The former Rangers Football Club Plc has lost its appeal to the Supreme Court in its long-running litigation with HMRC concerning the proper tax treatment of payments made to a discretionary trust as part of the package of agreed payments for securing the services of players and employees.
Amounts paid by the club to the trustee were then re-settled onto sub-trusts each in accordance with the wishes of the employee who, whilst not within the class of beneficiaries, would be appointed as a ‘protector’ with power to change the trustee(s). The employee would then be made a loan on which interest would be rolled-up and which he would not normally expect to repay until after his death. The club argued that payment to a third party, of money arising from the performance of duties, does not amount to the payment of earnings unless the employee already has a legal right to receive it and it is paid at his direction to a third party. On the facts, the players and employees never had a right to receive the sums paid to the trust; the loans were just that, and were not ‘earnings’ subject to income tax under PAYE.
HMRC argued that the contributions made to the principal trust were taxable earnings as, although not paid to the employee, they were paid as remuneration for the work done by the individual and the individual had requested or agreed that the remuneration be re-directed to a third party.
It was not in dispute that what is taxable is the remuneration or reward for services. The central issue was whether, for it to be taxable, it is necessary that the employee should receive, or at least be entitled to receive, the remuneration.
Lord Hodge (giving the judgement of the Court) stated that, if an employee enters into a contract with an employer which provides that he receives a salary of £X and that, as part of his remuneration, the employer will also pay £Y to his Aunt Agatha, the court could discern no statutory purpose for taxing the former, but not the latter. The charge to tax on employment income extends to money that the employee is entitled to have paid as his remuneration whether it is paid to the employee or a third party. It is not necessary that the employee himself receive it.
However, not every payment to a third party falls within the general charge:
- “perquisites” (or “perks”) are not taxable unless the benefit is received by the employee and is capable of being converted into money or something of direct monetary value to the employee (per s 62(2)(b) ITEPA 2003);
- if an employer spends money to confer a benefit-in-kind which the recipient cannot convert into money, that payment is no taxable under the general rules – although it may fall to be taxed under the “benefits code” in Part 3, Chapters 2-11 of ITEPA (living accommodation; cars; loans; expenses, etc.);
- Part 6 of ITEPA has special rules for ‘employer-funded retirement benefits’ and Part 7 has special rules for the taxation of employment-related securities;
- a situation in which the person entitled to receive the sums paid by the employer does not acquire a vested right to those sums until the occurrence of a contingency (per Edwards vs Roberts CA 1935) – this being the situation addressed in the recent Supreme Court decision in Forde vs McHugh, and a situation with which many employer-funded deferred bonus arrangements are concerned.
Earlier cases, such as the Special Commissioners’ decisions in Sempra Metals v Revenue & Customs Comrs (2008) and in Dextra Accessories vs Macdonald (2002) had focused on the question of whether funds paid by an employer into a trust belonged to the employee or was at the absolute disposal of the employee. Lord Hodge stated that Sempra Metals was wrongly decided, and the Special Commissioners in Dextra were not presented with the arguments advanced by HMRC in the Glasgow Rangers’ appeals.
In short, the Court held that (i) income tax on earnings is due on money paid as a reward or remuneration for the employee’s exertions; (ii) the relevant statutory provisions (except those relating to ‘perks’) do not provide that the employee must receive the remuneration; (iii) references in the PAYE Regulations to making a payment “to an employee” or other payee” should be construed as meaning payment to either the employee or the person to whom it is made with the agreement or acquiescence of, or as arranged with, the employee; (iv) the specific statutory rules governing gratuities, profits and incidental benefits (i.e. perks), in s62(2)(b) ITEPA, apply only to such benefits; and (v) the Special Commissioners erred in the Sempra Metals and Dextra cases.
Comment
At last, HMRC has the decision it has been craving for so many years and which, had it been handed down a decade ago, would have largely obviated the need for the 36+ (and growing!) pages of ‘disguised remuneration’ legislation. It is a ‘moot point’ for many a gathering of advisers as to why it has taken so long for the basis on which earnings are taxed to be so clarified. Of course, there will no doubt be arguments to be had over whether, in any particular case, an employee has ‘agreed, acquiesced in, or arranged with the employer’ for a payment to be made to his Aunt Agatha, a trustee, or any other third party.
© David Pett July 2017
David Pett, Tax Barrister 