Taxman wins in latest Rangers 'Big Tax Case' judgement

The challenge concerns the company which ran Rangers until 2012.

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HM Revenue and Customs has always argued that the use of EBTs were a way of paying players, managers and other staff and should be taxable like all salaries, but former owner Sir David Murray had twice successfully argued that they were loans and therefore exempt.

The judgement release today accepts the HMRC view and has overturned previous rulings on appeal.

HMRC had maintained that the effect of previous tribunal decisions in the case is that employees can avoid paying income tax by agreeing that payments be made to others of their choosing, rather than getting the money themselves.

The judgement said HMRC contended the scheme amounted to “a mere redirection of earnings which did not remove the liability of employees to income tax”, it was argued.   The court concluded that the argument by HMRC was correct, and accordingly allowed the appeal on that ground.

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An HMRC said after their victory that it will aim to challenge other EBT cases.

An HMRC source said: "HMRC has a responsibility to make sure people pay what they owe and will always challenge tax arrangements where we do not think they work

"As supported by the decision in this case, HMRC’s view is that Employment Benefit Trust avoidance schemes do not work. HMRC has collected over £1.3bn in tax through 1,500 users of similar schemes.

"HMRC will continue to settle appeals by agreement where appropriate but will if necessary continue to litigate cases where settlements cannot be agreed."

The judges observed that the “fundamental principle” that emerged from previous cases was clear that "if income is derived from an employee’s services (in their capacity as) an employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party”.  

Delivering the opinion of the court, Lord Drummond Young said: “That accords with common sense.  If the law were otherwise, an employee could readily avoid tax by redirecting income to members of his family to meet outgoings that he would normally pay: for example to a trust for his wife...or to trustees to pay for his children’s education or the outgoings on the family home…The funds are ultimately derived as consideration for the employee’s services, and on that basis they are properly to be considered emoluments or earnings.”

But this is not likely to be the end of the protracted affair. There could well be a final appeal to the UK Supreme Court.

Many believe the spectre of a massive loss in the tax case which the club could not pay was main reason for the financial implosion that led to the club's operating company entering liquidation.

It is understood the prospect of a massive debt that Rangers could not handle led to Lloyds Banking Group insisting £18 million in club debts were cleared, for fear that they would lose millions if it went into liquidation.

That led to Sir David Murray's sale to Craig Whyte, liquidation, and eventually Rangers playing in the bottom tier of the Scottish Football League.

As early as 2012 a tax tribunal ruled that the club's use of Employee Benefit Trusts (EBTs), which provided tax-free loans, was not illegal.

During the July appeal, the Court of Session heard the HMRC maintain that both a First Tier Tribunal and an Upper Tribunal, chaired by judge Lord Doherty, erred in dismissing their claim that EBTs should be taxed.

The taxman maintained the effect of previous tax tribunal decisions in the case is that employees can avoid paying income tax by agreeing that payments be made to others of their choosing, rather than getting the money themselves.

But the new judgement said that the “true nature” of the individual transactions was that bonuses were paid into the trusts on the basis of the work performance of the employee in question, and the profitability of his employing company. 

“On the foregoing basis, 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,” Lord Drummond Young said.

The judgement analysis said that in relation to footballers, when a contract of employment was concluded, "an additional side-letter provided for a discretionary trust payment and the amount of any bonus was typically negotiated by the footballer’s agent as part of his overall responsibility for securing “proper remuneration” for the player’s services".

Lord Drummond Young continued: “It seems to us to be self-evident that the obligations in the side-letter were part of the employee’s employment package, and provided him with additional remuneration.  They were negotiated as part of the total employment package…Once it is accepted that the bonus payments represented consideration for a footballer’s services qua employee, it inevitably follows that those payments represented emoluments or earnings of the footballer in question.

“Furthermore, so far as the footballers are concerned, at least, it seems to us that if bonuses had not been paid they might well have taken their services elsewhere. We realise that the fifth respondent [RFC 2012] was in, potentially, a difficult financial position, competing for good players in an international market where other countries may not have the same rigorous approach to taxation as the United Kingdom. Nevertheless, the law is clear: the payments made in respect of footballers were in our view derived from their employment and thus the payments were emoluments or earnings.”

He added: “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.”

Liquidators of the Rangers oldco have confirmed that £72m of the £94.4m owed to HMRC relies on the taxman's claim that ¬ Rangers was liable for its use of EBTs. A taxman victory means that the maximum amount of debt potentially left by the oldco would remain at the £168.8 million and may result in minimal payouts to other creditors.

Enraged Rangers fan groups have previously accused the HMRC of wasting millions of pounds of public money in its "witch-hunt" in pursuit of what it called a "phantom tax debt".

They have also raised questions over why HMRC began to target the club in the spring of 2010, nine years after the club starting using the scheme and as EBT loopholes were being closed through legislation.

The use of EBTs relate back to Sir David Murray's time in charge of the Ibrox club before he sold his controlling stake in the club to Craig Whyte for £1 in May 2011.

Rangers were subsequently forced into administration under Mr Whyte's control and placed into liquidation in February 2012.

A Charles Green-led Sevco consortium bought the liquidated assets of the club in June 2012 following the disastrous reign of Mr Whyte.

HMRC argued the payments should be taxable but Sir David's International Holdings argued they were loans and therefore exempt.