Why it's not the end for every EBT ever used
The continuing uncertainty over contractors’ tax liabilities has not been helped by the Murray Group Court of Sessions decision which was a surprise win for HMRC, writes Graham Webber of tax enquiry settlement firm WTT Consulting.
Tax people are not renowned for their fiery temperaments or outrageous opinions. They tend to be ‘fence-sitters,’ prepared to see both sides of the HMRC/taxpayer argument to consider matters carefully. It’s rare therefore to see such polarised reactions to the decision.
One group says that this decision is the ‘end of every EBT ever used.’ The other group says that the decision is weak and an appeal would have a very good chance of success. Curiously HMRC, at the time of writing, has been relatively silent aside from acknowledging the result.
Here, exclusively for ContractorUK, I will explore this case - Advocate General for Scotland v Murray Group Holdings and others (the Rangers case), and consider what it means for contactors who have used similar arrangements.
In the mid 2000s Rangers Football Club needed top class players to compete in Europe but had problems in paying the going rate. As a result the company that owned Rangers, with help, devised a scheme whereby funds would be paid into a trust, then a sub trust and then be loaned to the player. Their argument was that the loans were not remuneration.
This was an argument that, until last week, was approved by the first two levels of Tax Tribunals. The Court of Sessions has reversed this view and considers that the contribution made by the employer to the first trust, constitutes employment income.
According to the judges, a tax liability arises on the employer at the point a payment is made to the first trust. That is a PAYE liability. In other words, the contribution to the trust is effectively salary. This liability is triggered when the funds first emerge from the employer.
The earlier decisions
These held that the allocation of contributions from Rangers to the first trust did not give the ultimate recipients of the loans (the players) an absolute entitlement to any cash. The players/managers could not use the funds as they wished and the discretion of the trustee operated in a way that could deny them the funds. (The fact that such denial was never in practice exercised was obviously considered important but not crucial.) Additionally, the loans were legally and actually loans. As such they could not also be salary.
HMRC attempted to argue that the “interim” stages of funds passing through the trusts and loans should be ignored as they were essentially steps inserted to achieve a tax purpose, not a commercial one, i.e. the Ramsay principle.
The current decision
HMRC’s advocate clearly recognised that a new argument was needed to turn away from the blind alley created in the earlier Tribunals. He therefore said that a “mere redirection of earnings” did not remove the employee’s liability. This, the advocate argued, was common sense. He argued also that it was not necessary for the money to be at the unreserved disposal of the employee as in the circumstances the employee could direct the second trust to loan him the money. A nice mix of common and legal sense!
This gave the Court of Sessions a problem in that the FTT is a fact-finding body and had found that there was a real discretion held by the trustee and the loans were real. A higher Court cannot restate those facts unless the analysis is clearly wrong. Nor can it admit grounds of appeal that has not been advanced in a lower Court. Given that the second Tribunal (Upper Tier) had not heard this new point, potentially HMRC faced defeat without having their arguments tested!
The Judges however held that they should admit these new grounds for various reasons including the service of justice, to clarify matters of English v Scottish law and that it did not require the statement of facts to be materially changed. Perhaps the reasoning here is open to contrary interpretation and would be considered valid grounds of appeal (if made).
Having given itself grounds to hear the case, the court considered whether the use of the trusts was simply a redirection of earnings. If so, then the employer had paid salary and a PAYE liability arose at the point that payment arose.
There was a long, technical, exploration of what is meant by earnings. Broadly, if sums arise from the services that the employee gives to his employer, it’s salary and is subject to PAYE deductions which the employer is responsible for paying. It is my opinion that, a lot of the supporting cases have been selectively quoted or taken out of context, thereby offering further grounds for appeal.
A long debate was held over the potential for such income to be double taxed, initially when it arises from the employer and again when paid by the trust as a loan. In a potentially helpful piece of reasoning, the judges held that the “distributions” from the trust could not be regarded as income. The quid pro quo of course is the liability for the employer.
In this case there are a lot of fact-specific issues such as the non-discretionary nature of bonuses; the ability of the employees to direct the trust; the loan application processes, etc. Some of these have arguably been selectively justified by reference to cases.
The abiding sense I get from reading the judgement is that while the “common sense” argument has some power, in order to make it work, the judges have performed some logical somersaults. Whether they can remain valid when the law is applied, rather than common sense, is going to be interesting.
Can the decision be used elsewhere?
Yes it can, only if the circumstances of the payments arising from the employer are the same or very similar.
So, the question is, are the EBT arrangements used by contractors, sufficiently similar?
I think the answer to this divides into three parts. There is firstly the pre-2011 crop. These tend to have arrangements in which an agent engages an individual and places that individual with an end-user client. The client pays the agent. The agent pays the individual and makes a contribution to a trust. That contribution may be directly by the (normally UK) agent, or more likely perhaps, passes to the Isle of Man owner of the agent where it goes into a trust. Is that the same as seen in this case? Probably not.
Secondly, there are the post-December 2010 arrangements, put together after the disguised remuneration rules arrived. These tend to use a wider variety of structures and are bound by specific rules. Does the judgement sit easily with those rules? Again I think not. In particular the judges were keen to justify their decision as preventing double taxation. The DR rules may not permit that interpretation and as a result may invalidate it.
Thirdly, there are schemes being offered now that do rely upon the redirection of income. My personal view is that these are perhaps the most vulnerable. That said, these schemes are usually delivered to potential customers in a secretive way and I’m sure that I’ve not seen all the details.
My personal view is that those prophesying disaster for all EBTs are doing so for reasons that I cannot find in the judgement. I think most arrangements I’ve seen are sufficiently different from those described in the decision to permit a continuation of resistance.
I do not see any reason to accept the present HMRC analysis. Not only do the facts vary from those above, but HMRC will need to justify an assessment on an individual based on a decision on a PAYE liability. I think we’re a long way from that connection being proven for both pre and post 2011 schemes.