The long-awaited decision of the First-Tier Tribunal in Murray Group Holdings and others v HMRC (popularly known as ‘the Glasgow Rangers case’) has been released. Thought to be regarded by HMRC as ‘a test case’ which would lend support to HMRC’s contention that monies contributed to an EBT, appointed to sub-trusts for members of an employees’ family, and advanced on loan to the employee, are properly to be taxed as ‘earnings’ of the employee received at the time of contribution to the sub-trust, it must have come as a disappointment to HMRC that they have lost before the Tribunal (albeit on a 2:1 majority), notwithstanding that the arrangements in this instance were particularly aggressive and (arguably) egregious. However, HMRC can take succour from the closely reasoned and persuasive dissenting judgement of Dr Heidi Poon which must ‘reduce the odds’ in favour of HMRC ultimately succeeding on appeal.
In short, the majority judgement treated the trust structure, and the loans to employees by the trustees, as “genuine legal events with real legal effects” which could not be ignored (the majority considering that the Court of Appeal decision in CIR v Mayes had significantly weakened the ‘Ramsay principle). The transactions were not ‘shams’. There was not an absolute transfer of funds to employees and hence no obligation to account for income tax under PAYE and NICs on the amounts concerned.
By contrast, Dr. Poon’s approach was to ask if, on a purposive construction of ITEPA, the arrangements involved a payment of ‘earnings’ (per s 62 ITEPA 2003). On the authority of decisions of the higher courts, the fact that the transactions were not ‘shams’ did not preclude the Tribunal from considering what is the reality of the transaction as manifested by the documentary evidence and the intentions of the parties. “Payment” is a practical and commercial, not a legalistic, concept; giving effect to the legal position requires that regard be had to the business ‘substance’; and a transaction may be ‘real’ for one purpose, and not for another (per Lord Hoffman in MacNiven v Westmoreland Investments Ltd). That funds are “unreservedly at the disposal of the employee” is only a sufficient, but not a necessary, condition for a payment to constitute an emolument (per Walton J in Garforth v Newsmith Stainless Ltd and Warren J in the Aberdeen Asset Management case.
On the facts, the employer and employees had agreed remuneration packages in ‘net’ terms. The trustees had complied with the wishes of the employer and employees that funds be remitted in accordance with loan requests. In advancing loans on non-commercial terms, the trustees had acted in breach of trust (although this of itself was not relevant to the analysis). No security had been required; there was no intention to collect interest or that the loans be recalled or repaid against the wishes of an employee. The employees were intended to have de facto control of the trust funds through their respective roles as ‘protector’ of each trust and were never intended to repay the funds or account for them. They were indemnified against the financial consequences of the arrangements, and had unfettered access to, and the right to dispose of, the funds assigned to their sub-trusts. In effect, the payments were unreservedly at the disposal of the employees from the time of allocation of the funds to the sub-trusts. The loans lacked commercial reality (as vouched for by the opinion of the Jersey Financial Services Commission following their investigation of the original trustees).
Accordingly, Dr Poon concluded that the loans, although real for juristic purposes, stood to be disregarded in determining if there had been ‘payments’ of earnings made for income tax purposes. In Dr Poon’s view, the decision in Mayes was not relevant. That case was focused on steps taken as part of a tax avoidance scheme and the application to those steps of a prescriptive legislative code. Here, the focus was on the application of the legislation charging tax on ‘emoluments’, the broad meaning of which has been defined by decisions of the courts. Further, the question of whether sums were emoluments for the purposes of the charge to tax on earnings took primacy over the application of the benefits code as it applies to loans. The focus in the present case must be on whether the amounts received by the employees were ‘emoluments’. In her view, they were.