The long awaited decision of the First-tier Tribunal (‘FTT’) in the Rangers EBT case has now been delivered.1 The FTT, by a 2:1 majority, has held that amounts provided to employees in the form of loans from sub-trusts of an employee benefit trust (‘EBT’) were not liable to PAYE and National Insurance Contributions as employment income. In particular, the FTT held that the Ramsay doctrine2 could not be applied to make the benefits taxable.
The EBT structure
The EBT was designed to provide benefits to family members of employees of the companies owned by the group parent company, Murray Group Holdings Limited (‘MGHL’). The MGHL group of companies also included Rangers Football Club Plc (in liquidation).
108 sub-trusts in the EBT were created between 2002 and 2008, each funded by MGHL. In total, MGHL contributed £55.5 million and €5.3 million into the trusts. Each sub-trust was in the name of an individual and for the benefit of beneficiaries within his (or her) family nominated by him, but not for the direct benefit of the employee himself. The majority of the sub-trusts were for the benefit of families of Rangers’ players (81 sub-trusts). Generally, the employee became the protector of the sub-trust and was able to name those who would benefit from the sub-trust on his death. The employee could also appoint a different protector and trustee.
Each sub-trust was created by MGHL after consulting with the relevant employee. Funds for each sub-trust were provided by MGHL together with a letter of wishes from the employee identifying proposed beneficiaries of the sub-trust and a loan application from the employee. The trustees then granted the loan application, and loans were made without security for a term of 10 years at an interest rate of LIBOR plus 1.5% to 2%. The trustees did not enquire into the employees’ credit worthiness or establish the purpose for which the loan monies would be used.
Counsel for HMRC accepted that the trusts and loans were not a sham, but contended that they formed part of an intricate and secretive arrangement to place cash unreservedly at the employees’ disposal. Counsel for MGHL, on the other hand, contended that the trusts and loans were valid and that previous decisions in favour of the taxpayer should be applied.3
Ramsay – a step too far
The key to HMRC’s argument was that the arrangements in question should be viewed against the doctrine of purposive statutory construction as developed in Ramsay4 and later cases. However, the majority of the FTT (Kenneth Mure QC and Mr S Rae) did not agree with HMRC. In their view, the loan amounts could not be said to have been placed unreservedly at the disposal of the employees and they rejected the argument that the Ramsay doctrine could be applied so as to tax as employment income the loans made to employees from the EBT. The FTT found instead that the existence of the trusts, the continuing discretion of the trustees and the existence of the loans, meant that employees were not free to do whatever they liked with their allocated funds, the final decision remaining at the discretion of the trustees. Given that, and the existence of an existing statutory code to deal with loans, the Ramsay doctrine did not achieve the result sought by HMRC.
The FTT said:
“186. Essentially the issue before us is whether the term earnings (or emoluments for 2002/03) extends to the “loans” made to the Murray Group Executives and Rangers footballers under the Trust arrangement with the resulting charge to tax under PAYE. The same consideration arises in respect of liability to National Insurance Contributions.
193. In short it would seem that even in cases of “aggressive” tax avoidance, such as the present case, the application of the Ramsay doctrine to strike at tax saving arrangements may be fettered in a context where there is already a highly prescriptive statutory code and, also enforceable legal structures in place which are of fundamental practical effect, and not merely incidental or artificial for tax avoidance purposes only.”
This decision will be disappointing for HMRC in view of the hostile stance it has adopted in relation to EBTs, as set out in Spotlight 5 and their ‘settlement opportunity’, details of which were published in 2010. HMRC’s position has been that loans and other benefits provided through EBTs prior to the implementation of the disguised remuneration legislation contained in ITEPA 2003, Part 7A, are a form of disguised employment income and should therefore be subject to PAYE and National Insurance Contributions. HMRC have issued a large number of assessments on this basis and a number of appeals are proceeding to hearing before the FTT. Given the importance of this issue for HMRC, it is likely that they will seek to appeal the Rangers decision to the Upper Tribunal.
The refusal by the majority of the FTT members to apply Ramsay to the facts and circumstances of this case is also worthy of note. It is a welcome reminder that the FTT is prepared to maintain intellectual integrity when construing complex statutory provisions in the context of what HMRC would no doubt describe as an aggressive tax avoidance scheme. In our blog of 5 October 2012 (Tax avoidance scheme succeeds at the Upper Tribunal) we reported that the Upper Tribunal was similarly unmoved by HMRC’s arguments that the Ramsay doctrine could apply to a scheme described by the Upper Tribunal as a “carefully planned tax avoidance scheme which is designed to enable the appellants to provide substantial bonuses to employees … in a way that would escape liability to both income tax and National Insurance Contributions”. HMRC would do well to remember that they cannot rely upon the Ramsay doctrine in every tax planning case in order to do down the taxpayer.