RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland (Scotland) [2017] UKSC 45

Rangers Football Club paid employees' remuneration through an Employee Benefit Trust and sub-trusts, with funds extended to players as loans, to avoid income tax and NICs. The Supreme Court held that earnings redirected to a third party trust remain taxable employment income.

Facts

RFC (formerly The Rangers Football Club plc) and other companies in the Murray group operated a tax avoidance scheme between 2001/02 and 2008/09 using an Employee Benefit Trust (the ‘Principal Trust’) established by Murray Group Management Ltd in April 2001. When recruiting footballers and rewarding executives, RFC negotiated remuneration on a net-of-tax basis. Players entered two contracts: a formal contract of employment (with PAYE deducted on salary) and a side-letter under which RFC undertook to recommend that the trustee resettle agreed sums on a sub-trust for the player and fund the Principal Trust accordingly.

108 sub-trusts were established, 81 for RFC employees. The trustee invariably created sub-trusts when funded by RFC and almost always granted unsecured loans of the entire sub-trust fund to the player on request. Loans were repayable over ten years on a discounted basis, with the expectation they would be rolled over and ultimately repayable from the employee’s estate, reducing its value for inheritance tax. The employee was appointed protector with fiduciary powers to change the trustee and beneficiaries. The side-letters were not disclosed to the Scottish Football Association.

HMRC assessed the employing companies to income tax and NICs. The First-tier Tribunal (majority) and Upper Tribunal held the scheme effective. The Inner House reversed this, applying a ‘redirection principle’. RFC appealed.

Issues

The central question, as Lord Hodge framed it, was whether an employee’s remuneration is taxable as emoluments or earnings when paid to a third party in circumstances where the employee had no prior entitlement to receive it personally.

Arguments

RFC (Andrew Thornhill QC) submitted that the Inner House erred in applying any ‘redirection principle’ here. Payment of money arising from employment to a third party does not amount to earnings unless the employee already has a legal right to receive it and directs payment to the third party. The employees never had a right to receive the sums paid into the trust; they received only loans, which fall outside PAYE.

HMRC submitted that income derived from an employee’s work qua employee constitutes earnings assessable to income tax even if the employee requests or agrees that it be redirected to a third party. The payments to the Principal Trust amounted to such a redirection of earnings.

Judgment

Approach to statutory interpretation

Lord Hodge emphasised three principles: the tax code is not a seamless garment; courts must focus on statutory wording rather than judicial glosses; and a purposive approach must be applied, following Barclays Mercantile Business Finance Ltd v Mawson and UBS AG v Revenue and Customs Comrs. Lord Nicholls in Barclays Mercantile stated:

The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.

Construction of the charging provisions

Examining section 19 and section 131 of ICTA, and sections 6, 9, 13, 18 and 62 of ITEPA, the Court found no requirement that the employee personally receive (or be entitled to receive) the remuneration. Section 13(2) of ITEPA makes the employee the taxable person, but the receipts provisions do not specify the recipient. Section 62(2)(b), concerning gratuities and incidental benefits, is the exception requiring receipt ‘by the employee’; the wider definitions in section 62(2)(a) and (c) carry no such restriction.

The PAYE Regulations references to payment ‘to an employee’ must be read as including payment to another person with the employee’s agreement, acquiescence or arrangement.

Earlier authorities reconsidered

Cases such as Tennant v Smith, Abbott v Philbin, Heaton v Bell, Edwards v Roberts and Forde and McHugh Ltd concerned the source or nature of the employee’s right, not the identity of the recipient, and did not establish the principle for which RFC contended. The Privy Council’s decision in Hadlee v Comr of Inland Revenue supported HMRC’s position that income tax cannot be escaped by directing income from personal exertion to a third party.

Lord Hodge expressly held that Sempra Metals Ltd v Revenue and Customs Comrs and the reasoning in Dextra Accessories Ltd v Macdonald were wrongly decided, having misapplied Walton J’s contextual gloss in Garforth v Newsmith Stainless Ltd as if it were a general principle confining ‘payment’ to sums placed unreservedly at the employee’s disposal.

Application to the facts

The payments into the Principal Trust were a component of the footballers’ remuneration, negotiated as part of a net-of-tax package, with the trust mechanism designed to give access to funds via near-automatic loans and to confer inheritance tax benefits. The chance that the trustee might not establish a sub-trust or grant a loan did not alter the character of the payments, applying Lord Nicholls in Inland Revenue Comrs v Scottish Provident Institution:

The composite effect of such a scheme should be considered as it was intended to operate and without regard to the possibility that, contrary to the intention and expectations of the parties, it might not work as planned.

The executive bonuses paid through the same mechanism were equally taxable, despite being non-contractual, since voluntariness does not prevent a payment for an employee’s work from being earnings (Blakiston v Cooper; Hartland v Diggines). The PAYE system could operate by treating the trustee of the Principal Trust as the recipient of emoluments, requiring deduction at source.

The existence of specific provisions on employment-related loans, trust income and benefits in kind did not displace the general charge; the legislative code for emoluments has primacy.

Implications

The decision confirms that, under both ICTA and ITEPA, money paid as a reward for an employee’s work constitutes taxable emoluments or earnings even when paid, with the employee’s agreement, arrangement or acquiescence, to a third party such as a trustee, rather than directly to the employee. Section 62(2)(b) of ITEPA (gratuities, profits and incidental benefits) is the narrow exception requiring receipt by the employee.

The judgment authoritatively rejects the line of reasoning in Sempra Metals and Dextra that treated Walton J’s observation in Garforth (‘money placed unreservedly at the disposal of…’) as a general rule requiring the employee personally to control the funds. That gloss was illustrative, not definitional.

The case is a significant application of the purposive approach to tax statutes, requiring courts to identify the transaction Parliament intended to tax and analyse the composite scheme accordingly, disregarding the possibility that contingent steps within it might fail. It has direct implications for employers and advisers who designed or operated Employee Benefit Trust arrangements involving sub-trusts and loans, exposing them to PAYE and NICs liabilities. The decision is, however, grounded in the specific statutory provisions on earnings and the particular composite scheme found by the FTT, and Lord Hodge acknowledged that Part 7A of ITEPA, introduced in 2011, has separately addressed many such schemes prospectively.

Verdict: Appeal dismissed. The sums paid by RFC to the Principal Trust for the benefit of its employees (footballers and executives) constituted emoluments or earnings of those employees and were subject to income tax under PAYE and to Class 1 NICs.

Source: RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland (Scotland) [2017] UKSC 45