Rangers Tax Case – The trusts which broke the trust of football fans
This piece was first published in August 2017
We often hear football being recognised as ‘the beautiful game’, with fans up and down the land being royally entertained on a Saturday afternoon (as well as almost every other day of the week). Since the launch of the Premier League in 1992, ever-increasing mega TV deals and sponsorship have made clubs at the top level of the game flush with vast sums of money; transfer fees of £20 million or more becoming more common place than before. With the greater amounts of money coming into the game, clubs have become more financially sophisticated, and some have resorted to desperate measures to seek a competitive advantage in the arms race of modern elite football.
Nothing demonstrates this more than Glasgow Rangers FC (‘Rangers’), the superpower of Scottish football whose fall from grace was dramatic when the infamous Craig Whyte era saw the club liquidated. The rise of the Phoenix club which formed in 2012 has been slow and steady, having to start again in the bottom division of the Scottish Football League, but its ascendance through the leagues has always had a big cloud over it in the form of its historical use of Employee Benefit Trusts (EBTs) to remunerate its players and staff as a tax avoidance measure, which was the focus of a landmark UK Supreme Court decision on 5th July 2017.
The Fall of Rangers
The well-documented liquidation of Rangers were caused by after-effects of the 2008 Banking Crash, which forced Murray International Holdings Ltd (MIH) to sell the club in 2011. Lloyds, taking over from HBOS as the club’s bankers, had discovered an unpaid overdraft of almost £20 million owed to it by the club, which it decided to call in. Unable to cover that cost, MIH sold its shares in the club to businessman Craig Whyte, whose financial mismanagement saw the club struggle to pay off tax bills and debts. As a result, Rangers was forced into liquidation in February 2012.
Charles Green managed to save Rangers as a football club by creating a new company with which to own it (the ‘newco club’). The ‘newco club’ was forced to reapply for membership to the Scottish FA and Football League, and had to begin its new life in the bottom division of the Scottish Football League in the 2012/13 season.
RFC 2012 plc v Advocate General for Scotland
The question before the Supreme Court in RFC 2012 Plc v Advocate General for Scotland  was whether EBTs used by Rangers between 2001 and 2010 were valid tax avoidance measures. The club had used EBTs to avoid paying Income Tax and Class 1 National Insurance contributions (NICs) to 111 employees: players, staff and other personnel connected to MIH, the parent company which had owned Rangers since 1988. Crucially, during that nine-year period, Rangers had spent just over £100 million in transfer fees and won 13 trophies, thereby maintaining their position alongside Celtic as one of the superpowers of Scottish football.
Rangers had already faced some punishment for its use of EBTs. In 2012, an independent commission chaired by Lord Nimmo Smith had imposed a fine of £250,000 on the ‘oldco’ club for its use of EBTS. Controversially, however, it opted not to strip the club of any trophies it had won during the period that the EBT structure had operated.
However, HMRC – represented in the litigation by the Advocate General for Scotland – took the case further. It argued that the use of EBTs was a mere ruse for the ‘oldco’ club to avoid paying its real tax obligations, allowing it to inflate its short-term cash flow and spend money it should have paid in tax. Conservative estimates put the club’s debt to HMRC as somewhere between £25-48 million.
The club had initially been successful in defending the arrangements in the lower Scottish courts: both the First-Tier Tribunal (FTT) and the Upper Tribunal (UTT) had found the EBTs to be legal. However, the FTT and UTT decisions were overturned by Inner House of the Court of Session. The long-running litigation therefore culminated in the Supreme Court in March 2017, after an appeal against the Court of Session’s decision was brought by the ‘oldco’ club’s liquidaters.
What is an EBT?
An EBT is a trust which can be established either in the UK or offshore. It is set up by a company to hold cash, or other assets like shares, to provide benefits to employees and their families to attract and retain quality staff. They have been used extensively by companies to minimise their tax obligations.
In order for an EBT to function, a company sets up a principal trust, from which comes a subtrust in favour of an employee. The trustee of the sub trust has the power to appoint trust property to the beneficiary – the employee – at their absolute discretion.
In the Rangers case, the EBT structure took the following form. Murray Group Management Limited (MGML), a subsidiary company of the ultimate parent company MIH, set up a trust known as the Remuneration Trust. This allowed any company within the Murray group of companies which wished to benefit one of their employees to make a cash payment to the Principal Trust in respect of that employee. The company would then recommend that the trustee of the Principal Trust should create a sub-trust and resettle the sum which had been forwarded to it, asking that the capital and income should be applied as per the wishes of the employee beneficiary.
