For the last 7 years HMRC have been in a legal battle over the use of employee benefit trusts (“EBT”) as a means of paying staff and players at Rangers football club. During to the 1990’s and 2000’s an EBT was not an uncommon process by which companies would pay bonuses to employees. The bonus pool would be transferred to an offshore EBT, the trustees would then allocate the funds to sub-trusts for the benefit of individual employees and their families. This sub trust would then make a ‘loan’ to the employee, often these loans were interest free and were to be left outstanding indefinitely. Therefore, the employee had immediate access to the bonus and would pay no tax on it. HMRC challenged the tax status of these arrangements arguing that these payments were, in fact, “disguised remuneration” and that the payments should be classed as “earnings” rather than loans, therefore being taxable under PAYE.

HMRC’s challenge to the tax status of the EBT was first fought through the tax tribunal system and both the First Tier Tribunal and the Upper Tribunal found in favour of Rangers. However, HMRC took the appeal to the Court of Sessions which overturned the previous verdicts and found in favour of HMRC, with leave being granted to the liquidators of Rangers to appeal to the Supreme Court.

The five judges in the Supreme Court unanimously dismissed the appeal of the liquidators of Rangers and ruled that the payments into the EBTs were subject to tax under PAYE Rules.

This decision has wide ranging implications and it is anticipated that HMRC will be issuing Follower Notices to those employers who have operated such schemes and who have not already settled with HMRC. These notices will require employers operating EBTs to pay the tax on such schemes or face a penalty if they continue to defend their position but lose in Court. HMRC are, armed with this ruling, encouraging those who have tried to avoid tax on their earnings to now agree the tax owed.

If you are likely to be affected by this ruling and have concerns over the effect this may have on cash flow or the liquidity of your business please contact us for a free of charge meeting where we can review your options. Contact us.