not known let alone could be foreign? Am I missing something?

I am not saying the expense was not allowable, merely that the company considered it was not an advance of remuneration, and was therefore not wholly, necessarily and exclusively for the purpose of the business, as such on it's own account did not ask for a deduction. Which of course was happily accepted by HMRC. 

 

 

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David Winch
By David Winch
13th Nov 2015 08:33

@TMR

I think it is just routine to choose to fight the battle which you think you have the best chance of winning!  All's fair in love & war (& tax & legal arguments & politics & . . . ).

An argument can be made on every new case that it is different on the facts from previous cases & therefore the decisions in those previous cases should not be followed.  That's bread & butter for lawyers!

David

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By TMR
13th Nov 2015 14:07

How to calculate the liability

Does anyone out there know how to calculate a paye/nic liability when the recipient isn't known or may even not yet exist?  

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Hallerud at Easter
By DJKL
03rd Dec 2015 17:36

It appears that BDO have sought leave to appeal

 

"“Following discussions with the company's legal advisers and the liquidation committee, the joint liquidators have filed an application seeking leave to appeal the Inner House of the Court of Session decision in respect of the EBT case."

So, the fat lady has  maybe not sung just yet

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By TMR
07th Dec 2015 16:33

Leave to appeal

I understand counsel for the taxpayer does not have very much appetite to take the footballers case to the Supreme Court rather only the executives. As previously commented this case was maybe selected by HMRC on the grounds it was weak for the taxpayer.  The side letter connected to the footballers employment contracts has clearly always dogged the taxpayers' argument, and one can only presume this is a good decision on the part of the taxpayer to only appeal the executives case. Does anyone have any further information?

If so the case should undoubtedly now fall on the paperwork surrounding the 'loans' to the executives and whether they are or are not 'genuine'. I do not profess to know whether the loans were made on commercial terms or are capable of being repaid or indeed have already been repaid? 

Many have commented it is incredulous to believe that 'loans' made to footballers was anything other than disguised income, it would also be incredulous to believe HMRC could win an argument that 'genuine' loans can be treated as income for paye/nic purposes, especially ones that have maybe already been repaid. Company loans to executives are not treated as such so why should loans through any other means, it seems an entirely unfair treatment.

By the changes HMRC/HMG forced through in the FA 2011 there can no longer be much interest in any party to EBT loans made prior to FA 2011 now being repaid. IF HMRC are so convinced all EBT's were set up with the sole intention of tax avoidance, why don't they review and re-think the onerous impositions they have made on the taxpayer in the FA 2011. That would start to weed out the genuine from the non genuine.

The argument it's the contribution itself not the loan that implicates the onus to paye/nic is lost by the fact so much emphasis is based on what subsequently happened to the money, let alone my earlier comment, it becomes totally impractical to calculate paye/nic when the recipient isn't even known.

 

 

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By Justin Bryant
07th Dec 2015 16:49

The loans

Are a red herring. Even Julian Gosh QC accepted they were real loans e.g. the planning sought to deduct loans from IHT estate etc. Heidi Poon's Ramsay analysis of the loans was flawed and was not followed.

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By TMR
07th Dec 2015 17:47

The loans

Maybe I am missing the point. Loans are loans, income is income. If it's a loan and its repaid how can that be income. And what happens when it's re-loaned. Tax on tax?

 

Also how can a contribution to an unknown person be calculated? 

 

Maybe it is a red herring but the herring's got through my net. Can you please maybe expand on the point you are making? Thanks.

 

 

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By Justin Bryant
07th Dec 2015 17:55

You said above
"If so the case should undoubtedly now fall on the paperwork surrounding the 'loans' to the executives and whether they are or are not 'genuine'."

But you are wrong, as HMRC have now accepted the loans are genuine, hence JGQC's new redirection argument.

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By TMR
08th Dec 2015 17:04

The point I am making

Justin thank you for taking the time. I appreciate you are telling me what the Judges have ruled upon, but I remain curious, which no one seems capable of answering, maybe you can help?

 

If a contribution is made prior to FA 2011 in to an EBT, and the individuals receiving subsequent loans from said contributions are at that particular time not known, how can the company which contributed the funds calculate paye and nic?  

