On 8 July 2014, the Upper Tribunal (Tax and Chancery Chamber) (UT) handed down its eagerly awaited judgement in HMRC v Murray Group Holdings and Others, which concerned an Employee Benefit Trust (EBT) structure. Most readers will know this case as the 'Rangers Case', as the facts relate to employees of the Scottish football club as it existed before its liquidation and subsequent purchase.
The background to the case concerns the setting up of a discretionary trust known as the Murray Group Management Remuneration Trust and 108 active sub-trusts. Each of these sub-trusts was created in the name of individual employees of Murray Group Holdings Limited (MGHL). The sub-trusts were set up at various times between 2002 and 2008, and each was for the benefit of the employee's family, who were nominated by him. Importantly, the individual employee was not a beneficiary to the trust. Usually, the employee became the protector of his sub-trust with the power to name those who would benefit from his sub-trust on his death and to appoint a different protector and trustee. On the employee's death, a further tax benefit might be realised as the loan would be a debt on his estate, reducing its taxable value. Once set up, the employee could, and inevitably did, obtain a loan from the sub-trust. The loans were made without security for a term of 10 years and at an interest rate of LIBOR at the date of the loan plus 1.5 - 2%.
HMRC assessed MGHL group employees to PAYE and NICs in respect of payments into the sub-trusts. The MGHL group employers appealed the assessments to the First-tier Tribunal (Tax Chamber) (FTT).
Before the FTT, counsel for MGHL group employers argued that the trusts and loans were valid and that the loan amounts did not fall to be taxed as emoluments, as they were not placed unreservedly at the disposal of the employee and thus were not taxable 'payments'
Counsel for HMRC argued that although the trusts and loans were not a sham (the investigating HMRC inspectors had concluded that the sub-trust loans were a sham and simply represented contractual earnings of the employees concerned), they formed part of an intricate and secretive arrangement to place cash unreservedly at the employee's disposal. It was suggested that the decision in Sempra Metals Ltd v HMRC was flawed and that the loans, or amounts of sub-trust funding, were taxable as earnings. To reach this conclusion, counsel for HMRC argued that the trust and loans structure should be disregarded for tax purposes by applying the so called Ramsay principle developed in the line of cases including WT Ramsay v IRC.
The FTT decision was released on 29 October 2012. The majority (Mr Mure and Mr Rae) allowed the appeals in principle. The majority held that the taxpayer had been successful in demonstrating that the relevant trusts were properly established and did not simply act as cyphers. The only right retained by the employee, once payments had been made into the trust, was the right to obtain a loan. Although the trust loans discharged an obligation of the employer, the majority held that they were not taxable as earnings as the loan amounts were not placed unreservedly at the disposal of the employees. Recovery of the loans could still be enforced even if it seemed unlikely that this would happen in practice. The FTT rejected HMRC's argument that the Ramsayprinciple could be applied to tax as employment income an employee's benefits from the trust loan arrangements and concluded that the statutory provisions in relation to emoluments and/or earnings contained in ICTA schedule E (for periods before 6 April 2003) and ITEPA Part 2, did not extend to loan relationships. The appeal was therefore allowed. No doubt partly spurred on by the dissenting decision of Dr Poon, HMRC appealed to the UT.
Appeals to the UT are restricted to questions of law. Before the UT, HMRC's primary contention was that the FTT had misdirected itself in law in relation to the correct interpretation of the Ramsay principle. The central question was whether the term 'earnings' could extend to loan payments in the circumstances of the case.
HMRC argued that the FTT, in finding for the taxpayer, had adopted an overly restrictive interpretation of 'emoluments' and 'earnings' and had consequently misdirected itself on the law. What it should have done, according to HMRC, was take a purposive view of the law and then consider the EBT structure in the round. Once looked at in this way the payments of loans were clearly disguised emoluments/earnings. In support of this contention HMRC relied on Aberdeen Asset Management Plc v HMRC, a case which also concerned an EBT but where the Inner House in looking at the structure as a whole had formed the view that the payments into the trust did amount to emoluments and earnings.
The UT (Lord Doherty) found that the FTT had not made any material error in applying the Ramsay principle. The FTT identified and set out the correct approach and considered the transaction as a whole. It had applied a purposive construction and 'endeavoured to take a realistic view of the facts'. The UT rejected HMRC's appeal and remitted certain aspects of the case back to the FTT.
Crucially, the difference between the Aberdeen case and the Rangers Case was the extent of control retained by the employee after payment had been made into the trust. In Aberdeen it was possible for the employee to obtain the trust money absolutely and because of this the Ramsay principle was found to be engaged and the transaction unravelled. It was critically important in the Rangers Case that the employee retained no rights other than the right to a loan. The trusts were properly constituted, the transfers of funds straightforward, and the employee had no rights to the trust money. The only benefit the employee could derive was a loan, and loans are not subject to PAYE or NICs.
HMRC have undertaken something of a campaign against this type of structure in recent years. In HMRC's view, the payment of funds into EBTs is equivalent to employment income and should be subject to income tax and NIC accordingly. However, its success rate before the courts in this area has not been particularly impressive and yet it has continued to challenge such arrangements.
HMRC will no doubt be very disappointed by this decision. Decisions of the UT (unlike those of the FTT) are binding authority and this decision is a strong endorsement of the FTT's approach and reasoning in relation to the application of the Ramsay principle. With the potential for significant application to the large number of other EBT cases which remain unresolved, it is likely HMRC will seek to take this matter on appeal to the Court of Session. However, looking at the broader picture, it is perhaps time for HMRC to accept that not all EBT planning arrangements should be challenged and that finite resources could be better utilised elsewhere.
This decision is also of wider importance, as it represents a further iteration and articulation of the approach the tribunals and courts should take in relation to the interpretation of taxing statutes and the application of the Ramsay principle.