Payments to trusts were earnings
The Supreme Court has published its judgement in the Rangers Football Club (RFC) case (RFC 2012 plc (in liquidation) formerly The Rangers Football Club plc) v AG for Scotland). The judgement explained that “The appeal raises a fundamental question about the nature of the income tax charge on employment income. That question is whether an employee’s remuneration is taxable as his or her emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself.”
The decision stated that “The central issue in this appeal is whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for his or her work in order for that reward to amount to taxable emoluments”.
And that “The breadth of the wording of the tax charge and the absence of any restrictive wording in the primary legislation, do not give any support for inferring an intention to exclude from the tax charge such a payment to a third party which the employer and employee have agreed as part of the employee’s entitlement”.
The court decided that payments that the employees had agreed should be paid to trusts which then made loans to the employees were earnings when paid to the trusts and therefore liable to tax and national insurance contributions at that time, rather than beneficial loans.
This decision upheld the decision of the Court of Session, which had overturned the decisions of both the Upper Tribunal and the First Tier Tribunal.
This decision settles the law in respect of the facts surrounding RFC and similar fact patterns where remuneration is paid to third parties including EBTs. The judgement is clear that there has to be a payment of earnings albeit the payment of earnings does not have to be to the employee but can be to a third party for the tax charge to arise. In the words of the judgement “As a general rule, therefore, the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party. The legislation does not require that the employee receive the money; a third party, including a trustee, may receive it. While that is a general rule, not every payment by an employer to a third party falls within the tax charge. It is necessary to consider other circumstances revealed in case law and in statutory provisions which fall outside the general rule.”
We propose to enter into dialogue with HMRC to clarify the implications of and the extent of this decision.