The ‘Rangers’ or ‘Big Tax’ case concerns the establishment of an employee benefit trust (EBT) in 2001 by the Murray Group, then owners of Rangers Football Club. Sub-trusts were established for the benefit of players, other employees, and their families. Sub-trust funds were then lent to relevant employees.
HM Revenue and Customs (HMRC) contended payments into the EBT should be treated as employment income, but both First-Tier and Upper Tribunals held in the taxpayers’ favour, rejecting application of the Ramsey principle.
HMRC appealed to the Court of Session (Advocate General for Scotland v Murray Group Holdings and others) presenting two grounds. First, contributions to the EBT were “redirected payments of earnings” taxable as employment income (new ground). In November 2015, the court agreed that “accords with common sense”, although a statement that funds once in the EBT are capital appears erroneous. Second, as ‘protectors’, employees had power to access sub-trust funds absolutely, which it rejected.
Murray Group’s liquidator is applying for leave to appeal to the Supreme Court.
So what could this mean for employers and employee benefits? If the taxpayer does not win the next match, then the basis of salary sacrifice arrangements may be questionable. Here, employees waive employment income before entitlement, in exchange for benefits. Wide application of the ‘redirection principle’ could mean that the amount waived is still taxable.
Those with EBT arrangements registered under disclosure of tax avoidance schemes who did not use HMRC’s ‘settlement opportunity’ can expect accelerated payment notices. These cannot be appealed, presenting a cash flow disadvantage. Hence, it might be wise to approach HMRC for an out-of-court settlement (contributions to EBT being subject to pay-as-you-earn and national insurance contributions, and corporation tax deduction being due). However, inheritance tax implications arise.
Finally, introduction of Part7A of the Income Tax (Earnings and Pensions) Act (ITEPA) (‘disguised remuneration’) has generally stopped this type of planning. However, if reward or recognition of earnings occurs before the money enters the EBT it is possibly outside the scope of Part7A. An own goal for HMRC perhaps?
Caroline Harwood is director, incentives, at law firm Burges Salmon
