The Rangers FC Employee Benefit Trust tax case revolves around the club’s use of EBTs to provide payments to players and staff between 2001 and 2010. EBTs are a type of trust fund used by some companies to provide loans or other legal benefits to employees. The controversy arose over whether the payments made through EBTs should be classified as taxable income or loans. The club argued that these were loans and thus not subject to income tax other than benefit in kind. However, HM Revenue and Customs (HMRC) contended that these payments were taxable earnings.
The case went through multiple tribunals and ultimately to the Supreme Court, seeking a final resolution. The Supreme Court unanimously ruled against Rangers FC, affirming that PAYE tax deductions should have been paid on the transfer of funds to the trusts, not the loans themselves. The distinction between loans and taxable income was at the core of the legal dispute in this case. It was reported that loan agreements associated with the payments made to footballers and other staff members through the EBTs outlined the terms and conditions of the loans, specifying details such as repayment terms, interest rates, and other customary elements found in traditional loan agreements.
This decision had significant implications for Rangers FC, HMRC, taxpayers and set a precedent for similar cases.
HMRC inconvenient win
The Rangers Supreme Court case win left HMRC in an embarrassing situation as it demonstrated that the loans themselves are not taxable, and PAYE should have been operated on the sums paid into the trust, which the registered PAYE employer are legally responsible for running and paying tax and NI. In particular, the PAYE regulations provide that individuals are usually entitled to a credit for any PAYE that should have been, but was not, deducted by their employer.
Due to targeting the employee loans and not the employers, HMRC had failed to take timely steps due to statutory time limits to secure this tax from the payer (employer) and, with the PAYE credit, enquiries opened into the employee tax returns would be of little effect. HMRC recognised it was now unable to use the conventional methods under the PAYE regulations to transfer liability to the employees. Thus, the HMRC victory in the Rangers FC case was an ‘inconvenient win’ as the cost of winning the battle is so high that it rendered the victory meaningless in the long run.
The solution was the retrospective loan charge to circumvent taxpayers’ protections. This would look at the amount of any loan that remained outstanding on 5 April 2019 and treat that as an additional amount of taxable income for the 2018-19 tax year. After Sir Amyas’s review, the charge applies to all outstanding loans that had been advanced since 9 December 2010. Before this date the tax position was not clear. For many participating in these arrangements for several years, the loan charge aggregate sums received in different tax years, with the consequential impact on marginal tax rates and the loss of personal allowances, become unpayable.
Why the loan charge is wrong
One attitude that has been expressed by some – is that this targeted group of people have participated in tax avoidance so are not entitled to any sympathy and, if the rules change even with retrospective effect, then so be it. This attitude shows little regard for how this country has for centuries respected the rule of law, human rights, and statutory time limits.
Most of this group of people were not seeking to avoid tax and were doing their best to comply with their tax obligations, such as IR35 rules, and were at worst naive. There are hundreds of impact statements from affected individuals who all make it clear that they were participating in what they believed to be HMRC-approved arrangements and for those with zombie open enquiries for years, HMRC failed to express the view that it did not like the tax arrangements. Its silence only reinforced the view that everything was in order.
Serious concerns
Professional organisations raised serious concerns when the legislation was first announced during the consultation stage. The Institute of Chartered Accountants in England and Wales (ICAEW)’s response opened by saying that it was:
“Very concerned about the proposals in the consultation document as they contravene generally accepted notions of fairness and break the constitutional convention against retrospective legislation, imposing tax charges in cases where taxpayers already had legal certainty that none were due.” Two paragraphs later, its response criticised the rules as “aggressively retroactive” and “open to challenges under the Human Rights Act.”
The Chartered Institute of Taxation (CIOT)’s response emphasised the importance of the rights of the taxpayers:
“The rights of taxpayers to have certainty and clarity in respect of the taxation of employment income” and recognised that the proposed legislation “effectively imposes a retrospective tax charge on events that happened in the past.”
As HMRC itself announced at the end of the consultation period in 2016 that “The vast majority of respondents, over 90%, disagreed with the fundamental policy objective of the measures to tackle [these loan arrangements].”
However, with a sleight of hand, HMRC then dismissed these objections stating “Mostly from individuals who had used a disguised remuneration scheme and were concerned about their ability to meet their liabilities arising from these changes”.
HMRC’s response document proceeded to give the misleading impression that the professional bodies “broadly supported the aims of the consultation.”
Taxpayers statutory rights
What a lot of tax experts find particularly disturbing is that HMRC is on the record as having made it clear that the loan charge was designed in part to discourage taxpayers from exercising their statutory rights of appeal and from taking advantage of the protections that the enquiry and discovery rules confer on taxpayers. It must be emphasised, of course, that these chilling statements were not made public when the legislation was being enacted.
If HMRC can hoodwink parliament into enacting legislation that simply ‘drives a coach and horses’ through these valuable rights for one group of society, who is to say who will be next?
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