Time for the fourth official?

On Wednesday, 4 November, the Inner House of the Court of Session (“the CoS”) handed down its judgment in HMRC’s appeal against the Upper Tier’s decision in The Advocate General for Scotland v Murray Group Holdings Ltd & Others [2015] CSIH 77.

Reversing the decision of the Upper Tier, the court ruled in favour of HMRC and determined that the contributions that had been made by the Murray Group (the former owners of Glasgow Rangers Football Club) to an employee benefit trust (“EBT”) constituted payments of taxable employment income, on which PAYE and NIC should have been operated.

The background to the case and the decision of the Upper Tier was discussed in our article on that decision.

HMRC advanced two key arguments before the CoS:

  • that the contributions to the EBT constituted nothing more than earnings that the employees had redirected to the trustees and should be taxed on the employee in the same way that salary redirected to a spouse would be; and
  • the employees had been appointed as “protectors” of their family sub-trusts, which gave them the de facto power to access the trust assets for their own benefit.

The first argument is new, HMRC had not made a similar argument before the Upper Tier or First Tier Tribunal, and it had required a specific ruling from the CoS to give permission for this argument to be admitted at this stage in the appeals process.

Redirected Earnings

The CoS agreed the appeal on the basis of HMRC’s first submission, ruling that the arrangements to make contributions to the EBT in respect of each employee should be viewed as nothing more than an agreement to pay that employee’s remuneration to another person.

Citing Hadlee v Commissioner of Inland Revenue [1993] AC 524 and Brumby v Milner [1976] 1 WLR 29, the CoS held that income derived from the labour of a taxpayer is always his own income, even if it is paid to a third party.

The CoS ruled that the correct approach would be to undertake a realistic appraisal of the true nature of the transactions undertaken by the Murray Group and the trustees: in each case, the amounts contributed to the main Murray Group EBT and then allocated to employees’ sub-trusts were derived from the employment of the individual employees and, as such, constituted taxable employment income.

The CoS went on to consider whether any distinction should be drawn between EBT contributions that had replaced employees’ contractual entitlement to remuneration and contributions that replaced non-contractual bonuses.  The judgment states that non-contractual payments were still derived from and based on the work done by the employee and, as such, their tax treatment was not distinguishable from contractual payments.

In summary, the CoS ruled that employees should be treated as being in receipt of taxable employment income at the point at which their employer company made contributions to the group’s EBT.  All of the subsequent steps (the appointments to sub-trusts and the making of loans to the employees) were immaterial.

Access to Cash

The CoS rejected HMRC’s second contention, which had been argued before both the UT and FTT, that the employees had the de facto ability to compel the trustees to distribute the EBT assets to the employees.

The CoS held that the employees, in their role as protectors of the trust, had a genuine fiduciary duty to the beneficiaries of the trust and, as such, they could not take control of the trust assets and direct those assets to their own benefit.  The CoS went on to look at the loans taken by the employees, but ruled that the taking of the loan was not, of itself, significant:

“It is true that [the protector] will normally have received a loan from the trustees, but that is a quite different matter from taking a benefit under the trust, if only because the loan is subject to an obligation of repayment.”  (para 89)

Key Decisions Distinguished

In reaching their decision, the CoS examined a number of the key cases on contributions to employee trusts, principally Forde & McHugh Ltd v Revenue and Customs Commissioners [2014] 1 WLR 810, Dextra Accessories v McDonald (2005) 77 TC 146 and Sempra Metals Ltd v Revenue & Customs Commissioners [2008] STC (SCD) 1062.

The CoS distinguished Forde & McHugh and Dextra stating that those cases were decided on the basis that there was a risk of double taxation if contributions into the employee trusts were treated as earnings, as the amounts coming out of the structures would also have been taxable.  With regard to Sempra, the CoS stated that the case should not be followed, as it failed to take sufficient account of the realistic nature of the transactions that had constituted the EBT in that case.

The court also reviewed the decision in UBS AG; DB Group Services (UK) Ltd v HMRC (2014) All ER (D) 159, which is discussed in more detail here, and distinguished that case because employees had exchanged their rights to receive cash bonuses for the right to receive shares, whereas, in this case, the employees had simply diverted their bonuses.


The cases that the CoS has distinguished in its judgment are key to the taxation of EBT contributions and the grounds on which those cases have been distinguished are contentious; in particular Dextra employed a very similar structure to that in Murray Group and the underlying assumption of the litigation when it reached the Lords was that the contributions to the EBT did not, at that time, constitute earnings.

This aspect of the decision does leave clear scope for an appeal to be mounted, as there is a clear legal issue to be resolved in reconciling the judgment of the CoS and the earlier judgments of the Supreme Court and House of Lords.  Certainly, there is speculation in the Scottish press that Sir David Murray will wish to appeal further.

The decision will come as a welcome fillip to HMRC, whose strategy on EBTs since Spotlight 5 in 2010 has had little support in the courts so far.  However, until the case is either dropped or an appeal is heard by the Supreme Court, this decision lacks the finality required for them to issue follower notices to other EBT users.

For employers who have used EBTs and have not chosen to reach a settlement with HMRC, the decision does not yet represent a significant change to their position.  Over the weeks to come, we should have clarity as to whether an appeal will be lodged and should then be able to give guidance to EBT users on their next steps.

In the meantime, we have to wait to see whether the fourth official is called on to review the referee’s call.

For further information please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby or Priya Dutta.