 

Secondly when a loan is made to a particular individual, which would I accept allow the company to calculate a paye/nic liability, then what happens when the loan is repaid? And then what happens when a subsequent loan is made to a new individual?

 

The judges can say what they like, us minions have to deal with the practicalities. Can you help? Thanks.

 

 

 

 

 

 

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By Paul Soper
08th Dec 2015 18:19

identity....

Although the case was anonomised the identity of each of the participants is known to the company so the points made above about calculation when the person's identity is not known is irrelevant.  Schemes such as this depend on loans which, whilst possibly genuine, are never intended to be repaid.  Assuming that the company would bear the liability the sums involved would be grossed to identify the liability.  However if the loans are genuine why isn't the liquidator pressing for repayment from all of the staff of the Murray Group who benefited when the scheme was first introduced but more to the point from the players and management staff of Rangers FC who benefited in the later years of the scheme.

 

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By TMR
09th Dec 2015 21:15

Identity

We have been informed the loan is irrelevant as it's the contribution to the scheme that strikes the paye/nic liability. If this is true, then how does the company know at the precise time of the contribution just who loans from it's contribution(s) are going to be made to?  Simply it can't. They could be foreign working for a foreign subsidiary under which HMRC has no jurisdiction to charge paye/nic and it could be anyone of possibly hundreds of possible participants. So by saying the person's identity is irrelevant cannot be correct. For a company to calculate a liability it has to know the precise amount and to which precise person at the precise time, and whether that person falls under UK tax jurisdiction.

I do agree that on a subsequent loan or other payment to a particular individual in the scheme it's then, and only then, possible for the company to calculate the liability. However it seems hypocritical that loans made directly by companies to their execs/employees are not treated as income for paye/nic purposes but loans from a trust are. That cannot be deemed fair treatment to the taxpayer, and whoever heard of a genuine loan being treated as income in any case?

HMRC follow similar principle to yourself when saying the loan (whilst possibly genuine) is never intended to be repaid. Well certainly following the changes made to the FA 2011 by HMRC and HMG concerning 'future' loans, any genuine loan made prior to the FA 2011 is now even less likely to be repaid.

As I have stated, IF HMRC are so certain that loans are never intended to be repaid, then they should re-think the onerous rules they have now laid down and let's sort out once and for all the genuine from the non genuine.

As to the liquidator, the contributions have been made to a trust and at that stage the company no longer had any control or indeed interest in the monies, so they, representing the company, have nothing to gain by chasing the repayment. Of course they could avoid a paye/nic liability on the company (should HMRC ultimately win this case) IF HMRC accepted that loans (particularly those that are repaid) do not get charged paye/nic. I doubt however the liquidator has appetite to avoid the liability as the company is totally bankrupt in any case. Liquidators are far more concerned with collecting assets rather avoiding liabilities.

The question of repayment of 'loans' should be addressed to the trustees not the liquidators, but given that this seems also pointless (HMRC being convinced paye/nic liability applies regardless repayment, and that the liability in any case is applied against the company), makes it even more,  a "pointless" waste of time in this particular case. It's the solvent companies HMRC have in mind here!

 

 

 

 

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By Paul Soper
10th Dec 2015 19:00

Seriously?

As this was a remuneration scheme do you seriously believe that the company had no idea which loans may be made and to whom?  Seriously?  This is a Scottish company remember, they knew exactly, to the bawbee, which sums were being paid, and to whom, and what would be advanced as loan...

 

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David Winch
By David Winch
10th Dec 2015 19:14

The judgment says this at para [2]

A company in the Murray Group which wished to benefit one of its employees made a cash payment to the Principal Trust in respect of that employee

So in the decided case it would appear that right from the start particular payments referred to identified employees - so PAYE could have been operated on those payments.

David

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By TMR
11th Dec 2015 09:25

Seriously

Maybe in the Murray Group case the particular facts show that specific contributions were for specific loans to be paid to specific people at a specific time with no intention of them ever being repaid. This does not apply to all EBT cases of course, which was a point I was making.

