They think it’s all over ….
7th July 2017
Posted in Articles, Employee Incentive Arrangements, Employment Tax, Featured Articles by Tom Minnikin
… well it is now (possibly). This week the Supreme Court handed down its decision in the Murray Group Holdings tax case and, with it, ended one of the longest legal knockabouts in tax history.
Most Tax Biters will be familiar with the case, which concerned the use of Employee Benefit Trusts (‘EBTs’) to provide benefits to employees, in this case footballers of Glasgow Rangers. Between 2001 and 2010 the club piled almost £50m into a series of EBTs with the aim of the funds being used to remunerate players and club officials. In the typical scenario, money would be contributed to the EBT, following which the trustees would appoint the money onto a sub-trust for the benefit of the employee and/or other family members. These sub-trusts would then make loans to the respective employees.
HMRC challenged the arrangements, arguing that in reality the loans were a form of ‘disguised remuneration’. The company argued that a contribution to an EBT was not a payment of earnings to the employee. Instead, it was at the trustees’ discretion how they applied the funds, and in this case the trustees decided to make a loan.
The Supreme Court’s decision
Both the First Tier and Upper Tier Tribunals found in favour of the taxpayer company. However, the Court of Session overturned these verdicts and found in favour of HMRC. The Supreme Court has now affirmed that ruling, and in doing so made the following key points:
- The Court found that as a general rule, there is an income tax charge when an employee is entitled to receive remuneration, irrespective of whether it is paid to the employee or a third party.
- Furthermore, the Court ruled that in applying this rule there can be no distinction between remuneration which is contractual and amounts which are discretionary (e.g, bonuses).
- Finally, the Court was not persuaded that the risk that trustees of the EBTs might not follow the company’s wishes in providing loans in any way altered the nature of the payments. Instead, the Court agreed with HMRC that the purpose of the scheme was to provide remuneration, and that the sub-trust and loan arrangements – whilst not a sham – were simply a means to that end.
What this means for clients with EBT schemes
Many clients may have chosen not to settle their EBT scheme, awaiting the outcome of the Rangers case. We think it is highly likely that HMRC will be buoyed by this decision and seek to issue Follower Notices where similar arrangements have been undertaken. There are a few points to note in this regard:
- For a follower notice to be valid, HMRC has to demonstrate that the circumstances sit on all fours with the Rangers decision. The Rangers case was unusual because of the existence of side letters with employees guaranteeing their entitlements, which could in theory limit HMRC’s ability to apply the decision more widely. However, as noted above, the Court has said that the existence of contractual agreements is not necessary for the earnings charge to apply. We think it is likely that HMRC will seek to use this victory to combat schemes quite widely, but the facts of each case would need to be reviewed, particularly if the payments were subject to contingencies.
- It is also important to note that if HMRC seek to rely upon the decision in Rangers, this means that the PAYE/NIC charge arises when the contributions were paid into the EBT. The timing of when Regulation 80 PAYE assessments and Section 8 NIC decisions were raised therefore becomes crucial. In some cases, HMRC raised these assessments based upon when loans were made, and if this was in a different tax year HMRC may be out of time to reissue assessments.
- Clients with EBTs who are not in receipt of a Follower Notice should look at settlement opportunities now. Whilst the terms on which HMRC is prepared to settle is gradually becoming tougher, there can still be some easements available.
- Notwithstanding the above, there is the impending threat of the EBT loans charge on from 6 April 2019 (see here) and so HMRC may still be able to charge loans via this mechanism. However, an interesting point to consider is the fact that the 2019 charge will be calculated at that date and is therefore without interest. Given that any settlement would include interest here may be situations where clients who accept defeat are better off waiting to be taxed in 2019 (assuming HMRC will then agree to close enquiries).
EBT scheme users should be encouraged to review their options. We would be pleased to advise any clients who may be affected by this decision.