HMRC hits Rangers Football Club for employee benefit trust

On 14 February Rangers Football Club took the decision to enter into administration in view of an HM Revenue and Customs (“HRMC”) tax tribunal case launched against them, concerning in part its use of an employee benefit trust (“EBT”). It is believed that the case could result in a Rangers tax bill of around GBP40-GBP50 million.

An EBT, widely used also within the hedge fund industry, is a discretionary trust into which an employer settles monies from time to time for the benefit of its employees. Historically, if structured correctly and run appropriately, the payments into the EBT should fall outside of usual emoluments of the employees and therefore would not be subject to income tax (“PAYE”) and national insurance (“NI”). The benefit being that the EBT (often set up in low or neutral tax jurisdictions) would receive untaxed monies and assets that can be invested and grown tax-free for the benefit of the employees.

As a further benefit the trustees can exercise their discretion and grant loans to employees who are not be subject to pay NI on the loans and may only pay nominal tax on a small portion of the value of the loan as a benefit in kind or as withholding tax on interest paid to the EBT.

In practice and on occasion such EBT loans have had no set repayment date and interest (if charged at all) has not been collected, resulting in a de facto payment of a bonus to the employee without the higher rate of tax being charged.

It is irresponsible loan practices such as these that caused the HMRC to clamp down on the use of EBTs and which have lead to the introduction of the disguised remuneration legislation* which has further reduced the scope to run EBTs.

In the case against Rangers the HMRC seems to be focusing on the club’s use of an EBT set up in 2000-2001. It is alleged that the footballers’ wages were being paid into the EBT to avoid PAYE and NI. There are suggestions that Rangers overstepped the mark, and through general correspondence (emails, discussions etc.) between the club and its players as well as side letters to employment contracts there is apparently evidence suggesting that payments into the EBT were not discretionary but were contractual in nature and therefore should have been taxed as usual payments to employees at the point when it was paid into the EBT.

The First Tribunal concluded their case on 18 January 2012 and will likely pass their judgement in March or April 2012.

Depending on the decision, Rangers could now face PAYE and NI on all the money (around GBP24 million) that was paid into the EBT, plus interest and penalties, rising to an amount of around GBP40-GBP50 million.

There are thousands of EBTs in operation and registered with the HMRC. This case is a further sign that the HMRC does not like EBTs and they will raise enquiries when they have been misused. There are suggestions that HMRC currently has around 300-400 outstanding enquiries on EBT schemes. The First Tier Tribunal case was held in private and it is not clear whether the Rangers will be a flag ship case for the HMRC as there appears to be very specific facts that have allowed the HMRC to call into question the validity of this EBT.

What is clear is that if you are an employer and have set up an EBT it is not enough to simply ignore it in light of the new laws and hope that it will go away. The HMRC is taking a very aggressive stance against EBTs. You should therefore act now and ensure that the EBT has operated properly throughout its existence and that the EBT will continue to operate properly.
If the trustees of the EBT continue to run an EBT as they did prior to the introduction of the new disguised remuneration laws such as informally earmarking assets, granting new loans then there are real risks that the EBT has fallen foul of the new rules and has incurred a tax liability.

It is now important, more than ever, to be aware of any tax which the EBT might have unknowingly incurred and account for it properly. It is imperative that employers understand what the EBT should refrain from doing to avoid incurring unnecessary tax.

At Laven Legal Services, we have a strong team of specialists working on EBTs in a variety of offshore locations and successfully dealing with HMRC enquiries. We can assist clients with ongoing support and advice. We can analyse the operations of the EBT to identify risk areas, liabilities and suggest and implement practices to navigate the new laws and mitigate undue tax obligations.

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