Rangers: Supreme Court confirms remuneration paid through EBT is subject to income tax

In RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45, the Supreme Court has held that remuneration payments made into an employees' remuneration trust were earnings for income tax and NICs purposes.

Background

From 2001-2009, Rangers Football Club Plc (Rangers) paid remuneration to certain of its employees (most of whom were footballers) through an employee benefit trust (EBT). The EBT trustee then resettled each payment into a sub-trust for the benefit of the employee concerned. The employees could apply for a loan from the sub-trust. The arrangements were intended to avoid liability to income tax (under PAYE) and national insurance contributions (NICs). 

The case raised a fundamental question of whether an employee’s remuneration is taxable as his emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it.

HMRC assessed the employing companies to income tax and NICs on the sums so paid as remuneration. The employing companies appealed those assessments to the First-tier Tribunal (FTT).

The FTT allowed the companies' appeals and held that the arrangements were effective in avoiding liability to income tax and NICs. The FTT concluded that the trusts and loans were  not shams and that the arrangements were effective in avoiding liability for income tax and NICs. 

HMRC appealed to the Upper Tribunal (UT). The UT agreed with the FTT and dismissed HMRC's appeal.

HMRC appealed to the Inner House of the Court of Session and advanced a new legal argument which had not been presented to, or at least had not been developed before, the FTT or the UT, namely, that the payment of the sums to the EBT involved a 'redirection' of the employees' earnings and accordingly such earnings were not excluded from the charge to income tax.

The Court of Session accepted this argument and allowed HMRC's appeal. Of the employing companies within the group, only Rangers appealed the Court of Session's judgment to the Supreme Court. 

Supreme Court's judgment  

The Supreme Court concluded that the Court of Session's reasoning was correct and dismissed the appeal.

Rangers had argued that the redirection principle only applies where the employee has a prior legal right to receive the payment himself but directed that it be paid to a third party. 

The central issue before the Supreme Court was whether it is necessary for the employee to receive, or be entitled to receive, the remuneration for his work in order for that reward to amount to taxable emoluments. 

The Supreme Court (Lord Hodge delivered the judgment of the Court) concluded that a payment to a trustee, where the employee is not legally entitled to receive the amount paid, does attract a charge to income tax and NICs.

In summary, the Court confirmed that:

i. provisions imposing specific tax charges do not necessarily militate against the existence of a more general charge which might have priority over and supersede the specific charge;

ii. a purposive approach to the interpretation of taxing provisions should be adopted and the court should identify and analyse the relevant facts accordingly;

iii. income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee;

iv. neither section 131, Income and Corporation Taxes Act 1988 nor section 62(2)(a) or (c), Income Tax (Earnings and Pensions) Act 2003 (ITEPA), provide that the employee himself must either receive, or have a right to receive, the remuneration;

v. the references to making a relevant payment “to an employee” or “other payee” in the Income Tax (Pay As You Earn) Regulations 2003, fall to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee, or as arranged by the employee;

vi. the specific statutory rule governing gratuities, profits and incidental benefits in section 62(2)(b), ITEPA, applies only to such benefits; and

vii. Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062 and Dextra Accessories Ltd v MacDonald [2002] STC (SCD) 413, had been wrongly decided.  

Comment  

It would appear from this judgment that a charge to tax on employment income extends to money that an employee is entitled to have been paid as remuneration, irrespective of whether it is paid to the employee himself or a third party. There is no requirement that the employee is entitled to payment, or actually receives the money, in order for it to be subject to income tax and NICs.

If the payment under consideration constitutes remuneration referable to an employee and is paid into an EBT, it is taxable at the point at which it is paid into the EBT, unless there is an exception to the general rule. One of the exceptions to the general rule is where, on a proper analysis of the facts, the employee only has a contingent right to the payment. Where this is the case, the payment will not be chargeable to income tax until the contingency occurs.  In the instant case, the fact that there was a chance that the EBT trustee might not have agreed to set up the sub-trust or might not have granted the loans did not, in the view of the Court, constitute a genuine contingency. The trustee had almost invariably exercised its discretion to set up the sub-trusts and grant loans of the full amount in the sub-trust each time it was asked to do so. Although the contingency exception could not be relied upon in this case, it does not follow that the exception will not be available in other EBT cases. 

In the recent case of OCO Ltd and Another v HMRC [2017] UKFTT 589 (TC), a case involving a similar but not identical arrangement involving an EBT, the FTT dismissed HMRC's redirection of income argument and confirmed that whether a redirection has occurred will depend on the facts of the case. Although the FTT did not have the benefit of the Supreme Court's judgment (its decision was released four days before publication of the Supreme Court's judgment), it had been referred to the Court of Session's judgment by HMRC. 
 
Whilst HMRC will no doubt seek to persuade other taxpayers who have utilised EBT arrangements that, following this judgment, payments by their employers to those EBTs constitute taxable earnings, whether a redirection of income has occurred will  depend upon the facts of the particular case under consideration. 

A copy of the judgment can be found here.