I have not had a chance to read the full Supreme Court decision on Rangers in detail as yet. I was too tired last night to do more than scan it all. But based on that reading I am extremely pleased with the decision.
The facts are simple, in essence. Over an extended period Sciottish football club Rangers FC set up trusts for the beenfit of its employees to which their salaries were paid. The trusts then lent the players, or other people they nominated, the sums in question. Technically these were loans repayable on death. The aim was to avoid tax and national insurance, and the case wobbled its way through various tiers of the UK legal system with the Revenue winning and then losing until the Supreme Court was reached. That court gave their decision yesterday.
All five Supreme Court judges shared the view that Rangers had sought to avoid tax and the arrangement did not work. There was no dissent, and only one opinion was offered as a result. And that opinion is emphatic in extremely useful ways to those, like me, who have no liking of tax abuse.
This is not meant to be a technical summary. Suffice to say that in essence the decision marks the complete revival of what is known as the Ramsay principle. This idea, based on a tax case of the early 1980s, says that tax law has to look at transactions as a whole to see what they are meant to achieve. This is the so called purposive approach to tax law interpretation. If when looking in this way it is obvious that the scheme as a whole was meant to avoid tax then it is taxed as if the steps that were inserted to achieve the tax avoidance goal did not occur and the facts of what really happened are taxed instead. So in this case the Supreme Court decided that football players had been paid a wage and income tax and national insurance were due under PAYE as a result, as common sense would always have dictated. The alternative contractual interpretation, which would have viewed the legality of each step in isolation, which would have permitted the abuse because each step was legal in itself, was resoundingly rejected.
The decision revolves a dispute in how to interpret tax law that has been running for twenty or so years since Thacher inspired judges began the kick back against Ramsay and encouraged the tax abuse industry, and artificial constructions that they sold of the type Rangers used. Those judge's attempt to block common sense tax interpretation that kills tax avoidance dead in the tracks has now itself been consigned to the history books. And that is very good needs indeed.
The full decision is available at https://www.supremecourt.uk/cases/docs/uksc-2016-0073-judgment.pdf . I am having a problem with links this morning.
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There are obviously football related ramifications that many of us hope to see, but that’s perhaps for another debate.
I agree that this is a fantastic ruling from a tax perspective as the lack of application of Ramsay has been the justification for wholesale tax avoidance by the City for decades. My unwavering hope is that this will result in a change that sees fair tax payment at the top, which can only benefit those at the bottom.
You get my behavioural point
I don’t fully agree. The prevailing Ramsay/BMBF principle has been to “construe the facts realistically and apply the legislation purposively”. This was applied in this case and hasn’t been revived. The Supreme Court didn’t disregard the inserted steps of the sub-fund contributions and subsequent loans. They agreed these weren’t a sham and were real legal transactions with real legal effects. However, these subsequent steps were all irrelevant given the contributions were earnings at the point they were paid into the principal trust.
To any layman, it’s clear these steps were a sham, by any reasonable definition. But interesting that the Supreme Court has reaffirmed they had real legal effects and wouldn’t be ignored had they gotten that far. Still, the right overall decision in my book.
That’s not the way I read it
I’ll go and seek your interpretation in what they say
Respectfully, David is right. Since the Arrowtown case in 2003 and BMBF in 2004, there has been almost universal acceptance of the flexible mantra that “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
Some have argued that this formulation gives too much discretion to unelected judges, to reinterpret the facts and rewrite the law as much as they wish, and so offends the rule of law, but the courts have repeated it time and again.
(That said, there are a few cases where the courts have decided that the legislation is so dense and precise that is not possible to bend the words to fit an identifiable purpose.)
In this case, the Supreme Court essentially agreed with the new argument raised successfully by HMRC at the Court of Session, that payment of an employee’s earnings to a third party remains taxable as income of the employee. And in this case, to quote para 64: “the sums paid to the trustee … for a footballer constituted the footballer’s emoluments or earnings.” Once the initial payment is earnings, the machinery after that becomes irrelevant.
(You could see the taxpayer was going to lose this case from the first line of the Supreme Court judgment – “This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees through an employees’ remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance contributions”).
