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  • Stitch up?

    Lord Hodge, in last week’s highly anticipated judgement in the Rangers / Murray Holdings / RFC2012/Big Tax case, stated that the legislative code in relation to the taxation of earnings was not ‘a seamless garment but… a patchwork of provisions’.

    Of course, most interested parties will know that HMRC were victorious. However, does the ‘redirection of earnings principle’ rip up this patchwork and replace it with that seamless garment or, thimble in hand, is the Court merely adding yet more fabric to our Elmer[1]-like tax code.

    Let’s address the elephant in the room (and I’m not talking about Elmer). I confess, I was a little surprised by this judgement. Not because I have a great deal of sympathy for what was, at the end of the day, an egregious piece of EBT planning. Additionally, I don’t fully agree with the decision though suspect that won’t keep the Supreme awake at night. That said, Lord Hodge’s judgement was much more thorough than the one presented by the Scottish Court of Sessions. For example, his view that an overly keen ‘judicial gloss’ had been applied to a number of previous decisions at least explained why these were being dispensed with.

    I will not go in to the detail of the decision as this can be found here. The rationale was, for all intent and purposes, the same as laid down by the Court of Sessions. My previous thoughts can be found here.

    However, in sum, it was found that the payments to the EBT were earnings when the contributions were made. This meant we did not have to concern ourselves with whether the loans, at the back end, were taxable.

    What does this mean?

    Well, a PAYE liability will fall on the Employer. In this case, it will fall on the Rangers OldCo. It is my understanding that OldCo has recovered some cash so HMRC should recover at least some of the liability.

    As things stand, it is difficult for a liability to be transferred from an Employer to an Employee. There is more scope for Directors than run of the mill Employees. In the case of Rangers, I would say the players fell in that ‘run of the mill category’.

    However, as part of their revision of anti-avoidance measures surrounding disguised remuneration, HMRC has made noises about being more freely able to transfer such liabilities to Employees.

    Although this will make HMRC’s life easier, it is my view that such powers we should push back on this. Especially when one considers the new April 2019 loan charge that we expect to be part of the second instalment of Finance Act 2017. These are highly pernicious proposals which we should all be outraged by and, again, should push back on.

    Of course, if one has to stump up the PAYE then one might revisit the corporation tax position and look to claim a deduction for the payment in circumstances where one was not claimed at the outset (or has been denied). That said, this is not without difficulties.

    Follower Notices

    A Follower Notice (“FN”) is a specific type of Accelerated Payment Notice (“APN”) which is triggered by, amongst other things, the fact that “HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements”.

    Sadly, my spider senses always start twitching these days when I read about HMRC’s ‘opinion’. This is especially so when a particular ‘opinion’ allows them to raise money quickly and easily from taxpayers who, in turn, possess little in the balance of power.

    Is this fear misplaced? Well, for a FN to be issued, we essentially need the ruling to be ‘final’. In this case, by definition, a ruling of the Supreme Court is final. In addition, “the principles laid down or reasoning given in the ruling would, if applied to the arrangements, deny the accepted advantage.”

    As mentioned above, the Rangers scheme, especially when considered with the supporting documentation and side letters, was a crude one. It was clear, in the case of the players, that the use of the EBT was to ensure they got a nice high ‘netto’ figure each week.

    One could be in a position where a particular EBT could be distinguished from the Rangers facts. For example, where a global contribution was made to the EBT and, at a later date, a remuneration committee then decided who got what. Of course, this would not work following the introduction of Part 7A of ITEPA 2003. However, there is nothing in this judgement that would necessarily effect this type of arrangement (indeed I have seen part of HMRC’s legal team state this in a public forum).

    However, do we think HMRC will be taking in to account any such subtleties when they are about to issue FN’s? My experience of trying to help clients with APN’s would suggest not.

    The legislation compels HMRC to issue an FN within 12 months of the relevant ruling so, sadly, I suspect HMRC will be firing up their mail-merge machine again.

    Part 7A of ITEPA 2003

    What is interesting is that Part 7A was introduced to counter this type of arrangement. One could say that this legislation is no longer necessary and should be scrapped.

    However, we have the same position with the Annual Tax on Enveloped Dwellings (“ATED”) which was introduced to levy an annual tax levy on the holding of residential property through corporate structures to mitigate UK IHT by non-doms. However, now the IHT benefits have been removed (subject to the re-emergence of the second part of Finance Act 2017!) then surely ATED should be scrapped? Of course, it has not been scrapped.

    I would not hold one’s breath on Part 7A either. However, there are genuine reasons why there should be some form of Part 7A in place – including to protect against the EBT set out in my example above (Part 7A would attack the earmarking element).

    Secondly, we also have contractor tax avoidance where Part 7A is highly relevant, though it still remains far from watertight. We have discussed the planned implementation of the 2019 loan charge which will apply to contractors which is to bolster HMRC’s anti-avoidance toolkit, and make tax collection much easier.

    Image rights

    Clearly, HMRC will have a spring in their step about this ruling. I suspect that, not only will they use it to issue FN’s, they will also use the momentum to go after the footballing world more vigorously. Clearly, they have the backing of the Public Accounts Committee on this matter and have announced a three-year review where they will visit all EPL, SPL and Championship teams.

    Of course, image rights are slightly different as the settled position is that image rights structures ‘work’. Due to the tax systems being very different, it is a red herring to demand that HMRC follows  Spain’s lead on this and starts pursuing custodial sentences for the Premier League’s biggest stars. In the UK, it has generally been about the level of image rights payments that have been the issue.

    That said, getting out my crystal football, I can certainly see a change to the law only very slightly over the horizon. Where such a payment comes from the employing club (rather than a third party) it would seem highly likely that this income might be reclassified for tax purposes under a new code. It would hardly create public outcry and would raise some revenue.


    So, what can one take away from this. Clearly, although the direct litigation is done and dusted this case will have a substantial ongoing impact and raises many questions.

    My view is that HMRC should set out precisely what they are going to do in respect of the follower notices – do they intend to issue them or not.

    However, going forward, the message sent out by the Courts is clear. If you are an employee and your employer makes a payment to you or a third party in respect of those services then you will be subject to employment income taxes.


    If you have any issues surrounding the Rangers case, EBTs, Follower Notices or Accelerated Payment Notices then please get in touch.



    [1] Elmer was patchwork. Elmer was yellow and orange and red and pink and purple and blue and green and black and white. Elmer was not elephant colour.”