The sub trust would then make a payment to the player in the form of a loan, nominally repayable over ten years at an interest rate of 4.5%, which would be accrued and repaid at the end of the term. Rangers established 108 sub trusts for individual employees, 81 were for club employees such as players and executives, and 27 for other Murray Group employees. Whenever the club signed a player, his terms of employment were recorded in two separate contractual documents: his standard employment contract stated that his remuneration would be subject to the usual deductions of Income Tax and NICs, and a side letter in which the club agreed to recommend that the Renumeration Trust set up a sub trust in favour of the player, and to fund the sub-trust with the amounts agreed in the contract of employment.
Because the funds forwarded to the player were considered to be a loan, they were not liable for Income Tax deductions or NICs. This allowed the club to make significant short term savings on its wage bill.
But HMRC argued that these payments from the trust should constitute income rather than loans, and thus liable to tax. The club successfully defended this argument in the FTT and the UTT by arguing that while the scheme might involve aggressive tax avoidance, it was not a sham.
Income Tax and the law
Two pieces of legislation cover the period of the club’s EBT scheme: the tax years 2001/02 and 2002/03 were governed by the Income and Corporation Taxes Act 1988 (ICTA 1988), and the remaining part of the period was covered by the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
The critical issue of the case relates to emoluments. Emoluments, as defined by section 131 of ICTA 1988, include “all salaries, fees, wages, perquisites, and profits whatsoever”. Under ICTA 1988, these were taxed on a receipts basis, meaning they were calculated based on the amount received by the taxpayer in question. Section 202 of ICTA is the critical section, which states income tax was chargeable under Schedule E on “the full amount of the emoluments received in the year in respect of the office or employment concerned”. S.202B defined when they were to be treated to be received, either at the time of payment or when the person becomes entitled to payment. Sections 7, 9 and 62 of ITEPA sets out an almost identical concept of emoluments and when any tax becomes due in respect of them.
Employers, who pay emoluments which are assessable to tax, are required to deduct income tax from their payments to their employees under the “pay as you earn” (“PAYE”) regime. The employer must then pay to HMRC the amount of tax which it was liable to deduct and, if HMRC suspects that an employer has not paid to it the correct amount of tax, it may determine the amount due and service notice on the employer. At the Inner House hearing in November 2015, Lord Drummond Young opined that:
“the central concept in the tax regime governing employment income is the payment of emoluments or earnings derived from employment, and an employer who pays emoluments or earnings to or on account of an employee is obliged to deduct tax in accordance with the PAYE Regulations”.
Interpretation of the legislative code for income tax has developed over time to reflect ever-changing government policy in this area; almost every Budget seems to affect the taxation of income in some way, whether it is a mere tinkering with the rates, the adjustment of bands, or the closure of loopholes in the code.
This has meant that the law has resembled more of a patchwork quilt rather than one perfect, elegant garment. As a result, it has fallen on the judiciary to provide some clarity. Traditionally, thanks to cases such as Hochstrasser v Mayes  and Laidler v Perry , a literalist approach to statutory interpretation was taken: focus was placed solely on the words of the statute, thereby avoiding interpretative gloss being added by the judiciary.
However, a new principle was established in the leading case of W T Ramsay Ltd v Inland Revenue Comrs  AC 300 and confirmed in Barclays Mercantile Business Finance Ltd v Mawson  1 AC 684. In W T Ramsey, the House of Lords outlined the modern approach to statutory construction, which involves having regard to what the purpose of a particular provision is, and to interpret its language in a way which gives effect to that purpose as far as possible.
Defending this shift in approach Lord Nicholls argued in Mawson that the purposive approach was more appropriate for determining the nature of the transaction which would be likely to apply and whether that transaction matched that statutory description. After all, tax is imposed by reference to real-world economic activity, and some go to great intellectual lengths to legally avoid their liabilities by inserting elements which are designed to bring a transaction outside the scope of the legislation, but in practice bring little or no commercial value. Therefore, Lord Nicholls argued, the correct judicial response is to apply the purposive approach to assess whether a transaction would be of the type that the legislation was designed to catch. This change in interpretative approach would later prove to decisive to the Supreme Court’s decision in this case.
Did Rangers break the law?
