HMRC have lost the latest round of litigation in the long running dispute over payments made to an Employee Benefit Trust (“EBT”) made by companies linked to Rangers Football Club. The Upper Tribunal (“UT”) has largely upheld the judgment of the First Tier Tribunal (“FTT”) that neither the making of contributions to the EBT nor the making of loans by the EBT to employees constituted earnings for PAYE and NIC purposes.
The decision represents a further set-back for HMRC and casts into doubt HMRC’s approach to EBT and Employer Funded Retirement Benefit Schemes (“EFRBS”).
The case concerned an EBT established by the Murray Group of companies, which included Rangers Football Club Plc. In outline, companies within the group made contributions to the group’s EBT and requested that the trustees ring-fence the value of the contributions in sub-trusts for the families of specific employees; more often than not the trustees then advanced the whole value of the sub-trust assets to the employees as a loan.
HMRC argued that the appointments to the sub-trusts should be treated as a payment of earnings or that the making of the loans should be viewed as a payment of earnings (on the basis that it was a remote contingency that the loans would be repaid).
HMRC accepted that the EBT, the sub-trusts and the loans were not shams, but argued that, based on the Ramsay principle, looking at the transaction as a whole, a realistic view of the substance of the arrangements was such that value was transferred to employees on terms that were little short of absolute ownership.
The FTT had held that both the loans and the sub-trust appointments created legal realities that had their own tax and legal consequences: these realities could not be simply set aside.
The key arguments that were advanced on behalf of HMRC in the appeal to the UT were that:
- the FTT had not applied the principles in Ramsay correctly – the sub-trust appointments and loans should be viewed as a whole and, on a realistic view, they should be seen as a payment of earnings;
- the case should be distinguished from the decisions in Dextra and Sempra (in both cases the courts had ruled that an appointment to a sub-trust did not constitute a payment of earnings), because in this case the trustees were mere cyphers – the sub-trust assets were, de facto, under the control of and at the disposal of the employees; and
- the repayment of the loans was a remote contingency, the nature of the loans was tantamount to a distribution to the employees.
The UT rejected these arguments:
- the creation of the sub-trusts and the loan advances created legal realities which were not incidental to the transactions being undertaken;
- the FTT had held, as a matter of fact, that the trustees were not mere cyphers (although both the FTT and UT were less than complimentary about the evidence given by the trustees, both accepted that the trustees held and exercised real power over the trust assets);
- the FTT had determined as a matter of fact that the repayment of the loans was not a remote contingency.
The significance of the UT decision is that it restates that there are limits on the ‘realistic view’ approach that HMRC have advocated over a number of years and is a further instance of the courts unambiguously rejecting the opinion that HMRC first set out in Spotlight 5: that the appointment of assets to sub-trusts constitutes a payment of earnings that should be subject to PAYE and NIC.
In many ways, the fact pattern in the Murray case seems to favour the interpretation advanced by HMRC far more than is the case in other sub-trust arrangements, where assets are retained in the sub-trust instead of being advanced by way of loan. That HMRC has not managed to convince the courts to agree with its interpretation of the law in this case adds to the sense that this is an important decision.
HMRC is reportedly contemplating an appeal and has a month in which to take a decision.
In the meantime, the decision of the UT should be considered as a factor when contemplating whether to accept a settlement on the terms offered by HMRC under their EBT Settlement Opportunity.