HMRC successfully appealed to the Court of Session which held that payments into an employee benefit trust (EBT) were subject to tax.

The Glasgow Rangers Football Club had used an EBT arrangement to deliver payments to players and staff in a way that they expected would avoid income tax and national insurance.

The EBT arrangement involved a number of steps:

  • The employing company made a payment of cash into an EBT in respect of a particular employee
  • The employing company then requested that the EBT resettle the payment into a sub-trust (the beneficiaries of this sub-trust were identified in a letter of wishes by the employee)
  • The employee would request a loan from the sub-trust (in practice this request was always accepted)
  • The employee did not repay the loan

The planning was thought to be effective because the loans remained repayable and therefore it could not be said that the monies were unreservedly at the disposal of the employee. HMRC had been unsuccessful at the First Tier Tax Tribunal and Upper Tier Tax Tribunal.

The Court of Session considered that the critical question was whether the payments made by the employing company represented part of the consideration for the employee’s services.

In determining that the payments were consideration for the employee’s services the Court of Session took the view that as part of the arrangement the employee was effectively directing where their remuneration should be paid.

If the employee had directed that the payment be paid to their wife/husband then under well established principles this would remain taxable to the employee. The payment to the trustees effectively achieved the same result (ie it was paid to someone else at the employee’s direction).

Reaction amongst advisers has been mixed to the decision with suggestions that the reasoning is difficult to reconcile with some of the earlier cases and by reference to the specific employment legislation and regulations. However, in the current climate the courts are increasingly looking for ways to rule against arrangements that are regarded as aggressive.

Given that the arrangement would have the result, if effective, that large chunks of remuneration would escape the charge to tax it is unsurprising that HMRC has devoted significant resources to challenge this arrangement.

The successes at First Tier Tax Tribunal and Upper Tier Tax Tribunal level may well encourage Rangers FC to seek a “replay” of the match at the Supreme Court.

It is understood that there a number of other cases and arrangements which HMRC has lined up once this case is finally disposed of and it can be expected that a large number of follower notices and accelerated payment notices will be issued.

The use of EBTs in tax planning is much less common following the enactment of the disguised remuneration legislation (this case pre-dated that legislation). To the extent that EBTs are still being used this case is a timely reminder that HMRC can be expected to look at any EBT arrangements very closely.