Market leading insight for tax experts
View online issue

The Court of Session judgment: more on Murray Group Holdings

printer Mail
Speed read

Tax professionals continue to digest the impact of the Court of Session’s decision in the Murray Group Holdings case. The court applied a redirection of earnings principle to treat payments made by the employer to employee benefit trusts (EBTs) as taxable earnings. Contrary to some suggestions, the decision does not introduce a new principle but is instead a classic application of a 1904 case. Furthermore, the disguised remuneration rules may not apply to an EBT resulting from the redirection principle. Under that principle, the employee is the settlor, not the employer. HMRC is unlikely to agree, however, so some caution is required about future developments.

The Advocate General for Scotland v Murray Group Holdings Ltd [2015] CSIH 77 (reported in Tax Journal, 13 November) has rightly generated a great deal of interest, but there does not seem to be a consensus on exactly what it decided and what the implications are.
The latter will not become clear until the Murray Group decide whether or not to seek permission to appeal to the Supreme Court and HMRC announces how exactly it proposes to use the decision of the Court of Session in its ongoing enquiries.

No new principle

I do not believe that the Court of Session in Murray Group has introduced any new principle of law (whether tax law or otherwise).
In 1904, it was decided, in Smyth v Stretton (1904) 5 TC 36, that, where an employee agrees to the diversion of part of his or her salary to a third party, such as a retirement benefit scheme, the salary is chargeable to income tax as earnings, just as if it was paid to the employee. A payment is not prevented from constituting earnings because the employee agrees that the employer is to apply it in a certain way (rather than paying it to the employee). Effectively, the employer pays the salary to the third party as the employee’s agent.
The Court of Session used the word ‘redirection’ but I believe that, in this context, that word is synonymous with ‘diversion’ or ‘application’.
What is really striking about the Court of Session’s decision is that: 
  • it has taken a venerable principle of tax law and extended it to a completely new set of facts in which the employees ‘requested’ or merely ‘acquiesced in’ a part of their earnings being redirected into an EBT; and 
  • the court felt that the facts found by the FTT (principally directed to HMRC’s orchestrated scheme for the delivery of cash argument, though it was also addressed on a Smyth v Stretton directed payment of earnings argument) were sufficient to enable it to find the necessary ‘request’ or ‘acquiescence’ by the executives and footballers. 
The Court of Session said this was different from the directed payment of earnings argument presented at tribunal but, unfortunately, did not explain why.

Interplay with the disguided remuneration rules

Crucial to the redirection of earnings principle in an EBT context is that payments out of the EBT to the employee are not earnings. If they were, there would be double taxation. The Court of Session was very clear that, having decided that payments into the EBT were redirected earnings, the employee could not be subject to any further liability to income tax on that money, which became trust capital.
The situation is no different from that of an employee using part of his post-tax income to fund a trust, as settlor, for the benefit of his family. A payment out of such a trust to the settlor for family reasons would not be earnings.
The Court of Session does not expressly say that a subsequent payment by the EBT sub-trust to the employee would not be liable to income tax under the disguised remuneration (DR) regime.
Does this also follow from the redirection principle? It seems to follow from that principle that the employee’s sub-trust is not itself an EBT but a family trust settled by the employee. Whilst an EBT is an ‘arrangement for the provision of rewards or recognition in connection with employment’ and, therefore, within the DR regime, a family sub-trust settled by the employee out of his post-tax income (whether redirected or not) would not appear to be within the DR rules, because the reward or recognition occurs before the money reaches the trust.
That conclusion, if correct, would be an own goal for HMRC if it is relying on the DR regime to capture money currently sitting in legacy EBT sub-trusts. 

Where to draw the line?

The final intriguing point to emerge from the Murray Group case is how difficult it is to draw the line, particularly in the context of salary sacrifices, between a redirection of the employee’s earnings into a fund held by a third party and an employer’s contribution of an amount (not constituting earnings) into such a fund.
The Court of Session suggested, by reference to Forde & McHugh [2014] 1 WLR 810 and Edwards v Roberts (1934) 19 TC 618, that the fact that the fund is a contingent fund from which the employee will only benefit if the contingent event occurs may point towards an employer’s contribution.
By contrast, a payment to a fund in which the employee and his family have an absolute interest may point towards a redirection of the employee’s earnings.
However, this will not always be the case. The retirement funds in Smyth v Stretton and Edwards v Roberts were both contingent, yet the courts reached opposite conclusions.
In any event, the Court of Session made it clear that the redirection of earnings principle is not prevented from applying by reason only of the fact that the employee consciously accepts a risk that the third party controlling the fund may not use it to benefit him.
Ultimately, the question must be in each case: is the true nature of the payment that of earnings or of something that may mature into earnings.