Analysis
The appeal concerned a tax avoidance scheme by which employers paid remuneration to their employees through an employees’ remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance contributions. The question on appeal was whether an employee’s remuneration was taxable as their emoluments or earnings when it was paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself.
The employing companies, including RFC, operated the tax avoidance scheme in the tax years between 2001/2 and 2008/9. It was therefore necessary to describe the relevant provisions under each of the relevant acts, although they were essentially to the same effect. ‘Emoluments’ were defined in ‘very wide terms’ in s131 of ICTA.
In accordance with the judgment of Lord Drummond Young, the central concept in the tax regime governing employment income was the payment of emoluments or earnings derived from employment; and an employer who pays emoluments or earnings to or on account of an employee is obliged to deduct tax in accordance with the PAYE Regulations.
The proper approach to the interpretation of tax legislation was as follows:
(1) First, the legislative code was not a ‘seamless garment’ but ‘in certain respects a patchwork of provisions’.
(2) Second, some judicial decisions on the interpretation of the tax legislation had been ‘definitional’. However, the court had to focus on the words of the statute and not judicial glosses.
(3) Third, there had been a definitive move in the interpretation of taxing statutes from a generally literalist interpretation to a more purposive approach.
The relevant transactions were not a sham, but that was not the point. The proper approach was to interpret the relevant statutory provisions purposively and secondly to analyse the facts in the light of those statutory provisions so construed.
As to the facts, the employing companies were at all relevant times members of a group of companies. A Remuneration Trust had been set up in 2001 (the Principal Trust). A company within the group which wished to benefit one of its employees made a cash payment to the Principal Trust in respect of that employee. When it did so, the employing company recommended the trustee of the Principal Trust to resettle the sum which it paid on to a sub-trust and asked that the income and capital of the sub-trust should be applied in accordance with the wishes of the employee. The trustee had a discretion as to the requests, but, when an employing company provided the funds, the trustee without exception created a sub-trust for the favoured employee. When RFC negotiated the engagement of a footballer, a senior RFC executive would explain the mechanism of the sub-trust, and in particular that the prospective employee could obtain a loan of the sum paid to the sub-trust from its trustee which would be greater than a payment net of tax deduced under PAYE if he were to be paid through RFC’s payroll. The arrangement had the additional tax advantage that the loans would be repayable out of the footballer’s estate on death, thereby reducing its value for IHT purposes. The footballer would also enjoy ‘extensive’ powers over the sub-trust as its ‘protector’ with powers to change both the trustee and also the beneficiaries of the sub-trust. It was clear that the sums paid to the Principal Trust and to the sub-trusts represented remuneration for employment.
The central question in the appeal was whether it was 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.
The Supreme Court held (per Lord Hodge):
(1) The primary legislation revealed no such requirement that the employee himself or herself should receive or be entitled to receive the remuneration. According to the legislation, the employee, whose work gave rise to the remuneration, was taxed: not the recipient of the earnings. The provisions of ICTA and ITEPA, with one exception, did not restrict the concept of emoluments by requiring their payment to a specific recipient. Moreover, there was nothing in the wider purpose of the legislation which excluded from the tax charge or the PAYE regime remuneration which the employee was entitled to have paid to a third party. The relevant subordinate legislation pointed in the same direction. Nothing in the wording meant that only the employee could receive a relevant payment.
(2) The general rule was that the charge to tax on employment income extended to money that the employee was entitled to have paid as his or her remuneration whether it is paid to the employee or a third party. However, while that was the general rule, not every payment by an employer to a third party fell within the tax charge. The circumstances that fell outside the general rule included (i) the taxation of perquisites, (ii) where the employer used the money to give a benefit in kind which is not earnings or emoluments, and (iii) an arrangement by which the employer’s payment does not give the intended recipient an immediate vested beneficial interest but only a contingent interest.
(3) As well as ascertaining whether remuneration amounted to ’emoluments’ or ‘earnings’, it was necessary under the provisions relating to PAYE to determine whether there had been a payment from which deductions were required. There were examples in the case law of misplaced reliance on judicial glosses in relation to the concept of ‘payment’. For the reasons discussed, Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062 had been wrongly decided.
(4) In summary:
a. Income tax on emoluments or earnings was due on money paid as a reward or remuneration for the exertions of the employee.
b. Focusing on the statutory wording, neither s131 of ICTA nor s62(2)(a) or (c) of ITEPA, nor the other provisions bar s62 (2) (b), provide that the employee themselves must receive the remuneration.
c. The references to making a relevant payment ‘to an employee’ or ‘other payee’ in the PAYE Regulations fell to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee or as arranged.
d. The specific statutory rule in s62(2)(b) of ITEPA applied only to such benefits.
e. The cases referred to above, other than Hadlee [1993] AC 524 did not address the question of the taxability of remuneration paid to a third party, and Hadlee supported the view of the Supreme Court.
f. The Special Commissioners in Sempra Metals had erred.
(5) The scheme was designed to give each footballer access without delay to the money paid into the Principal Trust, if he so wished, and to provide that the money would ultimately pass to the member or members of his family whom he nominated. The sums paid to the trustee of the Principal Trust for a footballer constituted the footballer’s emoluments or earnings.
(6) There was a chance that the trust company might not agree to set up a sub-trust and there was a chance that as trustee of a sub-trust it might not give a loan of the funds of the sub-trust to the footballer. But that did not alter the nature of the payments to the trustee. In applying a purposive interpretation of a taxing provision in the context of a tax avoidance scheme it was legitimate to look to the composite effect of the scheme as it was intended to operate.
(7) That the employees had no contractual entitlement to the bonuses before their employers decided to give them did not alter the analysis of the scheme’s effect. The fact that the bonuses were voluntary on the part of the employer was irrelevant so long as the sum of money was given in respect of the employee’s work as an employee. For the same reasons as the footballers, therefore, the bonuses paid through the trust mechanism fell within the tax charge as emoluments or earnings.
(8) Other provisions in tax legislation did not militate against the view of the Supreme Court.
(9) The appeal was dismissed.
JUDGMENT LORD HODGE: (with whom Lord Neuberger, Lady Hale, Lord Reed and Lord Carnwath agree) [1] This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees through an employees’ remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance contributions (NICs). …Continue reading "Rangers v Advocate General for Scotland [2017] WTLR 1093"