Jolyon Maugham is two stages into a three part series on why he thinks that the Rangers Employee Benefit Trust case was wrongly decided by the Court of Session last week.
Jolyon's thesis appears to be threefold. The first is that trusts can be real things. The second is that the EBT in Ranger's case was real. Third, as a result the employee's of Rangers did not receive taxable income until such time as all the conditions attached to the arrangemts made via the Ranger's EBT were released. I stress, I am summarising Jolyon's argument, which he has himself said he has simplified, so there is risk in such a caricature, but I think it fair.
I disagree with Jolyon's conclusions and think the Court of Session got this case right, and in the process correctly overturned decisions by the First and Upper Tax Tribunals. In the process I am, I stress, using the logic of common sense that the CS referred to in its decision and I am not referring to the detail of the ruling.
So, let me be clear. I am sure that what appeared to be valid trusts were created by the EBT arrangements. And I presume that they were properly managed. But that, in my opinion, is simply not the point. These trusts were not, as such shams: what they did was real. But the fact was that what they did had nothing to do with whe. there was a charge to income tax, or not. As Jolyon has noted, what the CS has decided was that the very first payment made by Rangers, when money was initially transferred into the EBT, was the point where the tax liability on the Ranger's players was created. Jolyon does not agree with this, but I do. And the implication, with which I agree, was that the whole EBT structure can simply be ignored for tax purposes.
My reasoning is simple. The Rangers players and managers all agreed to work for the club. They did not do so with gratuitous intent. Nor did they do so with any expectation that the sums they would be rewarded with would be discretionary. Footballers negotiate, as I understand it, very tight contractual terms where even the conditions for bonuses are agreed long in advance. Side letters to the EBTs were, of course, intended to provide comfort to those partaking that their dues would be paid. And that was because, in my opinion, the truth is that everyone working for Rangers knew three things.
The first was that they would be paid.
The second was they knew how much they would be paid.
And the third was that however the EBT was structured these obligations would be honoured.
Even if there was no hint in writing of these understandings I have no doubt at all that these very clear and deeply implicit understandings existed or not a single footballer would have played for Rangers; that's the way professional football is.
So, in that case the EBT's are real, interesting and even unusual arrangements around the management of the relationship between Rangers and their managers and players but they are not to be seen as any arrangement relating to the settlement of the tax due on reward owing to the players and management for the services they undertook: that obligation to pay tax arose the moment Rangers paid the EBT precisely because they knew that they had to make such payment to secure the services of the players and managers, even if that fact was unrecorded in writing in that form. I argue that from the moment that the payment to the trust was made the players and managers could quite reasonably predict the inevitable outcome that they would benefit as a result. Even if the trustees of the EBT might decide how those players might benefit this was only the consequence of, again, an implicit (and I would argue contractual) consent by the player to permit them to do this, that consent being granted as a part of the agreement to play for the club way before the first payment implicitly on their behalf was made to the EBT.
In that case the CS's argument that in effect the whole EBT arrangement can be set aside for tax purposes as a mere curiosity of the financial arrangements the club put in place to help their managers and players manage their personal affairs is right. The taxable event giving rise to the obligation to settle tax in the case of Rangers fulfilling its contractual obligation to its employees arose when it made the payment to the EBT because at that moment the consequence that the employee would have effective control of the funds was wholly predictable even if precisely how and when was subject to some discretionary management at what should have been the after tax level.
In that case all of Jolyon's discussion of trusts in this case is irrelevant in my opinion. Their tax consequence in this case was irrelevant except for the fact that it was claimed there was such consequence. Rangers were wrong to make that claim: it was untrue. Rangers had a contractual obligation to their employees that all parties knew existed. And as the CS said, in that case the common sense view much prevail that tax was due when the first payment that represented Rangers' settlement of this obligation arose, which is when payment was made by them to the EBT. And because this was due in respect of what I think to be what was quite obviously an obligation to settle wages then PAYE had to apply at that time.
So, the real question is, what is the liability of those who thought up this arrangement and said that it would work to Rangers, its fans and Scottish football? And what penalties should apply to them? That's the really interesting question, because the social cost of their actions has been enormous and I think those who created them should be accountable for those consequences.
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Jolyon tries very hard to have his cake and eat it. In one breath he’s comparing employment relationship with the relationship he has with his grandmother in order to prove to Rangers fan that critics of their club’s EBT schemes (including judges of the Court of Sessions) are wrong thus creating a misleading impression to justify the artificial distinction between the schemes he approves of (like Eclipse 35 he defended in court) and those he disapproves of. In the next breath he’s berating scheme promoters that persuade people to buy avoidance schemes largely due to the enabling environment created by such artificial distinctions. It’s time people like him acknowledged that the Revenue Bar would not exist as we know it (if at all) but for tax avoidance and stopped blaming everyone apart from themselves for the scam that is tax avoidance.
