Introduction

The long awaited decision of the First Tier Tribunal in the Rangers EBT case has now been delivered. The case has attracted significant media attention and holds important lessons for employers making use of trust loan schemes. It is a welcome reminder that the courts are prepared to look at the reality of what is happening when construing complex statutory provisions in the context of what HMRC would no doubt describe as an aggressive tax avoidance scheme.

In Murray Group Holdings and others v The Commissioners for HMRC [2012] UKFTT 692 (TC), an appeal against HMRC assessments for income tax and National Insurance contributions (NICs) in relation to loans made to soccer players and executives through an employee benefit trust has been allowed by the First Tier Tax Tribunal.

An employee benefit trust or “EBT” is usually a discretionary trust for the benefit of a class of beneficiaries consisting of the employees of a particular company, or group of companies, and family members or dependents of those employees. In the UK, EBTs have been used in a tax-efficient way to make payments for the benefit of key employees of what were, in substance, bonuses, without any immediate material liabilities to tax arising. Applying the principles established in WT Ramsay v IRC (1984) 54 TC 101, the First Tier Tax Tribunal found in favour of the taxpayer. It was held that, under the anti-avoidance legislation, the benefits under the EBT could not be taxable as employment income as the loan amounts were not placed unreservedly at the disposal of the employees.

In very broad terms, the principles developed in Ramsay and now applied in Murray are that when considering a tax planning arrangement, a court should look at the reality of what is happening and whether the legislation is intended to apply a tax charge to the arrangement (viewed realistically). Whilst the appeal was successful, the dissenting judgment rested particularly on the commercial reality that the loans were practically (if not theoretically) irrecoverable and, as such, amounted to emoluments. Had the trustees not acted properly – by exercising their discretion in relation to the loans and requiring proper security and information as to the debtors’ financial circumstances and by considering whether any of the loans should in certain situations have been called in – a successful appeal might have been less likely.

The Facts

In the Murray case, Murray Group Management Limited (“MGML”) (a holding company in Rangers FC) set up an EBT arrangement in April 2001 called the Murray Group Management Remuneration Trust, with a Jersey-resident trustee. 108 active sub-trusts were set up by the relevant MGHL group employer between 2002 and 2008 with assets from the principal trust. Each sub-trust was in the name of an individual and for the benefit of beneficiaries within his family nominated by him, but not for the direct benefit of the employee. Funds for a sub-trust were provided by the employer to the principal trust together with a letter of wishes from the employee identifying proposed beneficiaries of the sub-trust, a loan application from the employee and a draft sub-trust deed.

The full amount of the sub-trust funding was then loaned to the employee without security for a term of ten years. The original trustee of the principal trust was replaced (by MGML) in 2006 with another Jersey-resident professional trustee, who expressed concerns about the lack of security for loans made to individuals who were not beneficiaries of the relevant sub-trust, leading to delays in the advancement of requested loans to some players by the original trustee. The MGHL group employers ceased funding the principal trust whilst a new trustee was sought. HMRC assessed MGHL group employers to PAYE and NICs in respect of payments into the sub-trusts for income tax and NICs and concluded that the sub-trust loans made to employees were a sham (i.e. a secretive arrangement to place cash unreservedly at the employees’ disposal) and that in fact the gross amounts were contractual earnings of the employees concerned and taxable accordingly. The MGHL group employers appealed to the First-Tier Tax Tribunal arguing that the loan amounts did not fall to be taxed as emoluments, as they were not placed unreservedly at the disposal of the employee and so were not taxable “payments”.

Following the decision in Ramsay, it was held that, under the anti-avoidance legislation, the benefits under the EBT could not be taxable as employment income. Even though the trust loan discharged an obligation of the employer, the majority held that they were not taxable as earnings, as in their view, the loan amounts were not placed unreservedly at the disposal of the employees. This is a long-awaited decision, following hearings that began in October 2010 and confirms two previous first instance decisions concerning the taxability of loans to employees from trusts, which had not been appealed. HMRC lodged an appeal in the Upper Tier Tribunal last year and it is set to be heard on several days between February and March 2014.

Tackling the future

The Murray decision is likely to be relevant to employers that made any similar use of trust loan schemes before Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) came into force. These employers are likely to be under pressure from HMRC to settle large outstanding claims for unpaid PAYE and NICs.

The correct application of the Ramsay approach to the scheme is likely to feature significantly in HMRC’s appeal. The above decision may prove a pyrrhic victory for Rangers’ employees. The loans will need to be repaid ten years after the date on which they were made, and under current law, it will be difficult to refinance the loans without a tax charge arising. There are significant numbers of employing companies that have established a discretionary EBT. Some of those EBTs will have made loans to employees, in respect of which the sponsoring employer may have received protective assessments to income tax through PAYE and NIC from HMRC. Such employers may see the majority judgment in this case as giving them a reprieve, however, HMRC will be helped significantly in any appeal by the opinion of the dissenting judge, Dr Poon, who took a different approach to the majority and found that the trust arrangements were, in fact, an orchestrated scheme to place certain sums unreservedly at the disposal of employees, but with a more favourable tax treatment than direct payments from the employer.