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HMRC’s Upper Tribunal Case against Former Rangers FC: 1–0 to the Taxpayer!

HMRC has lost the Upper Tribunal (UT) case over tax-free loans made to staff by the former Rangers FC through its Employee Benefit Trust (EBT), between 2001 and 2010. HMRC issued Rangers, known as "oldco", with a bill of £46.2 million, which now it is ruled should be reduced substantially.

History of the case

HMRC issued Rangers with a tax bill that treated the £47.65 million made as tax-free loans to staff as income and therefore liable to PAYE. HMRC argued in the First Tier Tribunal (FTT) of 2012 that the EBT was written into employees’ contracts; the loans came with side-letters that gave the strong impression that the loans were remuneration. The loans were not discretionary and so formed a taxable part of their contracts, HMRC argued.

The ruling of the UTT

The UT decided that payments made to club employees including players and directors were genuine loans, although as the judge said: "The appeal is dismissed except in so far as it relates to the termination payments. ... the payments in respect of guaranteed bonuses, and any related questions of grossing up."

EBTs, are they viable?

Payments made through trusts of this type are now largely no longer possible due to the disguised remuneration rules added into statute in 2011. The implementation and administration of Ranger’s particular EBT was criticised by the tribunal, but that was still not sufficient to compromise the tax treatment.

Can HMRC use this case against other taxpayers?

It was expected that the verdict of the Rangers case would be used by HMRC as a form of authority to support their stance that payments through EBTs and anything similar is subject to PAYE. It is now thought, however, that this verdict offers taxpayers support in similar disputes with HMRC. The ruling suggests that PAYE is not due simply because HMRC believes that to be the case, but that such cases will have to be argued on fact-specific grounds.

Is it all over?

A slight twist dampens the euphoria: first, that HMRC’s initial claim is seen to have sent the former Rangers FC into liquidation, for the tax authority’s outlandish claim for unpaid taxes did hamper the sale of the club and ruin its reputation. There is a warning for us all here about how damaging tax investigations are. Secondly, it is likely that the liquidator will demand repayment of some of the loans, and as HMRC is a main creditor in the liquidation, it may yet stand to benefit.

Tax planning alive and well

This case does prove one thing: that tax planning is not yet dead in the water! What this case proves is that HMRC cannot have its own way in every case. Providing that the tax-planning strategy is properly executed with the right paperwork, this case shows that HMRC cannot go beyond the actual planning that took place and just create their own meaning, when it suits them, to extract tax. However, beware tax-planning opportunities that look artificial: always consult with your accountant before you jump into any scheme of this sort, so that you are safe and sound from the legal pitfalls of HMRC’s anti-avoidance measures.

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