On 4 November 2015, the Scottish Court of Session overturned the earlier decision of the Upper Tribunal in Advocate General for Scotland v Murray Group Holdings Limited and Others9. The Court held that amounts contributed to an employee benefit trust (EBT) by employers for the benefit of employees’ family members were properly taxable as earned emoluments, albeit “redirected” through the EBT.
This particular case – which pre-dated the 2010 introduction of the “disguised remuneration” provisions10 – involved an English EBT with 108 sub-trusts, each for a named employee and funded with money from employer companies in the taxpayer group. The funds in each sub-trust were for the benefit of the relevant employee’s family members and were lent to the employee.
The Court agreed with HMRC that the contributions into the EBT were “redirected” payments of earnings, taxable at the point of contribution. This argument was not raised by HMRC before the tribunals. However the Court’s view was that as the contributions were derived from the services of an employee, they must be taxable as an emolument (even if the employee seeks to redirect the payment to a third party).
There is some uncertainty as to whether this decision is of wider application, or is limited to its particular facts. It does, however, potentially call into question the tax treatment of salary sacrifice arrangements, which are attractive as they operate by waiving a legal entitlement to amounts that would otherwise be subject to tax as employment income.
Although the disguised remuneration regime has resulted in a tax charge arising on similar arrangements since late 2010, the decision is of significance to arrangements put in place prior to that date.
The decision can be found here.