Thanks for doing that, you have removed all of the obfuscation and got to the heart of the matter, the side letters. These were contractual payments and as soon as they were made the player had effective control of the cash and could do what they wanted with it.
As such they “got” the payment at that point and tax was due.
It would be interesting to know how many “loan applications” made by a player or his family were rejected by the trustees. I suspect it was a very small number. It would also be interesting to see any correspondence between the employer and the trustee and what instructions if any passed between them.
In employment contract terms what is described here is known as an implied term of the employment contract. Standard fare in employment law.
Joloyn Maugham is not so much barking up the wrong tree as howling at the moon on this issue.
I join you in agreeing with the Court of Session’s judgement. I do not follow all of Mr Maugham QC’s arguments but indeed they seem to rest upon the effectiveness of the Trusts and so do not support the CS’s contention.
The CS though I thought was relying on slightly different reasoning to that you have stated in your pre-penultimate paragraph where you say “The taxable event giving rise to the obligation to settle tax in the case of Rangers fulfilling its contractual obligation to its employees arose when it made the payment to the EBT because at that moment the consequence that the employee would have effective control of the funds was wholly predictable….”
My reading of the Judgement was that the CS viewed the initial payments to the Trust as emoluments (hence liable to income tax) because they were reward to employees for services performed as employees, it then mattering not at all that the monies in question were redirected (i.e. not paid to the employee but to the Trust). That the Trust (or as it was arranged in fact sub-trusts) would in due course very likely see the employee in question in any instance then having effective control of the funds as predicted was not something upon which the CS relied in determining that income tax was payable on the initial payments.
Looking afresh at the Judgement (found at https://www.scotcourts.gov.uk/search-judgments/judgment?id=8213f5a6-8980-69d2-b500-ff0000d74aa7 ) I see that paragraph 63 deals with the point referred to in my earlier post (that redirection of income having been established, the extent of the employee’s control of those funds subsequently is not material): that says: –
“[63] For the purposes of the Ramsay principle it is frequently important to determine whether or not the sums paid have been placed at the unreserved disposal of the employee: Aberdeen Asset Management Ltd v HMRC, supra, is an example of such a case. In dealing with the redirection of income, however, it will not normally be relevant whether or not sums are at the employee’s unreserved disposal. The employee chooses to redirect part of the consideration for his employment — emoluments or earnings — to trustees for specified trust purposes. In so doing he obviously hopes that those trustees will apply the funds in the manner that he has requested, in this case in accordance with the letters of wishes. He nevertheless runs the risk that they will not do so. Whatever happens, the sums paid to the trustees were redirected from income, and that is enough to render them liable to income tax in the ordinary way.”
I rather hoped that last point was the one I was making, but from my own first principles
Surely the key issue with this case is that the employees were provided with side letters staying that the “loans” would never need be repaid. That meant that they were but “loans” at all. The “loans” were a sham and immediately became emoluments for tax purposes. I never understand why HMRC never ran this argument originally, and several friends who are members of the tax bar agreed with me.
The tax advisor behind it was the infamous Paul Baxendale-Walker, now a porn star in California (yes you read it right). He is also currently facing fraud and forgery charges. You couldn’t make it up.
Indeed…
Actually it looks like the existence or not of side letters is totally irrelevant at this point. A number of executives also received bonuses through this scheme, supposedly discretionary, but with a pretty large nudge, nudge, wink, wink element to them. The CoS has ruled that as there was no reason why Rangers (or the various Murray companies involved) should be paying monies into trusts on behalf of said executives apart from as a payment for their services as employees, then those payments too are emoluments. Hence taxable. So unless people start coming up with evidence that their particular company trust gave out cash to a random selection of individuals, just some of whom happpened to be senior employees, that’s putting the boot into just about every EBT scheme that was set up as a tax dodge. Here’s para 13 of the judgement in full
[13] The respondent companies made payment of bonuses to senior employees (excluding footballers). The First-tier Tribunal accepted (paragraph 205) that those payments were entirely discretionary, without any contractual entitlement. While the views of the individual employee would be canvassed, he never had an enforceable claim to a bonus or other benefit. The arrangements were described as “very informal”, and at most offered a hope or expectation. If the employee expressed interest, the employer would make a payment to the Principal Trust. In relation to these bonuses, the First-tier Tribunal considered that the benefit amounted to “a mere discharge of an employer’s obligation to an employee”. On that basis they concluded that no tax liability arose. We observe that, although the bonus arrangements may not have been enforceable, it seems self-evident that the only reason that the bonus was paid was the fact that the senior employee in question was working for one of the group of companies and providing services for it. If bonuses had not been paid, the employment would have been significantly less attractive. Any contrary argument seems an affront to common sense.
I agree
I did not rely on the existence of side letters
I relied on the existence of implicit, even if unwritten, contract terms that simply had to exist
The CS seemed to agree