The recent case of Murray Group Holdings Limited v HMRC TC 2372 concerned the tax implications of a loan to an employee from an employee benefit trust. We all know what the implications of loans are now - complete catastrophe - but that was not the case before the introduction of Part 7A ITEPA 2003 in April 2011.
Rangers Football Club had an EBT and the trustees made loans to employees and their families. HMRC argued that the full amount of the loans was taxable as earnings in the hands of the employees.
Unfortunately this potential liability pushed Rangers into liquidation and that had some effect on the team's position in the Scottish football league; the management tried to reach some accommodation with HMRC to prevent these seriously adverse consequences. They could not reach agreement; HMRC pressed the case to the Tribunal and Rangers went into liquidation. The Tribunal found in favour of the taxpayer but the damage to Rangers financial position was beyond redemption.
Anyway, back to the loans. As this case deals with events prior to April 2011 and you cannot have loans anymore, this may seem to be of rather limited interest. However, it does expose aspects which might have a much wider application.
HMRC said that these loans were shams. (That is to say, they were not really loans; they were made to look like loans but in truth they were something else.) The true nature of the payments is that they were contractual earnings of the employees.
Interestingly, when it came to the Tribunal, Counsel for HMRC did not claim the loans were shams. He claimed that the loans formed part of an intricate and secretive arrangement to place cash unreservedly at the employee's disposal. This seems to me to be just another way of saying that it was a sham. But what do these words mean? When somebody has a loan, the cash is always unreservedly at their disposal - that is what a loan is. (If I hire a car for the weekend, it is unreservedly at my disposal. I have to give it back. Well actually, I don't - I could hang on to it, as long as I keep paying for it. It does not make it my car). If what he was meaning is that the cash was never going to be repaid, then it was not a loan and the true nature of the transaction was different from that which it was represented to be i.e. it was a sham. It seems to me that for some reason, HMRC were just a bit coy about pressing the argument. The judgment of the Tribunal was mainly about whether the loans were real or not. The majority said that the loans were real and did not therefore represent earnings.
The Tribunal also considered that the Ramsay doctrine could not be applied as they saw the trusts and the loans as "genuine legal events with real legal effects". This is resonant of the concept of "genuine legal events with real legal effects" in the Court of Appeal in Mayes and I guess that most people would feel it is right that a genuine legal event with a real legal effect should not be completely ignored.
There was a long dissenting judgment in the Tribunal (85 pages) and this too concentrated on whether these were loans or not. Dr Poon was clearly desperate to avoid using the S word. She accepted that the loans had juristic reality but said that they were not real for any commercial purpose.
I cannot help thinking that this is just a more delicate way of saying it was not really a loan - and if it was not a loan, it is easy to conclude that it should be earnings. It is really difficult to say to somebody, I am lending you this money; juristically it is a real loan but it is not real for commercial purposes.
Where does it leave a bank employee who has the benefit of a bank loan to buy a house or car? Why is that not earnings? Is it because this loan would be accepted as genuine but the loans to the Rangers footballers were not genuine? If that is the case they should say so and not confuse us with references to juristic reality and unreal commercial purposes.
(I digress. I expect a number of people will have had the experience when explaining a difficult tax problem to a client for them to say: "Let's be commercial". I have always regarded this as code for meaning that we should pretend these rules do not exist because I do not want my objective to be frustrated by legal obstacles. My response is always to suggest that if they do not want to adhere to the legal rules, why are they going to all this trouble - why don't they just pop into the nearest bank with an Uzi.)
It seems to me that the matter ought to be concluded on the basis of whether or not the loans were real or not. Shades of genuineness are as elusive as shades of virginity. However, I guess we have not heard the last of this.