When the law is confusing, when the efforts of HM Revenue & Customs (“HMRC”) seem ineffective and when an impecunious state needs higher tax yields, what better time could there be for the Supreme Court to invoke the populist battle cry “tax avoidance” and to head for the “right” decision? Perhaps, it is respectfully suggested, when the (reasoning) means can justify the (judgmental) ends.
Employment taxation has long been a fraught area of law. Complex, contradictory, anachronistic and – in its overlapping regimes of PAYE and National Insurance Contributions – schizophrenic, it is an area beset by technical misunderstanding and operational impossibility. Much of this trouble is evident in RFC 2012 plc (in liquidation)(formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45, where the Supreme Court, finding for HMRC, produced an apparently simple solution to a vexatious problem.
The Employee Benefit Trust (EBT) has become a target of UK tax law in the twenty-first century. No longer recognised as a pragmatic and prudent way for an employer to reward its employees, it is commonly portrayed as a wicked form of tax avoidance. However, despite often lengthy litigation by HMRC (such as Dextra Accessories Ltd. & Others v MacDonald [2005] UKHL 47; [2005] S.T.C. 1111) or complex legislation (such as the “disguised remuneration” rules that form Part 7A of the Income Tax (Earnings & Pensions) Act 2003), the extracting of tax from EBT arrangements has often proved as elusive as nailing jelly to a wall.
The relevant facts before the Supreme Court can be summarised shortly. Players (and some other staff) at Glasgow Rangers FC could choose to receive part of their remuneration package not as salary, but in the form of employer contributions to trusts set up for their (and their nominated relatives’) benefit. The trusts were sub-trusts of a “parent” EBT. The player could, if the trustees consented, borrow money from the sub-trust. In this way the player could receive some cash temporarily, without attracting the payroll tax that attaches to a payment of salary. When Glasgow Rangers set up the EBT arrangement in 2001, such loans were liable to another, lesser form of employment tax (by s. 173(2)(b) ITEPA); but the “disguised remuneration” rules of 2011 rendered the loans subject to payroll tax.
At the First-Tier Tribunal (as Murray Group Holdings v HMRC [2017] UKFTT 692), HMRC's standard argument, namely that the arrangements were a sham, failed. The argument failed also at the Upper Tribunal ([2014] UKUT 0292).
Ordinarily, such an outcome would not necessarily represent a defeat for HMRC. This is because of a reciprocity between corporation tax and employment tax. Broadly speaking, unless and until an employment tax liability arises on the money that the employee enjoys from the EBT, the employing company cannot get a corporation tax deduction for its contributions into the EBT. (This reciprocity principle emerged from Dextra and is now contained in ss. 1290–1296 Corporation Tax Act 2009.) Thus, in effect, if HMRC cannot tax the employee, it can tax the company instead – albeit that the rate of corporation tax is usually lower than the rate of employment tax.
In the case of Glasgow Rangers the position was different. The club had significant accrued losses and therefore was not liable to corporation tax. Thus the alternative route of denying a corporation tax deduction was of no use to HMRC.
Therefore, on appeal, HMRC had to adopt a different approach and, in footballing parlance, the Court of Session allowed the taxman to retake his penalty.
Counsel for HMRC presented the new argument that the employer's contributions to the EBT were a redirection of the employees’ “earnings” – and not, as the tax community had long understood, simple a type of “benefit-in-kind”. The distinction is important because “earnings” (as per s. 62 ITEPA) are subject to payroll tax, while “benefits-in-kind” (chapter 2 ITEPA) are not usually subject to payroll tax. The Court of Session accepted this argument and the Supreme Court has now upheld that decision, seemingly by changing the case law established definition of “earnings” (at [58]).
It should be stressed that benefits-in-kind do not escape tax. They are subject to various, specific but different forms of employment tax. This distinction did not always seem clearly understood in some of the courtroom exchanges.
