Rangers agreed to reward employees partly through a trust. The trustee later lent money to the employees. For tax purposes the decisive question was what the employer paid for when it put money into the trust, before any loan was made.
The scheme
From 2001/02 to 2008/09, companies in the Murray group paid money to a principal remuneration trust. A company recommended that the trustee put the money into a sub-trust for an employee’s nominated beneficiaries. The trustee had discretion, but in practice established the requested sub-trusts. The Supreme Court appeal concerned only payments made by the company formerly known as The Rangers Football Club plc.
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Players negotiated on the basis of the amount they would receive after tax. The trust arrangement offered access by loan to a larger sum than a payment taxed through payroll. The parties expected the loans to be renewed during the players’ lifetimes.
A player’s contract specified his payroll salary. A separate side-letter recorded the club’s undertakings about funding the trust. The player usually applied for a loan, and the trustee almost invariably lent the full amount without security. The side-letters helped the Court identify what the employer’s contribution represented.
As protector, the employee could change the trustee and the beneficiaries, although while he remained protector he could not give himself an absolute beneficial interest. The First-tier Tribunal found that the trusts and loans were valid and were not shams, and that the trustee genuinely exercised its discretion. HM Revenue and Customs did not challenge those findings. The same trust and loan mechanism was used for termination payments, guaranteed bonuses and discretionary bonuses. Senior executives had no contractual right to a discretionary bonus before it was awarded, but it was still paid as a reward for their work.
How the dispute reached the Supreme Court
The First-tier Tribunal accepted by a majority that the employees received genuine loans and ruled in favour of the employing companies. The Upper Tribunal upheld that result.
In the Inner House the Advocate General for Scotland relied on an argument that had not been developed before the tribunals: payment to the trust redirected the employee’s earnings and did not take them outside income tax. On 4 November 2015 the Inner House accepted that argument and allowed HMRC’s appeal. Only RFC 2012 Plc, the company in liquidation formerly known as The Rangers Football Club plc, appealed further. The parties agreed that the income-tax result would also decide the national insurance contributions.
Payment to a third party
RFC argued that a third-party payment could only be taxed as earnings if the employee first had a legal right to receive the money and then directed it elsewhere. Under these arrangements, it said, the employees had no entitlement to the trust contributions themselves.
Lord Hodge examined the income-tax legislation applicable in the relevant years. Both regimes used broad language to tax monetary rewards for employment. The general charge identified the employee whose work produced the earnings. It did not require every payment of those earnings to reach the employee’s own hands.
Lord Hodge therefore stated a general rule: money which the employee is entitled to have paid as remuneration is taxable whether it is paid to the employee or to a third party, including a trustee. An agreed payment to a spouse would be as much a reward for the work as salary paid to the employee. References in the pay-as-you-earn regulations to payment to an employee cover payment of that employee’s emoluments to another recipient.
The distinction is between money paid as remuneration and a payment made to provide a genuinely contingent future benefit. The Court also distinguished benefits in kind, which may fall under different rules. Earlier decisions about when a sum was put at an employee’s disposal did not establish that agreed monetary remuneration escaped PAYE whenever the employer paid a third party.
Why these payments were caught
The side-letters and the negotiations showed that the payments into the Principal Trust were part of the players’ reward for working for the club. The trustee’s genuine discretion, and the possibility of its refusing a loan, did not alter why the employer paid the money. For executives, the bonuses were discretionary until awarded. Once the employer decided to give a bonus for their work and paid it to the trust, its voluntary origin did not stop it being earnings.
The trustee of the Principal Trust was the recipient of the emoluments. Income tax should have been deducted under pay-as-you-earn when the employer paid that trustee. The later loan did not stop the earlier payment from being taxable.
Separate tax provisions concerning loans and other benefits did not displace the charge on the original remuneration. Nor could later anti-avoidance legislation determine what the provisions for these earlier tax years meant.
Verdict: The Supreme Court unanimously dismissed RFC’s appeal. PAYE income tax should have been deducted when the employer paid the trustee. The parties agreed that this conclusion also determined the treatment of Class 1 national insurance contributions.
Source: RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45
