Supreme Court dismisses Rangers’ Appeal

Thu 06 Jul 2017

The Supreme Court has unanimously agreed with the Scottish Court of Session that amounts paid by Rangers Football Club (RFC) to an employees’ remuneration trust were amounts paid at the direction of the employee. As a result the amount was liable to income tax and due under the PAYE regulations at the time it was paid to the trust with the agreement of the employee.

In relation to the earnings and the PAYE regulations, the Supreme Court considered that: (i) Income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee; (ii) There is no prescription that the amount has to be received by the employee except in the case of gratuities, other profits or incidental benefits; (iii) Making a relevant payment to an employee or ‘other payee’ for the purposes of the PAYE regulations, includes 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, for example by assignation or assignment.

All parties in the case agreed that the determination of the appeal in relation to income tax would govern liability to national insurance contributions (NICs), so the NIC legislation was not considered further.

Background facts

The case concerned amounts contributed by RFC to the employee remuneration trust as set out in a side letter to a contract with a footballer, or employee, to which the individual agreed. The footballer or employee would then provide a letter of wishes to the trustee, and RFC asked the trustee to settle the amounts in sub-trusts, which typically made loans to the footballers or employees. The footballer or employee was made a protector of the sub-trust and had the power to change the beneficiaries. The mechanics of the arrangement and the tax implications were explained to the footballer or employee at the stage of negotiation of the employment contract. An indemnity for any personal tax liabilities from the arrangement was also available.

RFC contended that as the money was only ever loaned to the footballer or employee, it was never ‘made available to them’ and therefore did not trigger PAYE obligations, nor income tax obligations on the footballer/employee with respect to the principal sum contributed to the trust.

Previous case-law

In reaching its decision the Supreme Court held that the Special Commissioners’ decision in Sempra Metals ([2008] STC (SCD) 1062) was wrongly decided. In Sempra the Commissioners had held that as the payments were not unreservedly placed at the disposal of the employees, there was no payment of emoluments or earnings giving rise to an obligation to deduct income tax and pay it to HMRC. It was noted that HMRC put forward similar argument at the Special Commissioners’ hearing in Dextra Accessories Ltd ([2002] STC (SCD) 413), but only the corporation tax issues were considered in later court hearings of that case.

The Supreme Court considered that the Sempra and Dextra cases misapplied comments made in Garforth v Newsmith Stainless Ltd ([1979] 1 WLR 409). That case had indicated money placed unreservedly at the disposal of the Directors by being made available through a Director’s loan account did constitute payment, triggering the obligation to account for income tax. The Supreme Court nevertheless considered these comments were appropriate for the circumstances of the Garforth case. Support for the Supreme Court’s view in RFC was found from a New Zealand Privy Council case (Hadlee v Comr of Inland Revenue [1993] AC 524), where profits of a partner were assigned to the partner’s wife and child, yet still held to be taxable on the partner as being the profits of his personal exertion.

Comment

This decision brings to a conclusion the long running proceedings on this case and HMRC will see it as a welcome victory, especially following its defeat at the earlier First tier and Upper Tribunals. The potential implications are very significant for other users of employee benefit trusts (EBTs) with similar features. In particular the case could give HMRC enough appetite to issue follower notices to other EBT users, using the principles and reasoning from the RFC case. Follower notices bring particularly onerous obligations which need to be fully understood and appropriately dealt with to avoid further problems.

To discuss the implications of this decision or matters related to follower notices, please contact one of the following:

• Jon Claypole: 020 7063 4323 or 07799 033089 or 07794 031354

• Dave Jennings: 0161 238 9251 or 07881 283409

The Supreme Court’s judgement and press summary can be found via the links as indicated.