There may never be an outright winner in the ongoing debate of whether Rangers are rightful winners of championships won during the years that the infamous Employee Benefit Trust (EBT) scheme was in operation.
But at the end of the day – to use a well-worn football cliché – HM Revenue & Customs (HMRC) is the undoubtedly the victor in a mammoth court case that ran all the way through extra time and to penalties – or more accurately to a Supreme Court ruling.
HMRC has been targeting the abusive use of these structures for years
The decision of the Supreme Court was not altogether unexpected and brings to a conclusion this long-running battle over the taxability of remuneration paid through the use of EBTs.
An EBT is a legal structure that is usually set up by an employer for the benefit of its employees and directors or their family members. EBTs can be used by companies for many purposes, including to support their employee share plans and executive long-term incentives.
However, they were also historically used by many businesses, particularly hedge funds and banks, to manage tax payments on bonuses, before many of the tax advantages of the structure were removed by new rules on disguised remuneration in the 2011 Finance Act. HMRC has been targeting the abusive use of these structures for a number of years, as it takes the view that they artificially lower income tax and national insurance contributions that would otherwise be paid on employee remuneration.
The case centred on payments made to footballers using EBT tax avoidance schemes by Murray International Holdings (MIH), the then-owner of Rangers, and other group companies to employees between 2001 and 2009. RFC 2012 went into liquidation in 2012, and the current Rangers Football Club was not a party to the case.
The Supreme Court ruled that the trustee of the EBT structure used by RFC 2012 was “the person in receipt of the emoluments or earnings and payment to it should have been subject to deduction of income tax”. In its judgment, the Supreme Court backed a “purposive” approach to the interpretation of the taxing provisions. Although there was no suggestion that any part of the transaction, which comprised the tax avoidance scheme, was a sham, that was not the point, said the court.
What is perhaps surprising is the clear backing of the judges in taking a purposive view of the relevant legislation rather than the narrower interpretation taken by the taxpayer and its advisers. Whilst there had been a feeling that other cases would be able to be distinguished from this one on their facts, the Supreme Court’s backing of a purposive view of the legislation makes this far less likely, and HMRC will undoubtedly seek to maximise the use of this decision in other EBT cases yet to settle.
In giving the judgement, Lord Hodge said employers that have used EBTs to remunerate employees that remain unsettled with HMRC should seek advice on the consequences of this decision for them.
Lord Hodge said: “Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money that the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect. Having regard to the purpose of the relevant provisions, I consider the sums paid to the trustee of the [EBT] for a footballer constituted the footballer’s emoluments or earnings.”
HMRC will be no doubt be delighted with the Supreme Court ruling and we can expect it to be cited extensively in the continuing war on tax avoidance. It is clear that anyone who has benefited from an EBT, or indeed an Employer Funded Retirement Benefit Scheme or employer/contractor loan scheme, should take appropriate advice on their affairs.
• Paul Noble is head of tax investigations at legal firm Pinsent Masons