In the case of the Murray Group it could, under these particular circumstances, be argued this is identical to the side letter argument without the documentation. However that suggests the loans are not genuine, but I am led to understand from the above, the Judges in this case have already accepted the loans are indeed genuine.

Prior to the FA 2011, good law existed pertaining to Dextra and Sempra. Additionally, companies could make loans and indeed still can, to employees and execs provided they gift HMRC an interest free loan of 25% of the amount loaned until repayment. I don't wish to extend in to the argument that loans to execs are illegal, just the practicalities of what happens.

The draconian law put down in the FA 2011 have of course now changed the geography dramatically. The disguised income provisions now dictating that such loans must be treated as income for paye/nic purposes. HMRC are of course now trying to retrospectively apply the law to loans made prior to the FA 2011, which puts the taxpayer in a rather unfair position.

All other arguments aside, and repeating HMRC's wish to treat taxpayers 'fairly', one could only suppose a genuine loan made via an EBT prior to the FA 2011 rather a direct loan from the company, simply avoided paying an interest free loan to HMG for the duration of the loan period.

The point I am making is that the draconian measures clearly prevent or at least do not assist genuine loans now being repaid post FA 2011 as this rather ring fences funds in an EBT.  This clearly assists HMRC's non genuine loan argument.

It would have been far better that the rules in place for company loans should be similarly followed in an EBT in which case there is a level playing field.

HMG and HMRC rather shoot themselves in the foot most of the time by not fully considering the laws they lay down. Repeating the old adage, the taxpayer has a moral right to conduct his affairs to pay the least amount of tax. The pendulum has swung from genuine loans via ebt's being a legal method of avoiding making an interest free loan to the Chancellor, to genuine ebt loans being an absolute non starter in reducing ones tax liabilities.  

Returning to the specifics of Murray Group, IF these are genuine loans and until the judges rule they are not genuine, then from a practical point of view what does HMRC propose when the loan is ultimately repaid if they have already imposed a paye/nic charge as they are trying ?  Are they suggesting the original genuine loan to Mr A falls under paye/nic and makes a tax charged accordingly and then when Mr A repays his loan and the money is re-loaned to Mr B it is again taxed under paye/nic? 

 

 

 

 

 

 

 

 

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David Winch
By David Winch
11th Dec 2015 10:29

The decision in the Murray Group case

At risk of stating the obvious, the decision in the Murray Group case is precisely that.  It is the decision in the Murray Group case.

What that decision primarily did was to confirm that "Don't pay me, pay my mum" does not work. It was not a decision which, in any sense, outlawed EBTs.  The judges did however conclude that Sempra "should not be followed".

The judges were not seeking to treat taxpayers "fairly" nor to make policy for the government or HMRC.  They were seeking to apply the statute law as it stood at the relevant time to the facts of what had happened at Rangers / Murray.  They were not addressing other possible scenarios which you describe.

You may say that following what appears to be the logic of the Murray decision in other circumstances would produce a dog's breakfast.  That may well be true.  It would not be the first time that a precedent created in one set of circumstances would appear to cause problems in another.  This is why lawyers have become expert over the years in 'distinguishing' their own (new) cases from unattractive precedents on the grounds that the facts in the new case are different (which of course they are always going to be).

David

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By TMR
11th Dec 2015 13:27

The decision

David

Understanding all of that and understanding even the company could calculate paye/nic (knowing the ultimate destination of the funds it contributes), how in your opinion would HMRC propose to deal with paye/nic on an ultimate repayment of a genuine loan in this scheme, and it's re-loan to another individual?  Surely paye/nic cannot be applied on the same income?

 

It would be interesting, if in the intervening period prior to the appeal, just one individual in the Murray Group scheme made a repayment of his/her loan to the ebt, and possibly a re-loan to other indivoduals. 

 

 

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David Winch
By David Winch
11th Dec 2015 17:41

Ask HMRC

TMR wrote:

David

how in your opinion would HMRC propose to deal with paye/nic on an ultimate repayment of a genuine loan in this scheme, and it's re-loan to another individual?

You need to ask HMRC, not me!

David

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