HM Revenue & Customs win on Penalties?

The Supreme Court has unanimously upheld an earlier decision, on behalf of HM Revenue & Customs, that payments made to employees in the form of loans from sub-trusts of an employee benefit trust (EBT) were emoluments from employment. The Supreme Court agreed with HMRC that the amounts contributed by the employer to the EBT were redirected earnings and were, therefore, subject to tax and NICs under PAYE when they were made to the EBT.

The case involved Glasgow Rangers Football Club making significant contributions (circa £60 million) to an EBT set up for the benefit of its employees between 2001 and 2008.  The EBT trustees subsequently transferred the contributed funds to 108 sub-trusts.  The sub-trusts were set up in the name of a particular employee, with the beneficiaries being their close family members that could benefit.  The player/employee became the protector of their sub-trust but they could not directly benefit from the sub-trust as they were excluded from being a beneficiary.  The trustees then granted unsecured loans to the players/employees for a term of 10 years at a commercial rate of interest.

Whilst this is an emphatic victory for the taxman, it has little chance of securing any of the back taxes due, bearing in mind the Football Club’s financial past. However, it does act as a “line in the sand” for other employers who became involved in this type of unacceptable tax avoidance and who, HMRC now expect, will have to pay the outstanding tax due, with interest and penalties.

Following the Glasgow Rangers case HMRC introduced new legislation which resulted in loans from EBTs (or other third parties) made on or after 9 December 2010 being subject to PAYE and NICs immediately.

Despite this ruling, there are still a number of acceptable ways for business owners to extract cash from their business for themselves and also their employees.