HMRC defeats Rangers

HRMC wins over EBT case

HM Revenue and Customs (HMRC) has emerged victorious following a seven-year legal battle with Rangers football club over the use of Employee Benefit Trusts (EBTs) to reward its players and staff. The Supreme Court has ruled that the payments should be classed as earnings taxable under PAYE rather than loans. More than £47m was paid to players, managers and directors between 2001 and 2010 in tax-free loans.

The case was heard at the First Tier Tribunal and the Upper Tribunal, who both found in favour of Rangers. However, these decisions were overturned following a successful appeal by HMRC to the Court of Session. The final judgment was delivered on 5 July 2017, with the Supreme Court unanimously dismissing Ranger’s appeal.

What is an EBT?

EBT refers to a trust which is established either in the UK or offshore and is set up by a company to hold cash and other assets. These were arranged to provide benefit to employees and their families for the purpose of attracting and retaining employees. Companies would set up EBTs and make cash payments from these trusts in the form of tax-free loans to employees or beneficiaries. Legislation has since been passed outlawing the use of the scheme for tax avoidance purposes.

What is the impact?

This verdict is likely to have wide-ranging consequences. HMRC have a large number of ongoing enquiries into EBTs. While many employers have already settled these, it is likely that HMRC will now issue ‘follower notices’ to those that have not where they consider the circumstances are similar to those in the Rangers case. Follower notices will require employers to pay the tax demanded by HMRC or face a penalty if they fight on but ultimately lose in the courts.

HMRC have stated: “This decision has wide-ranging implications for other avoidance cases and we encourage anyone who’s tried to avoid tax on their earnings to now agree with us the tax owed. HMRC will always challenge contrived arrangements that try to deliver tax advantages never intended by parliament.”

The Court’s conclusion that payments made to the EBT were a component of total remuneration establishes that PAYE should have been operated as usual. Those with historic EBT arrangements should, therefore, assess their own specific circumstances against the approach of the Court in this case.

If you have any questions around EBTs, and how they may affect you, please get in contact with Tax Services on 01903 234094.