On 8 July 2014, the Upper Tribunal (Tax and Chancery Chamber) (UT) handed down its judgment in HMRC v Murray Group Holdings and Others 10 (the Rangers case), which involved an Employee Benefit Trust (EBT) structure.
The case concerned a discretionary trust (the Murray Group Management Remuneration Trust) and its 108 active sub-trusts. Each sub-trust 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 established, the employees would inevitably 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).
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 whilst the trusts and loans were not a sham, they formed part of an intricate and secretive arrangement to place cash unreservedly at the employee’s disposal. HMRC argued that the decision in Sempra Metals Ltd v HMRC11 was flawed and that the loans, or amounts of sub-trust funding, were taxable as earnings. This was on the basis 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 IRC12.
The FTT, by majority, allowed the appeals in principle. The majority were of the view 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.
The FTT rejected HMRC’s argument that the Ramsay principle 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.
Before the UT, HMRC argued that the FTT had misdirected itself in law in relation to the correct interpretation of the Ramsay principle, adopting an overly restrictive interpretation of “emoluments” and “earnings”. Consequently the FTT had 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. HMRC argued that, looked at in this way, the payments of loans were clearly disguised emoluments/earnings. In support of this argument HMRC relied on Aberdeen Asset Management Plc v HMRC13, 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 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.
The key 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. In the Rangers case the only benefit the employee could derive was a loan, and loans are not subject to PAYE or NICs.
This decision will potentially have significant application to the large number of other EBT cases which remain unresolved. 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.
HMRC have now been granted permission to appeal to the Court of Session.