Rangers Judgement Analysis

11 July 2017

On 5th July 2017 five judges of the Supreme Court unanimously found in favour of HM Revenue & Customs (HMRC) upholding the previous decision of The Inner House of the Court of Session (2016 SC 201) dismissing the appeal of RFC 2012 Plc (in liquidation)(Formally The Rangers Football Club Plc).

Their judgement identified a fundamental question – whether an employee’s remuneration is taxable as his or her emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself.


RFC, along with other group companies, had operated a tax avoidance scheme in the tax years between 2001/02 and 2008/09. The group established a remuneration trust and when an employing company wished to benefit one of it’s employees it paid a sum to the trust and recommend that the trustees resettle the sum onto a sub-trust where the capital and income would be applied in accordance with the wishes of the employee.

The trustees had discretion as to whether to comply with the request but in every case it complied. The employee was also named as “protector” of the sub-trust giving him or her extensive powers over it.

At the request of the employee in every case bar one a loan was made of the entire fund to the employee. The loan was in principle repayable however both the employer and employee expected the loan never to be repaid as for inheritance tax purposes this would reduce the value of their estate upon death.

On recruitment of the employees two separate contractual documents were created, a contract of employment and a side letter outlining the mechanism for payments to be made to the trust and then onto the sub-trusts.

Agent’s of the employee’s had recorded their client’s remuneration as including the payments to the remuneration trust.

The Inner House previously decided that payments of the sums to the remuneration trust involved a redirection of the employee’s earnings and accordingly did not exclude those earnings from the charge to income tax.

Key Points of the Judgement

The parties to the appeal had previously agreed that should the payment of the sums be chargeable to income tax then they would also be chargeable to national insurance contributions (NICs). The legislation in relation to NIC’s was therefore not considered further.

In reaching the judgment three aspects of statutory interpretation of the legislation were identified as important.

Firstly, the tax code is not a seamless garment and as such provisions imposing a specific tax charge may not militate against the existence of a more general charge to tax that may have priority over and supersede or qualify the specific charge.

Secondly, it is necessary to pay close attention to the statutory wording and not to be distracted by judicial glosses which have enabled the courts properly to apply the statutory words in other factual contexts.

Thirdly, the courts must now adopt a purposive approach to the interpretation of the taxing provisions and identify and analyse the relevant facts accordingly.

The central issue identified for consideration was - whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for his or her own work in order for that reward to amount to taxable earnings.

A careful examination of the relevant legislation revealed no such requirement. Nothing could be seen in the wider purpose of the legislation which excludes from the tax charge remuneration which the employee is entitled to have paid to a third party.

As a general rule, therefore, the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party.

Case law exceptions to the general rule were considered, specifically (i) the taxation of a benefit in kind, (ii) provision of benefits in kind that are not earnings or emoluments, and (iii) arrangements where there is no immediate vested interest but only a contingent interest.

The third exception was key to RFC’s defence. Where upon a proper analysis of the facts there is only a contingent right then there is no payment until the occurrence of the contingency. The recent judgement of Forde and McHugh Ltd v Revenue & Customs Comrs, along with several other cases, were highlighted in support of this principle.

As the focus in each of these cases was the source or nature of the payment received rather than the identity of the recipient it was decided that they did not assist in deciding the central issue on this appeal.

The judgement also states that the decision in Sempra Metals Ltd v Revenue & Customs Comrs was wrong. Further, the conclusions drawn in Dextra Associates Ltd v Macdonald (Inspector of Taxes) are also wrong.

The Decision

The judgement makes clear that in applying a purposive interpretation of the legislation in the context of a tax avoidance scheme it is legitimate to look to the composite effect of the scheme as it was intended to operate.

In this case the payment to the remuneration trust and subsequent allocation to a sub-trust put the funds under the control of the employee, further on the employees death the funds would pass to beneficiaries of their choosing.

The payment to the remuneration trust was therefore payment of the employees earnings to a third party and as such are chargeable to tax under PAYE at that point.

Finally, the judgement also explained why the judges had not been persuaded by the assertion that other provisions in the tax legislation militate against this view. Specifically, in relation to the employment related loans provisions, the legislative code for emoluments has primacy over the benefits code. As the payment to the trust is emoluments the benefits code can not apply to the loans.

What’s Next?

This is clearly a major victory for HMRC, there are many open cases involving the use of EBT’s and how widely they try to use this decision to decide those cases remains to be seen.

Where other arrangements circumstances are similar to the Rangers case (and where they have not already been disclosed under the DoTAS regime) it is now likely that HMRC will issue follower notices and subsequently accelerated payment notices to users who have open enquiries.

If you have any concerns about your involvement in any structure involving an EBT or remuneration trust, or require assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

Non Resident Landlord Scheme

12 June 2017

If you are resident outside of the UK and receive rental income from a UK property you are subject to UK tax under the Non Resident Landlord Scheme (NRLS).

This means each year you will be required to submit a self assessment form to HM Revenue & Customs (HMRC) detailing your UK rental income and expenses. Further, your rental agent (or tenant if there is no agent) must deduct 20% of the rent paid to you and account for it quarterly to HMRC on account of your tax liability, you can then claim this credit against your tax liability usually resulting in an annual tax repayment.

If you own the property within a company then the company must submit a tax return to HMRC each year in a similar way to that stated above. There are also further complications if the property is a residential property valued above a certain limit, the property may be subject to the Annual Tax on Enveloped Dwellings (ATED) regime.

An important let out for the ATED regime is that the property is let on a commercial basis, however an ATED return may still require completion to claim this exemption.

If you are a complaint taxpayer, that is file your self assessment return in a timely manner each year and pay your tax as it falls due, then HMRC will grant exemption to your agent or tenant from withholding 20% from the payments of rent to you.

It is important that once HMRC have granted this exemption you remain compliant, otherwise HMRC may revoke the exemption and once again require your agent or tenant to withhold 20%.

If you require any assistance with any UK tax matter please contact us or get in touch today by calling +44 (0) 203 039 3993.

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