CBW's Robert Maas suggests that there is an interesting conundrum for tax practitioners arising from the Supreme Court's decision the Glasgow Rangers case.
This article was written for and first published in Taxation.
In HMRC’s Working with Tax Agents blog on 17 August 2017, HMRC stated that the Supreme Court decision in the Glasgow Rangers case stated that any payments made through an EBT should be considered as taxable income as opposed to a loan. This raises an interesting conundrum that I wonder if any of your readers have considered.
The real decision
The decision in the Rangers case (RFC 2012 plc (formerly Rangers Football Club Plc) v Advocate General for Scotland  STC 1556) was not actually that a loan should be considered as taxable income but rather that if something is earnings, it is taxable on the employee even if the recipient of the largesse is a third party. In the Rangers case the evidence was that the money was earnings even before it went into the EBT. HMRC had assessed the company, not the EBT, to the tax and NIC so they were entitled to collect tax because the trigger payment was that by the company to the EBT, which made the company liable.
A case study
But that need not necessarily be the situation in every case. Suppose for example X Ltd pays £1million to an EBT as a contribution to establish the EBT. That is not earnings. The company subsequently decides that staff deserve a bonus and ask the EBT to consider paying them. Can a payment by EBT to an employee of X Ltd be earnings from the employment with X Ltd? That is a question of fact. Suppose it can be. Reg 21 of the PAYE Regulations states:
“On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with those Regulations”.
Reg 4 defines “relevant payment” as payments of, or on account of net PAYE income (which is in turn defined by Reg 3). PAYE income is as defined in ITEPA 2003, s 683 (Reg 2(1)). Reg 12(1) treats other payers as employers. The effect seems to be that the responsibility to apply PAYE and NIC is with the EBT as being the payer.
That is fine if the payee or borrower is not a director because the trigger point for taxability is the time of the payment. But what if the borrower is a director of X Ltd? ITEPA 2003, s 18, Rule 3, makes it earnings of the year in which the amount is determined. That is probably when the EBT makes the loan or, possibly, if earlier, when it creates a sub-trust for the director. Suppose that was in 2011/12 or earlier. On the face of it, it is now too late for HMRC to collect the tax. In such a case how can the trustees of the EBT reach a settlement with HMRC? It is surely a breach of trust for them to agree to pay to HMRC tax that is not legally due.
But what if…?
However, does any of this matter because Sch 11 to the current Finance Bill taxes loans outstanding at 5 April 2019? Yes, because the tax charge is imposed by deeming a relevant step within ITEPA 2003, Part 7A to have occurred and ITEPA 2003, s 554Z6 provides that the amount of the relevant earnings must be reduced by the amount of the earnings taxable under ITEPA 2003, s 16. The fact that tax on those earnings is no longer collectible seems irrelevant.
Get in touch
Get in touch with Robert Maas on the details below if you would like more information on employee benefit trusts or to discuss this article further.