On 5 July 2017 the Supreme Court held that sums paid into an Employee Benefit Trust (EBT) by the former Rangers Football Club were subject to PAYE.
The judgement, which ends a seven-year legal battle, will have consequences for employers who have used similar remuneration planning and may also have a wider impact.
The Rangers scheme was a fairly typical piece of EBT planning. Between 2001/02 and 2008/09:
- Payments were made to an EBT on behalf of footballers and senior executives of the club.
- Those funds were resettled into sub-trusts to be applied in accordance with the wishes of the individuals.
- The sub-trusts made loans to the individuals which would, in reality, never be repaid but instead be deducted from their estate on death.
EBTs were popular tax planning tools until the disguised remuneration anti-avoidance rules introduced in 2011 made payments from EBTs or earmarking of funds within them subject to income tax and NICs.
The Supreme Court held that the original contributions to the Rangers EBT should have been subject to PAYE as:
- The charge to tax covers money the employee is entitled to have paid as remuneration regardless of whether it is paid to them or to a third party.
- There is no basis for establishing a general rule that a payment is only subject to PAYE if the money is paid to, or at least placed unreservedly at the disposal of, the employee.
Consequences of the Supreme Court decision
This decision is likely to be relevant not just to EBTs but also similar disguised remuneration schemes such as Employer-Funded Retirement Benefit Schemes (EFRBS) and contractor loan schemes.
HMRC are known to have a large number of enquiries ongoing into EBTs. Where employers have not already settled these, it is expected that HMRC will now issue follower notices requiring them to pay the tax due or face penalties.
The decision also raises further questions:
- If contributions to EBTs are subject to PAYE up front is there still a need for the complicated disguised remuneration rules?
- What impact will the decision have on salary sacrifice and flexible benefit arrangements? Do these similarly constitute a redirection of taxable earnings which should be subject to income tax and NICS?
- If employers have had corporation tax relief for EBT contributions deferred on the grounds that no income tax charge has arisen on the employee, can they now go back and claim this? What happens if they are out of time to amend their returns?
At the time of writing, HMRC’s position on the above points remains unclear.