A link to the Rangers judgment on BAILII here: http://www.bailii.org/uk/cases/UKSC/2017/45.html
If what you say is true then the judges would not have needed to restate their opinion in the way they did, or say it was new. But they did. So I think I am much closer to the truth than you
The “new approach” that the Supreme Court talks about in paragraph 12 of this decision is the purposive approach from Ramsay in 1982, as explained by the quotation from Lord Nicholls in the Barclays Mercantile case in 2004 (reported in 2005) which refers to the “new approach” propounded in Ramsay and Furniss v Dawson.
It was “new” in 1982, as it marked as a radical departure from the literalist position that had applied since the Duke of Westminster case in 1935. It is not “new” now, 35 years later.
As paragraph 14 goes on to say: “Lord Reed in UBS … [2016] … has helpfully summarised the significance of the new approach, which W T Ramsay, as explained in Barclays Mercantile, has brought about”
The last sentence in paragraph 15 just repeats the principle from Arrowtown again: “the courts must now adopt a purposive approach to the interpretation of the taxing provisions and identify and analyse the relevant facts accordingly”
The Barclays Mercantile case itself spends some time going through the cases after Ramsay – the likes of McGuckian, Craven v White, Fitzwilliam, Ensign Tankers, MacNiven v Westmoreland, etc. All very interesting, but the principles from Barclays Mercantile are the ones that the court is still applying.
Ramsay has been back in town since at least 2005, if it ever left.
And I repeat, none of this would need to have been said if this was not intended to make clear it was really back in town
Their Lordships do not waste breath
What is stated at paragraphs 10 to 16 of this decision, about the interpretation of tax legislation, is just a succinct summary of the state of the case law, and very similar to what was said just last year in UBS. Compare paragraphs 61 to 68 there. http://www.bailii.org/uk/cases/UKSC/2016/13.html
The new departure here is not the application of the modern (post-BMBF) Ramsay approach. It is the treatment of the payment to the trust as earnings, whether or not the cash is unreservedly at the disposal of the employee in question.
I think we are going to have to agree to disagree on whether this decision marks a new resurgence or complete revival of the Ramsay principle. Let’s how the decision is interpreted by others in the weeks and months to come.
I agree: let’s agree to disagree
I think that we can all agree that what happened at Rangers was simply awful for football, the club and the fans. I mean I’m a rugby fan and the sectarian side of the Rangers/Celtic rivalry is very unpleasant but it beggars belief that a club could have been ran like that.
It should not be allowed to happen again – ever.
I haven’t read the case, but who will get hit here – Rangers or the players or the advisors?
The players will have been ordinary young lads who have relied entirely on the club and on advisors, and they are told it is legal, with good reason (ie lower decisions).
They would be like most of us, who don’t want to devote our lives to understanding tax law.
The Rangers creditors will pay
I do not agree ” The players will have been ordinary young lads who have relied entirely on the club and on advisors, and they are told it is legal, with good reason”
Simply because the standard of player they were able to attract were mostly the type who could have gone to bigger clubs and must wonder how bigger clubs could not have beat the deals of Rangers. The side letters also to assure them that in the event of tax been asked the club would pay it would tell you nothing in life is free.
I too am not 100% convinced re the Ramsey comments, but HMRC got this one badly wrong from the start.
The football club issued side letters to the players, stating that the “loans” would never need to be repaid. By definition, that meant that were never genuine loans at all. They must therefore have been taxable emoluments. This case would have been cut and dried years ago if HMRC had run that argument.
The biggest benefit of all from this case is that it means a defeat for Paul Baxendale-Walker, whose aggressive EBT-based tax has cost the Exchequer hundreds of millions, possibly even billions, in lost taxes.
I agree with your technical point
I disagree re Ramsay
The point from the hearing is that the Supreme Court has made clear – it could. To be clerer – that a purposive construction is required. If so the bahvioural consequences are enormous: if it looks like avoidance it probably is avoidance on this basis and is likely to be struck down with the result that selling it is very much harder
And I think that’s why those taking a legal approach to a purposive opinion are wrong