On Wednesday 5 July 2017 the Supreme Court handed down its decision in the case of RFC 2012 (in Liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland  UKSC 45 – better known as the ‘Rangers Big Tax Case’.
In a carefully argued judgment, the court dismissed Rangers’ appeal and upheld the judgment of the Court of Session that the contributions to the company’s EBT structures (dubbed ‘Remuneration Trusts’ by the scheme’s promoter) were taxable employment income and that PAYE and NIC should have been operated when the contributions were made.
The arguments raised in the hearings were summarised in our article http://www.gabelletax.com/blog/2017/03/16/full-time-rangers-in-the-supreme-court.
In broad terms, the court has accepted the essence of HMRC’s argument, that a payment made to one person (‘B’) in respect of the employment of another (‘A’) remains the taxable employment income of A.
The judgment outlines three situations in which a payment made to a third party would not constitute taxable employment income in the hands of the employee:
- gratuities, profits or incidental benefits (perquisites or perks in the language of the pre-Income Tax (Earnings & Pensions) Act 2003 legislation) that are not convertible into money;
- the payment by the employer of money to a third party to provide a benefit in kind which the employee cannot convert into money, which could fall to be taxed under the Benefits Code of ITEPA 2003 or, possibly, Part 7 (employment related securities) or Part 6 (income which is not earnings or share-related); and
- payments that give an employee a contingent interest in assets, instead of an absolute interest in them – the judgment cites the situation in Edwards v Roberts (1935) 19 TC 618, where an employer paid money into a trust for the employee, which would only be paid out if the employee had remained with the company for five years or was a ‘good leaver’.
In the Rangers situation, the payment to the EBT was not considered to fall within any of these exceptions, as the employees’ ability to access the money held by the EBT was effectively unfettered; the restrictions placed on their access to the funds were largely illusory.
The judgment achieves a careful balance, in that it establishes a principle that payments to third parties will always be treated as taxable employment income in the hands of the employee (although Lord Hodge, who wrote the judgment, would argue that it merely reasserts the existing law) without opening up a can of worms by ruling that the pre-FA 2017 position on salary sacrifice was incorrect.
The decision has far reaching consequences for employees and companies that used EBT planning in the past, many of whom were waiting on the decision in the Rangers case. The decision leaves no room for most taxpayers with EBTs to differentiate their circumstances from the Rangers case, as the principle of taxation set out in the judgment is intended as a general statement of the law.
Taxpayers who have not settled with HMRC yet will face further pressure to do so and if there are open Revenue enquiries into the cases they should review their situation as soon as possible, as HMRC does now have scope to begin issuing follower notices to them.
For further information please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.