The Supreme Court's judgement in the Rangers case has clarified that income tax is chargeable even if payment was not directly received by an employee.
The Supreme Court has ruled that income tax will be charged on all remuneration regardless of whether or not it is paid directly to the employee or to a third party – in this case an Employee Benefit Trust (EBT). The Supreme Court also stated that PAYE should have been implemented in these circumstances to deal with the income tax and national insurance contribution deductions.
The Murray Group, owners of the now liquidated Rangers Football Club, made contributions to an EBT rather than to the players of the club. This EBT then directed the contributions into a number of sub-trusts belonging to each player. The sub-trusts were set up for the benefit of the individual players' families and would loan the money it received from the EBT to the players directly. Over £60million was placed into the sub-trusts over a six year period up to 2008. The loans were received tax free as this was erroneously not considered to be earnings of employment.
The Supreme Court, however, found that the sums paid to the principal trust and to the sub-trusts did, indeed, represent remuneration for employment. They upheld the decision of the Court of Session that the payment of sums to the remuneration trust involved the 'redirection' of the employee's earnings which did not exclude those earnings from income tax.
As a result of the Supreme Court ruling, HMRC have announced that they are inviting participants of disguised remuneration schemes to register an interest in settling their tax liabilities. As the ruling is final, those who do not wish to settle may be issued with Follower Notices and Accelerated Payment Notices to recoup what is likely to be millions of pounds of income tax.
The terms of any settlement are yet to be disclosed, however, due to the complex nature of these arrangements and the legislation in this area, there are concerns that the decision may be applied more widely by HMRC to bonus payments, image rights and self-employed schemes. Those who believe that they may be impacted by this decision should seek professional advice at the earliest opportunity.