With a recent announcement from the Supreme Court that the long-awaited judgement for RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland (Respondent) (more commonly known as the Rangers Case) will be known on 5th July 2017, it is worth recapping on the salient points of the case to anticipate what effects the decision might have on the wider tax avoidance landscape.
The facts of the case are such that The Murray Group devised an arrangement with sought to mitigate PAYE and NIC payments for both executives and footballers, using an offshore trust arrangement. Using the trust, the money was issued to the beneficiaries via a sub-trust, in the form of a tax-free loan. HMRC subsequently sought to re-classify the loans as earnings under s.62 ITEPA 2003. They raised PAYE demands on the company as the employer.
In the most recent installment of the case, the Court of Sessions upheld HMRC’s appeal following two previous defeats. Lords Carloway, Menzies and Drummond Young all held that the amounts were assessable to income tax due to the payments having the characteristics of emoluments or earnings.
The appeal was upheld on the basis of the redirection of earnings principle. This is summarised using the court’s own words that “The critical feature of an emolument and of earnings as so defined is that it represents the product of the employee’s work, his personal exertion in the course of his employment.”[i] The case therefore turned on the principle of whether or not the payments were received as a result of the “personal exertion” of the employee. In simple terms did the players and executives receive the payments for any reason other than the work they provided for the club?
So where does the eventual tax liability sit?
In summing up, the judges note that “we are of opinion that the sums received by the trustee of the Principal Trust, and in due course by the trustees of the sub-trusts, amounted to a mere redirection of income and thus constituted emoluments or earnings of the employees in question.”
“We accordingly conclude that the primary argument presented for HMRC is correct: the payments made by the respondents to the Trustee of the Principal Trust in respect of employees were emoluments or earnings and are accordingly subject to income tax.”
“Furthermore, those payments were made at the time of payment to the trustee of the Principal Trust, with the result that the obligation to deduct tax under the PAYE system fell on the employer who made such a payment.”[ii]
Here we see that the liability remains with the employer to deduct PAYE and NIC at the point that the payment was issued to the trustee and that HMRC had no grounds, therefore, to transfer that liability on to the players and executives who actually received the payments. This is an important consideration in HMRC’s ongoing battle with EBT’s and loan based arrangements such as those commonly used by contractors. The widespread use, by HMRC, of APN’s, Notices of Assessment and the Contractor Loan Settlement Opportunity to recover sums of tax that HMRC consider to be underpaid as a result of arrangements giving rise to similar effects to those seen in the Murray Group case, begs the question as to whether HMRC have the right target for recovery. Where it can be shown that the primary liability, to PAYE and NIC, should sit with the employer, as is the case here, then under what grounds does HMRC have to transfer that liability to the employee?
To answer this question an analysis of the PAYE regulations is required. Regulation.81(2) (PAYE Regulations 2003) notes that for the employee to be responsible for the primary contributions (PAYE & NIC) the employee must receive the payments knowing that the employer has wilfully failed to deduct the amount of tax which should have been deducted. With the above in mind if it can be shown that the employee thought that their employer was deducting all required tax on their behalf, then the moving that liability to the employee is difficult. Many historic EBT promoters assured employees that their arrangement was compliant and that all tax was being deducted.
It falls to reason that, whilst HMRC may win their overall argument that the loans were indeed income, this may become a pyrrhic victory once they appreciate that they are either too late to issue Regulation 80 determinations, or the employer is no longer solvent- as is the case for the Murray Group. The result- a limited recovery of underpaid tax. Perhaps this is why the latest HMRC attempt at drawing a line here, the controversial and retrospective 2019 charge, also has provisions to allow for PAYE to be transferred more easily to individuals?
The judgement to be delivered next week should go some way to clarifying the law on a particularly opaque area of tax legislation. Whilst it remains somewhat of a seminal case for HMRC in their continuing battle against historic tax avoidance, it is hard to see the monetary benefit for the public purse in HMRC’s relentless pursuit of this case. Given that HMRC has refused to divulge how much they have spent in legal fees, we may never know if the taxpayer has been well served or whether this is an exercise that owes more to personal pride than public policy.
With this in mind, whilst it is clear that the decision is likely to have an immediate effect on Corporate EBT’s, it is difficult to see how HMRC will apply the facts to their wider strategy. It is perhaps, therefore, not important who wins but rather how they win and on what grounds. The outcomes might, therefore, be distilled into the following:
1) HMRC win, redirection of earnings upheld- It seems clear that almost all payments coming out of an employer should be taxed by the employer
2) Murray Group win- Here the danger is that the assessment on the company for not deducting PAYE is incorrect and grounds for going against individuals becomes very uncertain.
3) HMRC win on alternative grounds- uncertainty will continue
Recently, Lord Drummond Young delivered an address at the Inner Temple discussing the merits of the Substance over Form argument which was characterised using an in-depth analysis of the Murray Group case. In concluding, he summarised the words of Jerome Frank stating that “legal rules are like a bus: they take you to the general area of your problem, but eventually a time comes where you must get off and walk.” [iii] Will the Murray Group case and its practical application in the event of an HMRC win, be the bus that takes them too far in the wrong direction, leaving a long walk back to the start?
[i] RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland)
[ii] RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland)
[iii] ‘The Rangers Case: HMRC v Murray Group Holdings – Substance and form – the triumph of reality over language?’ Lord Drummond Young, 23rd February 2017 N