On 5th July 2017 at the Supreme Court in London, HMRC were finally successful in their challenge against the liquidators of the former Rangers Football Club. HMRC had claimed that the use of Employee Benefits Trusts was a mechanism employed by the club to avoid tax.
How did the Employee Benefit Trusts work?
Employers paid cash into a Trust rather than paying it directly to an employee as salary. The employee then set up a sub-trust and the whole amount paid into the main Trust for him was then transferred to this sub-trust. This meant that the employee did not pay any tax or National Insurance contributions on that money. Importantly, it also meant that the company didn’t pay the employers National Insurance Contribution.
Once the money was in the sub-trust, the employee could then take out a loan from it. The sub-trust was generally for the benefit of the employee’s family with the loan to be repaid on the death of the employee. So far, in the case of Rangers, none of the loans have been repaid.
This case was very technical in its nature but it is clear from the Judgement of the Supreme Court that a much harder line is being taken on tax avoidance schemes when interpreting the meaning of the tax legislation.
What does this mean for Rangers Football Club?
It should be said that this ruling has no impact on the current club. It does mean that the creditors of the failed company that owned the club will now receive less as the liquidators will need to meet the tax bill, interest and penalties due as a result of this ruling.