On 5 July 2017, the Supreme Court handed down its judgement in the case of RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland often referred to as ‘the Rangers big tax case’.
The Supreme Court unanimously dismissed the appeal of RFC 2012 Plc (Rangers).
- Between 2001 and 2009, Rangers used an Employee Benefit Trust (EBT) (a form of tax avoidance) to pay its employees; including the professional footballers that played for the team.
- Instead of receiving a salary direct from Rangers, Rangers would pay money (equivalent to the salary) in to a trust for the benefit of the employees (either directly or indirectly) . In turn; the trust would lend money (by way of a loan) to the employees or their family members.
- It was suggested by Rangers that this placed the salary outside of the tax regime that requires employers and employees to pay Income Tax and National Insurance (NIC) (i.e. the Income and Corporation Taxes Act 1988 (ICTA) and subsequently the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), which replaced ICTA from 2003).
- HM Revenue and Customs Commissioners (HMRC) assessed the payments into the EBT as being subject to Income Tax and NIC.
- This decision was appealed to the First Tier Tax Tribunal (FTT) in 2012; the FTT overturned HMRC’s decision. There were further appeals to the Upper Tier Tax Tribunal (UTT) and the Inner House. The UTT agreed with the FTT and overturned HMRC. The Inner House disagreed with the FTT and UTT and agreed with HMRC.
- It fell to the Supreme Court to decide whether money paid in to an EBT (in place of remuneration or salary) was ‘income’ and subject to Income Tax and NIC.
The Supreme Court upheld HMRC’s position.
The purposive approach
The judgement of Lord Hodge (unanimously endorsed by Lord Neuberger, Lady Hale, Lord Reed and Lord Carnwath) talks repeatedly of a ‘purposive approach’.
Lord Hodge states:
“The courts at the highest level have repeatedly warned of the need to focus on the words of the statute and not on judicial glosses”
“the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose”
Over recent years HMRC (at the behest of the Government) has become ever more aggressive with regards to tax avoidance. Tax avoidance historically focussed on loopholes in tax legislation. Tax advisors used a strict interpretation of tax law to present tax avoidance schemes as legitimate tax planning.
This judgement is of particular significance, not only because it is a decision of the highest court on matters of tax avoidance, but also because it bolsters HMRC’s position.
The wider impact
EBTs are one of many tax avoidance schemes. Others include; Employee Funded Retirement Benefit Schemes (EFRBS), Stamp Duty Land Tax (SDLT) Schemes; Employee Bonus Schemes (such as the Growth Securities Ownership Plan (GSOP), Capital Gains Tax Mitigation Schemes; all of these schemes are, or have been, the subject of a dispute with HMRC as to their legitimacy. In every case, the scheme promoter has sought to uphold a technical tax loophole whilst HMRC has sought to rely on a purposive approach. The wider impact of the Rangers big tax case is clear; HMRC will be even more bullish and aggressive when it comes to pursuing individuals and companies who have participated in tax schemes.
Discussing the Rangers case, David Richardson, director general of HMRC’s customer compliance group, stated:
“This decision has wide-ranging implications for other avoidance cases and we encourage anyone who’s tried to avoid tax on their earnings to now agree with us the tax owed…”
“HMRC will always challenge contrived arrangements that try to deliver tax advantages never intended by parliament.”