The Supreme Court has today handed down an important judgment on the taxation of payments made by an employer into an employee benefit trust.
The Court held that:
- from 2001-2009, Rangers Football Club (as it was called before it went into liquidation – now RFC 2012 Plc (in liquidation)) made a number of payments into an employee benefit trust (EBT). These payments clearly formed part of the remuneration of the employees concerned (most of whom were footballers);
- the EBT trustee, on Rangers’ recommendation, then resettled each payment into a sub-trust and asked that the income and capital of the sub-trust should be applied in accordance with the wishes of the footballer concerned;
- whenever the footballer wished to use the money in the sub-trust he was given a loan by the sub-trust – he was therefore able to access the money whenever he wished;
- the expectation was that the loans would not be repaid during the footballer’s lifetime and therefore he would gain an inheritance tax benefit as the value of his estate would be diminished by the combination of the loan and accumulated interest.
An employee benefit trust is a legal structure set up by an employer for the benefit of its employees and directors or their family members. Alongside their more traditional use for hedging share awards, historically they were sometimes used as a way of managing tax payments.
That all changed in April 2011 when the disguised remuneration rules came into force. These rules were brought in to tackle the abusive use of EBTs (and other structures) to artificially reduce the amount of income tax/national insurance contributions which employees would otherwise pay. The rules achieved this goal by creating an income tax charge where third party arrangements are used to provide payments in connection with an employee’s current, former or future employment.
Today’s judgment in RFC 2012 Plc (in liquidation)) v Advocate General for Scotland, however, relates to payments made to an EBT before the introduction of the disguised remuneration rules. Some commentators have accused HMRC of trying to impose the disguised remuneration rules retrospectively. If that is the case, then HMRC has succeeded. It is clear from the judgment that:
- the general rule is that the charge to tax on employment income extends to money that an employee is entitled to have paid as remuneration whether it is paid to the employee or a third party – there is no requirement that the employee actually receives it for it to be taxable;
- if the payment constitutes remuneration referable to an employee and is paid into an EBT, it is taxable at the point at which it is paid into the EBT unless there is an exception to the general rule;
- one of the exceptions to the general rule is where, on a proper analysis of the facts, the employee only has a contingent right to the payment. Where this is the case, the payment will not be chargeable to income tax as remuneration until the contingency occurs. This means that deferred bonus arrangements which are subject to genuine conditions should not taxable until the point in time when the conditions are satisfied and the employee is entitled to receive the payment;
- in the Rangers case, the fact that there was a chance that the EBT trustee might not have agreed to set up the sub-trust or might not have granted the loans did not constitute a genuine contingency - the trustee had almost invariably exercised its discretion to set up the sub-trusts and grant loans of the full amount in the sub-trust each time it was asked to do so – the contingency exception could not therefore be relied upon;
- when a court is required to interpret a taxing provision in the context of a tax avoidance scheme, it should apply a purposive interpretation and, in so doing, it is legitimate for the court to look to the composite effect of the scheme as it was intended to operate.
Following today’s judgment, HMRC may now issue ‘follower notices’ to companies which operated similar arrangements, with the aim of settling similar claims without further litigation.
What does this mean for businesses?
Businesses should look at their pre-2011 use of EBTs to determine to what extent there might be PAYE obligations which were not discharged at the time the payments into the EBT were made – this may be the case where a remuneration payment was made into the EBT which was not subject to any contingencies.
If any such payments are identified, then PAYE will be payable on these amounts and a settlement will need to be reached with HMRC.