The issue at the heart of the Rangers decision is whether the recipient employees should receive, or be entitled to, the remuneration that amounted to taxable emoluments under section 19 of ICTA and section 9(2) and 62 of ITEPA. Case law such as Hochstrasser v Mayes (1960)– which decided that payments are assessable if they are paid in return for acting as, or being, an employee – seems to support the fact that the remuneration did amount to taxable emoluments.
The way the EBTs were structured and the existence of the side-letters, was proof enough for both the Court of Session and the Supreme Court to decide that the payments received by players and staff were undoubtedly emoluments, and thus should be liable to income tax.
Section 13 of ITEPA defines the taxable person as the person who is liable for any tax on salary or wages. It is therefore the employee, whose work and remuneration creates the liability, who is taxed, and not the recipient of the earnings. Crucially, neither ICTA nor ITEPA specify who the recipient of the funds must be. Therefore, implicitly, the legislation does not necessitate that an employee receives the money; it is possible for any third party to do so, like the trustee of the relevant EBT in this case.
Another key factual consideration is whether the payments are those arising from the normal contractual employee-employer relationship, or whether they are made purely at the employer's discretion: in Sempra Metals v Revenue and Customs , payments to a trust not placed unreservedly at the disposal of the employee in question were not considered taxable. However, Lord Hodge in this case felt that, when interpreting the terms of contractual payments outlined in the side letters, it was necessary to look purposively at the composite effect of the scheme as it was intended to operate. And, because the scheme was intended to allow each player unimpeded access to the funds paid into the trust in his name, he concluded that the decision in Sempra Metals did not apply.
If the payment is a discretionary one or one which relies on a contingency to be triggered, the fact that such payments were voluntarily made by the employer does not alter the underlying nature of them in that they are provided in return for the employee’s efforts. The Privy Council’s decision in Hadlee v Comr of Inland Revenue  AC 524, which although a decision relating to New Zealand, shares some circumstantial similarities in that a taxpayer was attempting to use a trust to appoint income for the benefit of a third party. In Hadlee, the Privy Council held that income tax was a tax on income which was the product of the taxpayer's efforts and could not escape liability by assigning a share to a third party. In the Rangers case, a perfect example of this type of payment would be the £30,000 paid to Graeme Souness in 2001, despite him leaving the club back in 1991 and having no direct employment relationship with the club in the intervening period.
He also observed, citing the decision in Inland Revenue Comrs v Scottish Provident Institution , that the risk that the scheme may not work as intended did not affect the nature of the payment.
Conclusion – B-Y-E to E-B-T’s?
The scandal of the self-inflicted financial Armageddon of Rangers rocked Scottish football to its core. To consider the effects this has on the game in Scotland; it would be the same as Barcelona or Real Madrid going to the wall in Spain, or Manchester United going the same way in England.
However, to many people, it is not so much the fact that Rangers were liquidated, but how they got to that point which stuck in the craw of many. The form of financial chicanery used was, to many people’s eyes, plain and simple cheating. The use of EBTs allowed the club to redirect money which should have gone to the taxman to fund transfer fees and salaries of players like Tore Andre Flo, Frank de Boer and Mikel Arteta, players that the club may never have been able to attract without the additional cash accrued through aggressive tax savings.
The decision of the Supreme Court has opened up old wounds amongst Rangers rivals about stripping them of leagues titles won during the EBT days, a sanction controversially discounted by the SPL’s Lord Nimmo Smith commission. Whilst there may be strong arguments for doing so, and the precedent of Juventus in Italy has shown that it has been done and would embolden our sense of natural justice, in practice that may well achieve very little but punish an institution which effectively no longer exists. It should also be mentioned that Celtic also used the EBT scheme in isolated cases, but others came nowhere using them to the degree employed by Rangers.
It is true to say that football is a pastime that stirs the passions of fans like no other sport: the clubs are no ordinary institutions, becoming part of us and an extension of our hopes, dreams, and beliefs. Footballers and football clubs are not held up to the same moral code as normal employees and companies; investors in the stock market rarely react with the same extremes of passion when the CEO of a company either makes a brilliant strategic move or decides to defect to a rival for a higher offer.
The fact that passions in football run so high tell us much about the reaction to the Supreme Court’s ruling, if a normal corporate entity had employed the same aggressive tax avoidance tactics as Rangers, then this decision would likely be confined to the footnotes of Law Reports. The fact they were employed by a major football club to gain what is perceived as many to be an unfair advantage will taint the use of EBTs for a long while to come; such is the damage done to our natural sense of justice and fair play. This looks like the final whistle on the use of EBTs.