The so-called ‘big tax case’ involved the use of EBTs by ‘old co’ Rangers, which paid out more than £47m to over 80 players, managers and directors between 2001 and 2010 in tax-free loans.

HMRC’s challenge to the tax status of the arrangement, arguing that in reality they were disguised remuneration, was fought through the tax tribunal system, with both the First Tier Tribunal and the Upper Tribunal finding in the Scottish club’s favour. However, an appeal to the Court of Session overturned those verdicts and found in favour of HMRC. By this point, ‘old co’ Rangers was in liquidation and liquidators BDO were given leave to appeal to the Supreme Court.

The Supreme Court was required to examine whether in order for a payment to constitute wages for tax purposes, it is sufficient that it was ‘derived from’ work done by a particular employee and/or it ‘it formed part of the employee’s employment package’.

It also looked at whether the powers which a player or senior staff held as a 'protector' of a subtrust through which payments were made were ‘unreservedly’ for the employee and therefore taxable wages.

In its decision, handed down today, the Supreme Court unanimously dismissed Ranger’s appeal. [RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC 45].

The judges said three aspects of statutory interpretation had been important in determining the outcome.

First, the judgment stated that ‘the tax code is not a seamless garment’, saying provisions in the tax code imposing specific tax charges do not militate against the existence of a more general charge to tax which may have priority over or qualify the specific charge.

Secondly, it is necessary to pay close attention to the statutory wording and not be distracted by judicial glosses which have enabled the court to apply the statutory words in other factual contexts.
Finally the judges said a purposive approach to the interpretation of the taxing provisions must be adopted.

As a general rule, the charge to tax on income extends to money that the employee is entitled to have paid as remuneration irrespective of whether it is paid to the employee or to a third party. The relevant ICTA and ITEPA provisions do not restrict the concept of earnings by requiring payment to a specific recipient.

The judge stated: ‘Thus, if an employee enters into a contract or contracts with an employer which provide that he will receive a salary of £X and that as part of his remuneration the employer will also pay £Y to the employee’s spouse or aunt Agatha, I can ascertain no statutory purpose for taxing the former but not the latter.’

‘The breadth of the wording of the tax charge and the absence of any restrictive wording in the primary legislation, do not give any support for inferring an intention to exclude from the tax charge such a payment to a third party which the employer and employee have agreed as part of the employee’s entitlement. Both sums involve the payment of remuneration for the employee’s work as an employee.’

The judgment went on to state that there is no rationale for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party.

For the purposes of PAYE, the judges said it is necessary to determine whether there has been a payment of earnings from which deductions were required, and argued that ‘misplaced reliance on judicial glosses in relation to the concept of ‘payment’ is evident in the case law leading up to the appeal.’

The judges said there is no basis for establishing a general rule that a payment is made for the purposes of PAYE only if the money is paid to or at least placed unreservedly at the disposal of the employee. The references to making a relevant payment ‘to an employee’ or ‘other payee’ in the PAYE regulations fall to be construed as payment either to the employee or to the person to whom payment is made with the agreement of the employee.

The sums paid to the trustee of the principal trust for a footballer constituted the footballer’s earnings. The risk that the trustee might not set up a sub-trust or give a loan of the sub-trust funds to the footballer does not alter the nature of the payments made to the trustee of the principal trust, the judges ruled.

The discretionary bonuses made available to RFC’s employees through the same trust mechanisms also fall within the tax charge as these were given in respect of the employee’s work.

The judges found that payment to the principal trust should have been subject to deduction of income tax under the PAYE regulations. As the sums paid into the principal trust were earnings in the first place, the specific provisions of the tax code which deem the benefit of loans to be earnings cannot apply.

The court's decision is not expected to have any material or financial impact on Rangers now as the club is owned by a different company.

In a statement Sir David  Murray, former Rangers chairman, said: 'I am hugely disappointed that the Supreme Court has upheld the decision of the Court of Session, reversing the decisions of the specialist tax First Tier Tribunal and the Upper Tribunal in this matter.

'The decision runs counter to the legal advice which was consistently provided to Rangers Football Club, that on the basis of the law and legal precedent at the time, the contributions made to the trust were not earnings and should not be taxed as such.

'It should be emphasised that there have been no allegations made by HMRC or any of the courts that the club was involved in tax evasion, which is a criminal offence.

'The decision will be greeted with dismay by the ordinary creditors of the club, many of which are small businesses, who will now receive a much lower distribution in the liquidation of the club, which occurred during the ownership of Craig Whyte, than may otherwise have been the case.

'I have not had the opportunity to discuss the decision in detail with tax counsel, but will do so, particularly in light of proposed legislation, which will alter the tax position applying to loans made by trusts to employees. Once the impact has been assessed, a further statement will be issued.'

EBT settlement opportunity closed in 2015

Until 31 July 2015, there was an HMRC arrangement whereby affected taxpayers could use the employee benefit trust settlement opportunity (EBTSO) but this was closed and subsequently in September 2016 the tax authority set out revised guidance outlining how income tax will be offset for non-disclosed years.

EBTSO only applied to users of EBTs before the introduction of the rules at part 7A Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), but as of 2016 it was still possible to enter into an agreement that met the conditions of paragraph 59 of schedule 2 of Finance Act 2011.

As a result, it is not clear whether HMRC will be able to recover substantial sums after this decision.

Colin Ben-Nathan, chair of CIOT’s employment taxes sub-committee, said: ‘We understand that HMRC have a large number of enquiries ongoing into EBTs at the moment and they will therefore feel vindicated by this decision.

‘While many employers have already settled with HMRC, for those that have not it is likely that HMRC will now issue “follower notices” where they consider that the circumstances sit on all fours with Rangers.

‘These notices will require employers to pay up the tax or face a penalty if they fight on but lose in the courts, neither of which choices will be particularly appealing after the Rangers decision.’

Reacting to the Supreme Court ruling, David Richardson, interim director general of HMRC’s customer compliance group, said: 'The unanimous decision of the Supreme Court supports our view that employment benefit trust avoidance schemes simply do not work.

'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.'

Mark Cawthron CTA LLB, specialist tax writer at Wolters Kluwer, said: 'The Court’s key conclusions were that money paid into the EBT was a component of each footballer’s (total) remuneration, and that the scheme was designed to give him access without delay to such money and ultimately for it to pass to his family.

'Against those conclusions, the PAYE system could operate straightforwardly, and there was no basis for a general principle, indicated in previous cases, that monies must be at the ‘unreserved disposal’ of the employee.

'Those with historic EBT arrangements will no doubt look to assess their own cases against the Court’s approach here.’

RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland) [2017] UKSC 45 is here.