Landmark decision in Rangers EBT case

Some of the most important consequences of the decision for companies which have used EBTs as part of their remuneration arrangements for employees and directors will be that;

• HMRC will shortly start the process of issuing Follower Notices to collect PAYE and NIC liabilities in open enquiry cases or where Regulation 80 determinations are under appeal.
• If the company has sufficient funds and settles the PAYE and NIC liabilities with HMRC, directors will incur a benefit in kind charge  unless they “make good” the PAYE to their employer
• If the company does not have sufficient funds to settle the liabilities in full, HMRC may seek to transfer the PAYE liability to the employee although it is currently unclear to what extent HMRC are lawfully able to do so under the existing PAYE regulations  
• In cases where HMRC cannot issue Follower Notices, PAYE and NIC liabilities may arise in April 2019 on any outstanding loans from an EBT and, based on HMRC proposals, it may be possible for April 2019 liabilities to be transferred from the employer to the employee
• Although not a direct consequence of the Supreme Court decision, many EBTs are now approaching the date of their first 10 year anniversary and the parties which have an “interest” in the trust (i.e. the settlor, the trustee and any beneficiary who has benefited from trust property) will need to consider how they are going to settle any Inheritance Tax liabilities which arise under the relevant property provisions for discretionary trusts.  

In RFC, when a Group company wished to benefit an employee, it made a payment to a Remuneration Trust (the “Principal Trust”).  Upon payment, the employer asked the Trustee to resettle the sum onto a sub-trust and requested that those funds be applied in accordance with the employee’s wishes.  Invariably, the sub-trusts then made loans to employees (“the trust arrangements”).  It was contended on behalf of RFC, that as the payments made to the employees were loans, employment income or PAYE liabilities did not arise from the trust arrangements and both the First Tier and Upper Tax Tribunals accepted that contention. However, in an appeal  to the Court of Session, HMRC  was successful on the basis of a new argument, that contributions to the Principal Trust were a component of the footballer’s remuneration and were, therefore, simply a “redirection of earnings”  subject to employment income tax and PAYE liabilities.

The central issue in the appeal to the Supreme Court was whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for their work in order for the payment (of remuneration ) to amount to taxable  emoluments.

Several key points emerge from the judgment;

• As a general rule, the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party;
• It is irrelevant whether bonuses paid for services are discretionary or contractual awards;
• The contributions to the Principal Trust were the payment of emoluments which should have been subject to deduction of tax by the employer under PAYE;
• The Special Commissioners’ decisions in 2002 in Dextra and in 2008 in Sempra Metals, both made in the taxpayer’s favour in relation to the use of trust sub-funds, were wrongly decided.

Some of the potential consequences of the Supreme Court decision in RFC which are likely to apply to both EBTs and EFRBS are considered below.

Follower Notices from HMRC can now be expected in open enquiry cases into arrangements by companies involving contributions to EBTs and, potentially, also EFRBS. The issue of a Follower Notice (“FN”) will, in effect, result in closure of HMRC’s enquiry with the risk of penalties if the previously disputed tax and NICs are not paid within 90 days of the FN. 

Employees will need to reclaim tax paid on any interest-free loans from an EBT, although the normal 4 year time limits will apply to such claims and, the proposed April 2019 employment tax charge on outstanding loans from EBTs should now only affect those cases which are not subject to a FN based on the RFC decision.

If, following receipt of a FN, an employer pays the PAYE liability of a director, such payment will be treated as a benefit in kind of the director unless the director reimburses the employer for that liability.

It is our understanding that many companies with EBT arrangements will not have sufficient net assets to meet all of the PAYE and NIC liabilities in respect of contributions which they made many years ago and, in some cases, the employer company may no longer exist.  In this respect, it is important to understand that HMRC can only transfer PAYE liabilities from an employer to an employee in limited circumstances. 

In light of the Supreme Court decision, HMRC will now be looking to close the vast majority of its long-running enquiries into EBT arrangements and to collect all of the underlying PAYE and NIC liabilities. It will, in our view, be critically important for any company affected by the decision and which now faces significant financial liabilities to take appropriate professional advice in order, wherever possible, to mitigate the effect of those liabilities. 

If you or any of your clients are affected by the decision and would like to discuss any EBT or EFRBS arrangements in advance of receiving a FN and/or closure notice from HMRC, please contact us.