InMurray Group Holdings and others v HMRC[2015] CSIH 77 (4 November 2015), the Court of Session found that monies paid via trusts were taxable as earnings.
The Murray Group had implemented a scheme designed to avoid PAYE and NICs on payments of benefits to two categories of employees: executives; and footballers. Under the scheme, a group company would make a cash payment to a principal trust, which would resettle the amount to a sub-trust for the income and capital to be applied according to the wishes of the employee. The monies would then be lent by the sub-trust to the employee. The issue was whether the monies were earnings for the purpose of ITEPA 2003 s 62.
As a preliminary issue, the Court of Session had to decide (inter alia) whether it had judicial knowledge of English law. It found that it did, as any other interpretation would be ‘highly artificial’. Furthermore, this would not lead to any practical difficulties as the relevant concepts of trust, contract and loan are ‘broadly similar’ under Scottish and English law, and the parties would present ‘careful and informed submissions on English law’.
The court noted that ‘the critical feature of an emolument and of earnings as so defined is that it represents the product of the employee’s work – his personal exertion in the course of his employment’. This remained so even if the income was paid to a third party. It was also irrelevant that the redirection of the income took place through the medium of trusts. The court suggested that both the FTT and the UT (which had found in favour of the Murray Group) had overlooked this principle. ‘The redirection of earnings occurred at the point where the employer paid a sum to the trustee of the principal trust, and what happened to the monies thereafter had no bearing on the liability that arose in consequence of the redirection.’ It was also immaterial that the employee had no contractual entitlement to the sums paid to the trustees of the principal trust, as gratuities are subject to income tax.
Furthermore, following Arrowtown Assets [2003] HKCFA 46, it was ‘imperative to determine the true nature of the transaction viewed realistically’.
Why it matters: This latest instalment in the Rangers EBT case may not be the final one, as the Murray Group may appeal to the Supreme Court. In any event, such arrangements may now be caught by FA 2011 Sch 2.
InMurray Group Holdings and others v HMRC[2015] CSIH 77 (4 November 2015), the Court of Session found that monies paid via trusts were taxable as earnings.
The Murray Group had implemented a scheme designed to avoid PAYE and NICs on payments of benefits to two categories of employees: executives; and footballers. Under the scheme, a group company would make a cash payment to a principal trust, which would resettle the amount to a sub-trust for the income and capital to be applied according to the wishes of the employee. The monies would then be lent by the sub-trust to the employee. The issue was whether the monies were earnings for the purpose of ITEPA 2003 s 62.
As a preliminary issue, the Court of Session had to decide (inter alia) whether it had judicial knowledge of English law. It found that it did, as any other interpretation would be ‘highly artificial’. Furthermore, this would not lead to any practical difficulties as the relevant concepts of trust, contract and loan are ‘broadly similar’ under Scottish and English law, and the parties would present ‘careful and informed submissions on English law’.
The court noted that ‘the critical feature of an emolument and of earnings as so defined is that it represents the product of the employee’s work – his personal exertion in the course of his employment’. This remained so even if the income was paid to a third party. It was also irrelevant that the redirection of the income took place through the medium of trusts. The court suggested that both the FTT and the UT (which had found in favour of the Murray Group) had overlooked this principle. ‘The redirection of earnings occurred at the point where the employer paid a sum to the trustee of the principal trust, and what happened to the monies thereafter had no bearing on the liability that arose in consequence of the redirection.’ It was also immaterial that the employee had no contractual entitlement to the sums paid to the trustees of the principal trust, as gratuities are subject to income tax.
Furthermore, following Arrowtown Assets [2003] HKCFA 46, it was ‘imperative to determine the true nature of the transaction viewed realistically’.
Why it matters: This latest instalment in the Rangers EBT case may not be the final one, as the Murray Group may appeal to the Supreme Court. In any event, such arrangements may now be caught by FA 2011 Sch 2.
