The Supreme Court has handed down its decision in the long-running Rangers EBT case on 5 July 2017, dismissing RFC’s appeal. It agreed with HMRC’s view that there had been a payment of earnings to the footballers and executives of RFC, and RFC should have deducted income tax and NICs from the sums paid to the EBT.
The basic facts were that HMRC raised assessments to income tax under PAYE and NICs on five Murray Group (RFC) companies, in respect of transactions involving an EBT and sub-trusts between 2001 and 2009. Typically, the employing group company made a cash payment to the trustees of the EBT, with a recommendation that the sum be allocated to a sub-trust established for the benefit of the relevant employee’s family. The trustees of the sub-trust then made loans to the employees at commercial rates of interest but on a discounted basis.
The use of EBTs to provide benefits to employees without the proper payment of income tax and NICs had been under HMRC’s spotlight for some time, and the disguised remuneration legislation was introduced in 2011. Since then, most loans made by trustees and other third parties to employees would be subject to an immediate charge to income tax and NICs – but the treatment of the historic Rangers arrangements have been the subject of an ongoing judicial case for some time.
The Supreme Court held that, as a general rule, the charge to tax on employment income extends to money that the employee is entitled to have paid as remuneration whether it is paid to the employee or a third party. Accordingly, the payments should have been subject to deduction of income tax (and NICs) under the PAYE Regulations.
On 29 September 2017, HMRC published Spotlight 41 “Disguised remuneration: a Supreme Court decision”, expanding its list of tax avoidance schemes that HMRC believes are being used to avoid paying tax due. This confirms that HMRC’s view is that:
- employment income paid from an employer to a third party is still taxable as employment income; and
- the principle applies to a wide range of disguised remuneration tax avoidance schemes, no matter what type of third party is used.
Unsurprisingly, HMRC is relying on the judgment to cast its net wider than EBT arrangements such as those used in the Rangers case. The Spotlight specifically mentions that HMRC will pursue disguised remuneration routed through employer-funded retirement benefit trusts (EFURBS) and a range of contractor loan schemes. Companies which have implemented such arrangements should be looking closely at these arrangements with their advisers, to consider to what extent they may be challenged as disguised remuneration schemes. HMRC strongly advisers users to withdraw such schemes and settle their tax affairs, to avoid the costs of legal action and minimise interest and penalty charges.