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RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland

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In RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland, the Supreme Court held that payments into an employees' remuneration trust were earnings for income tax and NICs purposes.

The Rangers had implemented a tax avoidance scheme in which employers paid remuneration to their employees through an employees’ remuneration trust, which made payments to sub-trusts for the benefit of named employees. The intended benefit of the scheme was the avoidance of liability to income tax (under PAYE) and NICs. The issue was whether the employee has to receive the remuneration for it to amount to taxable earnings.

The Supreme Court found that ‘a careful examination of the provisions of the primary legislation reveals no such requirement.’ The court pointed in particular to ITEPA 2003 s 13 which defines the ‘taxable person’ as ‘the person to whose employment the earnings relate’ and to ITEPA 2003 s 62(2) which defines taxable emoluments but does not specify the recipient. Furthermore, the wider purpose of the legislation, to tax any remuneration for the employee’s work, did not suggest that a payment to a third party should escape the tax.

The court observed that the footballers’ contract of employment and the side letter relating to the trust arrangement provided that every time a footballer wanted to use the money paid to his sub-trust, he was given a loan by the sub-trust and that the expectation was that the loan would not be repaid. The court added that the fact that the footballers were prepared to take the risk, and that the scheme might not operate as planned, did not alter the nature of the payment to the trustee of the principal trust. The position was the same with regard to the payment of bonuses to executives, even though the bonuses were discretionary.

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Why it matters: The Supreme Court considered that in both Sempra Metals ([2008] STC 1062) and Dextra ([2012] STC 413), the Special Commissioners had been wrong to hold that ‘on payments to the trusts, no transfer of cash or its equivalent was placed unreservedly at the disposal of the employees.’ The Supreme Court also referred to ITEPA 2003 Part 7A which taxes the value of loans provided by third parties to employees under arrangements to reward employment. It accepted that these provisions appeared to have removed many of the intended benefits of the tax scheme implemented by the Rangers. However, these provisions, which were designed to counter tax avoidance schemes, did not affect the interpretation of prior legislation.