This is an important result for HMRC. It will be significant for any other EBT cases but will also strengthen HMRC’s position when challenging tax schemes involving employment earnings.
The Court of Session’s decision has the potential for wider application than Employee Benefit Trusts. HMRC has argued to date that contributions into an EBT do not constitute employee earnings that are liable to PAYE unless the EBT appoints funds into a new trust set up or allocates funds into a sub-fund within the trust for the benefit of an individual employee.
However, the Court appears to have gone beyond this position deciding that the original payments into the main EBT, before allocation into sub-trusts, involved a payment of earnings;
“We are of opinion that the sums received by the trustee of the Principal Trust, and in due course by the trustees of the sub-trusts, amounted to a mere redirection of income and thus constituted emoluments or earnings of the employees in question.
“We accordingly conclude that the primary argument presented for HMRC is correct: the payments made by the respondents to the Trustee of the Principal Trust in respect of employees were emoluments or earnings and are accordingly subject to income tax.”
This could offer HMRC the wider arguments to tackle other tax avoidance schemes that were designed to provide income or benefits to employees without creating a PAYE liability. Careful study of the full judgement will be required to understand the potential wider significance of this judgement.