Many would have been following this case with enthusiasm not only because of the legal points in question, namely, the income tax implications surrounding employee benefit trusts (EBTs) but also because one of the Appellants was the owner of Scottish Championship team, Rangers FC.
This appeal to the Scottish Court of Session concerned the income tax treatment of sums paid by the Appellants into an employee benefit trust following which sub-trusts were set up for the benefit of each employee and/or his family. The EBT arrangements in question pre-dated the introduction of the disguised remuneration legislation (ITEPA, Pt 7A). No income tax at source (PAYE) was applied by the Appellants in making the payment into the trusts. The employee would be entitled to apply for a loan from the relevant sub-trust. The sums settled on the sub-trust would be almost invariably applied in accordance with the wishes of the employee.
Before the Court of Session, several interesting legal points were raised. From a tax perspective, a key issue was whether the scheme represented a mere redirection of earnings (as defined in ITEPA, s. 62) such that the employees’ liability to income tax subsisted.
The court found that the critical feature of an emolument and of earnings is that they represent the product of the employee’s work – his personal exertion in the course of his employment. As such, the sums transferred to the EBT did constitute “earnings”. The fact that such product of the employee’s work was paid to a third party was irrelevant. Likewise, the court viewed that neither the existence of contractual obligation upon the employer to pay the sum nor an absolute transfer of funds to the employee as being essential for earnings to be taxable under the general charge to tax under ITEPA (s. 6).
In light of the introduction of follower and accelerated payment notices in Finance Act 2014, taxpayers with similar (unresolved) EBT arrangements will be interested to see whether the remaining Respondent (the other four being in liquidation) will seek to appeal this decision to the Supreme Court.