The Supreme Court carefully articulated how it had gone about its judicial exploration of the matter. Lord Hodge emphasised (at [15]) three aspects of statutory interpretation that were important in determining the appeal. Firstly, the existence of a specific tax charge does not necessarily militate against the existence of a more general charge to tax. Secondly, judicial interpretations of statutory wording should not become a substitute for that statutory wording. This comment appears to be the preface to the disapproving of several authorities that Lord Hodge went on to consider. Thirdly – and perhaps most tellingly – the courts should adopt a purposive approach to the interpretation of tax legislation.
While Lord Hodge can be commended for his clarity, his three suggested aspects of statutory interpretation require scrutiny. As to the first, a simple restatement of his words may suffice as a critique: the existence of a specific tax charge can militate against the existence (or, more accurately, the application) of a more general tax charge. As to the second, what of the principle of judicial precedent? As to the third aspect, the moral climate – particularly in an era of continuing economic austerity – lends endorsement to Lord Hodge's view, provided always that “purposive approach” is not conflated with a populist approach.
The adopting of a purposive approach inevitably requires some judicial subjectivity as to Parliament's intentions, as can be evinced in Lord Hodge's opening remark: “This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees …” (at [1]). It might equally well – and more neutrally – have been said that “this appeal concerns a reward scheme by which …”. His Lordship's distaste for Glasgow Rangers’ EBT arrangements is underscored by his back-handed compliment about “the prodigious intellectual effort in support of tax avoidance” (at [13]).
More subtle is the subjectivity of His Lordship's proposition that the central issue of the appeal “is whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for his or her work in order for that reward to amount to taxable emoluments” (at [36]). (The pre-ITEPA term “emoluments” is synonymous here with “earnings”.) With respect it is suggested that this was not the central issue. Whether the employer's contributions into the EBT constituted “earnings” was the central issue. The discussion (at [39]) about whether the paying of part of an employee's salary to a third party might escape payroll taxation seems otiose; nobody was arguing that it might. A contractual salary payment is subject to payroll tax, regardless of to whom it is paid. (And a non-contractual payment to a third party might well be a breach of fiduciary duty by the directors of the company.)
With admirable simplicity, Lord Hodge seems to have recast the legal definition of “earnings”. By taking a strongly purposive approach, His Lordship was able to précis the EBT transaction. An employee had done some work, as a result of which the employer made some contributions to an EBT, from which the employee (or his nominated relatives) could enjoy some financial benefit at some future time. Therefore, these payments were “earnings” – even though, quite unlike salary payments, they were not monies which the employee could freely use. For future litigation this case does not look easily distinguishable.
At a stroke, this decision sweeps away many of the complications that HMRC had previously encountered, when trying to extract tax from EBT arrangements. In context, the decision is understandable. The lax administration of the trusts that Lord Hodge criticised (at [63]), the pseudo-trustee status afforded to the player-employees via their unusual “protector” status (as discussed, inter alia, at [21]), and the fact that foreign players might be difficult for HMRC to trace when they returned overseas are amongst the factors that validate the Supreme Court's decision.
Ideally, the narrative would end there; unfortunately, it does not. Philosophically, the use of a double negative to justify a proposition (at [59]) is rarely convincing, particularly where tax charges are thereby created. Finding no reason not to tax is less compelling than finding a reason to tax. Technically, whatever its merits, the decision begs a raft of new questions. What forms of non-salary remuneration must now be processed through the payroll? Now that, ironically, HMRC's victory in Garforth v Newsmith Stainless Ltd. [1979] 1 W.L.R. 409 has been cast aside, do “earnings” include contingent forms of remuneration? What should be the correct treatment of benefits-in-kind delivered under “salary sacrifice” arrangements? What was the purpose of – and what now is the need for – the loan provisions in the “disguised remuneration” legislation? Lastly, whither EBTs? Or perhaps that should be: wither, EBTs.
