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The Rangers case and the redirection of earnings principle

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In the latest fixture in the Rangers case, HMRC has scored what it will consider to be a significant victory following the Court of Session’s decision to treat loans made from employee benefit trusts (EBTs) as taxable earnings. The court accepted HMRC’s primary argument that the trust arrangements amounted to ‘a mere redirection of emoluments or earnings’ and were accordingly subject to income tax. This new redirection of earnings principle, a pragmatic substance over form approach, prevailed over the technical analysis of trusts and loans addressed in the tribunals. It remains to be seen whether the case will be appealed; but, as it stands, HMRC is likely to use this decision as a basis to vigorously pursue companies which did not take up the EBT settlement opportunity.

The opinion of the Court of Session in Advocate General for Scotland v Murray Group Holdings Ltd and Others [2015] CSIH 77 was published on 4 November 2015 (and reported in Tax Journal, 13 November 2015).
This is the latest decision in the long running ‘Rangers case’, involving the former owner of Rangers Football Club (and other companies in the Murray Group), and the way in which it paid certain of its players and employees prior to its liquidation and subsequent sale to new owners.

The background

HMRC raised assessments to income tax under PAYE and NICs on five Murray Group companies, in respect of transactions involving an employee benefit trust (referred to in the proceedings as ‘the principal trust’) during the period from 2001 to 2009.
The scheme involved the establishment of 108 sub-trusts for the benefit of the families of employees of certain Murray Group companies. Typically, the employing group company made a cash payment to the trustees of the principal trust, with a recommendation that the sum be allocated to a sub-trust established for the benefit of the relevant employee’s family. The employee was appointed ‘protector’ of the sub-trust and could name its beneficiaries. The trustees of the sub-trust then made loans to the employees at commercial rates of interest but on a discounted basis.
The use of employee benefit trusts to provide benefits to employees without the proper payment of income tax and NICs had been under HMRC’s spotlight for some time. Legislation was introduced into ITEPA 2003 in 2011 (Part 7A), which meant that from 9 December 2010, most loans made by trustees and other third parties to employees would be subject to an immediate charge to income tax and NICs. In the light of this, until 31 March 2015, HMRC made available an opportunity to settle outstanding PAYE and NICs liabilities in relation to employee trusts on beneficial terms (the EBT settlement opportunity (EBTSO)).
The case remains an important decision for those companies which did not take up the EBTSO and which may be in ongoing dialogue with HMRC regarding the use of trusts prior to the implementation of Part 7A.

Tribunal decisions

The First-tier Tribunal (FTT) held in a majority decision that the benefits provided through the trust arrangements were not emoluments or earnings and that no income tax liability arose (see [2012] UKFTT 692 (TC)).
This was on the basis that the trustee of the principal trust had a genuine discretion as to how to apply the funds advanced to it by the employer, and the allocation of the funds to a sub-trust merely represented the exercise of that discretion. Accordingly, the benefit enjoyed by the employee and his family resulted from the exercise of a discretionary power by the trustee of the sub-trust.
The dissenting judge considered that, on the principles of WT Ramsay v IRC [1982] AC 300, the arrangements were an orchestrated scheme to place sums unreservedly at the disposal of the employees and should be taxed as earnings.
HMRC appealed to the Upper Tribunal, which on 8 July 2014 refused the appeal (see [2014] UKUT 0292 (TCC)). However, HMRC was granted permission to appeal on one ground to the Court of Session in Scotland.

Court of Session’s opinion

The Court of Session permitted HMRC to introduce a new ground of appeal which had not been argued in the FTT or Upper Tribunal. This was that the payment of monies by the relevant employer to the principal trust (or alternatively the appointment of monies by the principal trust to the sub-trust) constituted a payment of taxable earnings. HMRC argued that the scheme amounted to a redirection of earnings which did not remove the employee’s liability to income tax, simply because it was paid by a third party.
The new ground was allowed, on the basis that the Court of Session considered that it required no new findings of fact and the argument raised an important point of principle and practice.
The Court of Session allowed HMRC’s appeal and accepted its primary argument that the trust arrangement amounted to ‘a mere redirection of emoluments or earnings’ and was accordingly subject to income tax. A secondary submission raised by HMRC was not accepted and is not considered further in this article.
The new redirection of earnings principle, a pragmatic substance over form approach, prevailed over the technical analysis of trusts and loans addressed in the tribunals, with potentially far-reaching consequences.

Redirection of earnings principle

The Court of Session considered the legal principles in place at the time the trust arrangements were in place; in particular, the historic Schedule E emoluments of an office or employment and subsequently earnings from employment (defined in ITEPA 2003 s 62).
The court noted that such terms are defined widely and that ‘the critical feature … is that it represents the product of the employee’s work’. It considered that ‘income derived from the personal exertions of the taxpayer is his income for tax purposes, even if it is paid to a third party’.
Lord Drummond Young noted that the fundamental principle which emerged from historic case law was that ‘if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. That accords with common sense.’
He further observed that ‘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 judges considered that if this principle applies, it is irrelevant that the redirection is through trust arrangements or that the trustees have a genuine discretion as to what happens to the funds. The funds are ultimately derived from the employee’s services and, on that basis, they are properly to be considered emoluments or earnings.
The judges considered the principle to be simple and straightforward –so straightforward that it may easily have been overlooked by the FTT and the Upper Tribunal in the context of an elaborate trust structure, such as in the Rangers case.
The Court of Session emphasised that it was essential to look at the true nature of the transaction. Were the payments to the principal trust and to the various sub-trusts derived from the employment of the employees in question? If so, they amounted to the employees’ emoluments or earnings.

