The recent Court of Session ruling on 4 November 2015 on the tax payable on payments made into Employee Benefits Trusts (“EBTs”) operated by the Murray Group of Companies (including Rangers FC) will, if unchallenged, have potentially significant financial consequences for those employers who have used EBTs.
The Court overturned the previous decisions of the First-tier and Upper Tribunals and held that arrangements whereby payments are made to employees and their families through the use of trust schemes were no longer exempt from taxation and that the participants of such schemes would now be liable to HMRC in respect of such payments.
In particular, the Court was clear in giving Judgment that income tax is a tax on earnings from employment and that even if the payments were made to third parties rather than to the employees themselves, the payments were still made as a result of the work of the employees. The Court stated that:
“…if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if that employee requests or agrees that it be redirected to a third party. That accords with common sense. If the law were otherwise, an employee could readily avoid tax by redirecting income to members of his family to meet outgoings that he would normally pay.”
The Court went on to say that it is irrelevant that the payments were first made into a trust or that the trustees had a discretion as to how to apply such payments. The fact is that the payments were made as remuneration for the employee’s services.
The Court concluded that the payments made into the trust and the sub-trusts “amounted to a mere redirection of income and thus constituted emoluments or earnings” and were therefore taxable.
In addition the Court held that the payments were made at the time of payment to the trustee of the discretionary trust. Therefore, the employer who made the payment would be obliged to deduct the tax under the PAYE system at that point.
Companies have historically used EBTs as a means of benefitting from certain statutory provisions and avoiding liability to PAYE and NIC. Making payments into an EBT was intended to avoid the payment of tax.
HMRC have raised tax assessments in respect of the payments made into the EBTs by employers and have entered into a programme to permit compromise on those assessments by 30 July 2015. There are a raft of assessments which remain to be concluded.
It is tolerably clear, at this point, that a further appeal on the substantive issues is being considered but no application has yet been made. It is possible that an appeal will be made on ancillary technical points regarding the jurisdiction of the Court of Session which may, if made, delay the final ruling on this matter. Until that time, those businesses who have used EBT’s and who have open assessments with HMRC for unpaid PAYE and NIC are, in our experience, likely to see HMRC becoming more proactive with their enforcement steps for recovery.