Full Time for EBTs

Rangers ruling should serve as further warning to contractors

The Supreme Court last week ruled unanimously that payments made by [formerly] Rangers Football Club Plc to its players via employee benefit trusts (EBTs) were taxable income, bringing to an end a long running saga.

Between the period 2001 – 2010, HMRC argued that Rangers players, managers and directors received a total of £47 million in tax-free loans, when the income was really earnings and should have been subjected to tax and NIC.

What is an EBT?

The popularity of EBTs began in the late 1980s. Companies would set up trusts to hold cash and other assets to provide benefit to employees and their families. In more recent times however they have been exploited by scheme promoters to provide tax-free loans to employees or beneficiaries, causing HMRC to clamp down on their abuse.

The Rangers scheme

RFC 2012 Plc (RFC) was a member of a group of companies whose parent company was Murray International Holdings Ltd. On 20th April 2001, Murray Group Management Ltd, also a member of the group, established the Principal Trust. When a group company wished to benefit an employee it made a payment to the Principal Trust and asked its trustee to resettle the same amount on to a sub-trust so that the income could be applied in accordance with the employee’s wishes.

All the trusts were set up in Jersey.

When RFC signed a player they would explain the EBT mechanism and, in particular, that they could obtain a loan which would be greater than it would if it were paid through the payroll. The same mechanism was used to pay discretionary bonuses to senior executives.

Once a player was signed, the terms of his engagement were recorded in two separate contractual documents. The first was a contract of employment which set out the terms of employment and the footballer’s remuneration which would be subject to PAYE tax and NIC. The second was a side-letter in which the EBT payments were set out, and which were hidden from both the tax man and the footballing authorities.

In July 2001, one player’s agent recorded his client’s remuneration as follows:

“Annual Salary £8,000 p.w. Contribution to Remuneration trust £8,000 p.w namely £416,000 p.a which equates to the sum of £250,000 p.a net. The player will accordingly receive £125,000 in October and February during each year of the Contract. Rangers will grant the appropriate indemnity that they will be responsible for payment of any tax should the revenue seek to recover any tax from the player on these amounts.”

The scoreboard

Rangers scored an initial victory in October 2012, when the First Tier Tax Tribunal held that the scheme was effective in avoiding liability to income tax and NIC because the employees had only received a loan of the moneys paid to the trusts. The club went 2-0 up when the Upper Tribunal upheld that decision in July 2014. However, the Inner House of the Court of Session found in favour of HMRC, agreeing that the payment of moneys to the remuneration trust involved a redirection of the employee’s earnings and therefore those earnings were not exempt from the charge to income tax.

So, to the Supreme Court where the next goal was the winner.

As a general rule, the charge to tax on income extends to money that the employee is entitled to have paid as remuneration irrespective of whether it is paid to the employee or to a third party. The sums paid to the trustee of the Principal Trust for a footballer constituted the footballer’s earnings and therefore the payments to the trust should have been subject to deduction of income tax under the PAYE Regulations.

Dave Richardson, director general of HMRC’s customer compliance group, released a statement following the judgment stating:

“The unanimous decision of the Supreme Court supports our view that EBT avoidance schemes simply do not work.

This decision has wide-ranging implications for other avoidance cases and we encourage anyone who’s tried to avoid tax on their earnings to now agree with us the tax owed. HMRC will always challenge contrived arrangements that try to deliver tax advantage never intended by Parliament.”

Any contractors still tempted by the lure of high returns of income from contractor loan schemes that use similar trust mechanisms should think long and hard about what they are getting themselves into. HMRC have had huge success in litigating against these schemes and it is apparent that the courts share the Revenue’s distaste of what they view as tax avoidance.