Applying the principle to the facts

The court considered the application of HMRC’s redirection of earnings principle to the facts as determined by the FTT.
The trust arrangements related to two main categories of participating group employees, namely executives and footballers.
Executives: Executives had no contractual right to a bonus; however, a practice had developed to pay annual bonuses on a discretionary basis. Such bonuses were paid, in whole or in part, through the principal trust into a sub-trust.
Key to the Court of Session’s decision was the fact that bonuses were paid on the basis of the work performance of the employee and the profitability of his employing company.
Taking a realistic view of the transactions, the judges considered that it was obvious that they were derived from and based on the work done by the executive: ‘the only reason that the bonus was paid was the fact that the senior employee in question was working for one of the group of companies and providing services for it.’
Footballers: In respect of footballers, a contract of employment was entered into (under which remuneration was paid subject to PAYE and NICs) and an additional side letter provided for a discretionary trust payment. Much speculation has been made of the need for the side letter, given the Scottish Premier League’s requirement that all payments to registered players are declared in the contracts submitted to the League.
The Court of Session considered the side letter obligations to be part of the employment package providing additional remuneration. The payments were analysed as bonus payments arising out of the footballer’s employment, but paid to a third party (the trustee of the principal trust).
For these reasons, the Court of Session concluded that HMRC’s primary argument was correct and that the payments made by the group companies to the trustees of the principal trust were emoluments or earnings and subject to income tax.

Timing of redirection of earnings

The judges considered that earnings are paid when the employer makes a payment directly to the employee or in a manner that has been requested (or at least acquiesced in) by the employee.
In this case, the redirection of earnings occurred at the point where the employer paid a sum to the trustee of the principal trust, and the PAYE obligation fell on the employing company which made the payment.
Viewed from a trust law perspective, many advisers would have expected any tax liability to arise at the later point at which the funds were allocated or transferred into the sub-trust. However, given the redirection of earnings principle, the judges considered that the tax point arose earlier.
Another interesting aspect of the redirection of earnings principle was the court’s view that it will not normally be relevant whether or not the sums have been placed at the unreserved disposal of the employee. In choosing to redirect earnings to trustees, whilst the employee hopes that the trustees will apply the funds in the way that he wishes, he runs the risk that they may not do so.
On this analysis, it is possible that employees could be taxed on amounts they never actually receive or enjoy.

No double taxation?

A number of cases were distinguished or considered not to be relevant to the decision, in particular Forde & McHugh Ltd v HMRC [2014] 1 WLR 810 and Dextra Accessories Ltd v MacDonald (2005) 77 TC 146. Forde was distinguished on the basis that it primarily interpreted ‘earnings’ for the purposes of the payment of NICs, rather than ‘emoluments’ in the context of income tax; but, in both cases, there would have been the potential for double taxation to arise had HMRC’s reasoning been followed.
The opinion makes clear that the present case cannot involve double liability to tax, although there is no detailed explanation for this.
Lord Drummond Young stated that ‘we have held that the payment made by the employing company to the principal trust is subject to income tax but payments out of the trust will not be so subject. The funds in question will be held by the relevant trustee as trust capital, and any payment out of the fund originally received from the employing company will accordingly be treated for tax purposes as a capital payment out of a trust. The only liability to income tax is on income earned by the trustees.’
It is not clear what the basis for this statement is. There is no analysis of the fact that post Part 7A, loans or payments from an employee benefit trust to an employee are taxable; or that prior to Part 7A, they may still be taxable to income in a number of situations, for example as general earnings or where the notional interest is taxable under the beneficial loans rules.


The opinion is likely to be the subject of much debate. Many will prefer the more traditional legal and technical analysis of trusts and loans, while others may view it as a victory for common sense. It certainly supports the trend for the courts to apply a purposive approach to their findings, and is a significant win for HMRC in its efforts to categorise loans as earnings.
It could be argued that the case turns on its specific facts and is of largely historic significance (given the enactment of Part 7A), but the redirection of earnings principle may have more far-reaching implications.
Four of the five Murray Group companies were non-participating parties in the appeal and it remains to be seen whether the decision will be appealed to the Supreme Court by the fifth participating Murray Group company.
If no appeal is made (or leave to appeal is not granted), HMRC is likely to use the decision as a basis to vigorously pursue companies which did not take up the EBTSO.
In any event, the latest step in the judicial process will be little comfort for fans who witnessed the damaging effect of the saga on Rangers FC and Scottish football in general.