Lessons from Murray Group

[webberg]

The following appeared elsewhere.

I'm concerned that the original thread on Murray Group has gone a bit off message and think that a new place is needed to keep a focus on useful lessons.

Hi Graham,

I read this summary about the Rangers case from an email received by a company calling themselves INOH:

Was it actually a win for HMRC?

There were a number of rulings made that were actually a huge blow to HMRC in favour of previous EBT users:

Contributions are tax deductible for the employer.
Neither employer nor employee is to be taxed on trust investment returns.
The movement of funds from main trust to sub-trusts is not an event giving rise to income tax liability on the employee.
The payment of cash funds out of the trust (even to the employee) is not an event giving rise to income tax liability on the employee.
Loans to the employee are not taxable as the employee’s income.
Loans to the employee are deductible against his IHT estate.

Are these conclusions valid?

(Note I've made a minor edit in the above.)

I would be wary at this stage of giving that analysis an unequivocal blessing but I think that there are elements of truth there.

What is misses of course is the fact that a liability to tax on income is said to arise at the point the employer makes a payment to employee or trust. If that is correct, then the employee is liable to income tax on funds that he/she gets only when the trust decides to advance a loan. Obviously if that is correct then the fact that intervening steps between employer and employee cannot create a liability as that would be double taxation which the Judges were very anxious to explain was not the case.

If that is true, then is the employer liable for the tax = yes.

The case was about PAYE, so not surprising.

What happens though if a deemed employer is deemed to have paid salary but has not deducted PAYE?

If it's now too late to raise a determination, does the deemed employee have a right to a tax credit?

That is one of several avenues we're looking into now.

[ASB]

If that is true, then is the employer liable for the tax = yes.

I'm not a scheme user, but my amateur reading seemed to suggest that might be the case. [Given the state of rangers OldCo what is the point of the administrators appealing, I can't see anyway how this would improve returns to the creditors given any HMRC debt is not preferred over anything else; however that point is probably somewhat moot]

So, the question to me seems to me to be "how can HMRC transfer that liability to a user - if at all".

I guess there are many different states, and all could come to a different outcome. Some springing to mind:-

UK Employer, still active. Now their problem?
UK Employer, no longer active. In order to allow the liquidation HMRC have surely accepted their PAYE state, whilst this is significant event would it mandate HMRC to go through administrative restoration

Intuitively, since in the general case the liability would remain to the employer in any normal case it seems there is at least some hope the liability may not be transferable. But my worry would be that the normal case is it is deducted and not handed over, that being somewhat different to never deducting it in the first place.

In the case of a non UK employer I would imagine that the regime is such that the liability may easily rest with the scheme user since overseas employers are not mandated to run PAYE.

I think that if I were a user I would be feeling a little more confident (not loads, just a bit).

Also, what about NI implications ? I don't really see any mention of this, but if it is outside the NI regime then that could also at least provide some damage limitation.

[Iliketax]

I answered some of these questions here: http://forums.contractoruk.com/hmrc-...ml#post2165360

Some of the other questions

Neither employer nor employee is to be taxed on trust investment returns.

No. The judgement says "The only liability to income tax is on income earned by the trustees, for example by investment of the trust funds" but the case is not about this. Income of the trust would be taxed on the employee as investment income (since the judgement would suggest that it would be a settlor interested trust) and not PAYE/NIC. The employer is unlikely to recognise the investment income in its accounts and so it would not pay tax on it. CGT would be taxed on the employee for similar reasons.

The movement of funds from main trust to sub-trusts is not an event giving rise to income tax liability on the employee.

That is right in this case since the Court of Session decided it was taxed the nanosecond before when the earnings were paid into the main trust. If they hadn't found that then the payment to the sub-trust would have been taxed as earnings or under the disguised remuneration rules. So the quote is right in the context of earnings having already been found to arise but would be completely irrelevant otherwise.

The payment of cash funds out of the trust (even to the employee) is not an event giving rise to income tax liability on the employee.

and

Loans to the employee are not taxable as the employee’s income.

Same as above. If the Court of Session hadn't found that then the payment out had already been taxed as earnings or under the disguised remuneration rules. So the quote is right in the context of earnings having already been found to arise but would be completely irrelevant otherwise.

Loans to the employee are deductible against his IHT estate.

The case had nothing to do with inheritance tax. But if it was considered, they may well have agreed with this but may well also said that the employee redirecting their earnings was a chargeable lifetime transfer (meaning that IHT would have arise when the money was paid to the trust instead of to the employee).

What happens though if a deemed employer is deemed to have paid salary but has not deducted PAYE?

The 'deemed employer' and 'deemed salary' point is not relevant as the Court of Session said that the employer did pay the earnings. Assuming that there was not an offshore employer then this will be the million dollar question for some people.

Condition B seems hard for HMRC to sustain. If the company had a QC's opinion that no PAYE was due then Condition A would seem to be in point. So there would certainly seem to be a real risk that HMRC could pursue the individual for the PAYE. But there are obviously timing issues associated with this.

[pimpernell]

Ah.

So Graham, are you saying that the INOH assertion that loans to an employee from an EBT are not subject to income tax is incorrect??

I think I'm right in saying that the Rangers case only found that the employer should have deducted PAYE at the time of submitting funds to the Trust. It's not yet proven/ been through the courts whether the tax debt is transferrable to the employee if the employer can't/ won't pay because that wasn't what the case was about?

And as ASB says, if the employer no longer exists (as in oldCo Rangers), and the company was liquidated in a proper way with HMRC notified as a creditor- then HMRC would have to re-instate the now defunct companies to redeem any funds, which is hardly likely .....

So still some way of finality on this minefield for us poor punters??

What's HMRCs next steps do you think? Go after one of the footballers with a side letter to try to prove employee liability and try to redeem income tax?

[webberg]

There's a lot of very good information above and I'll need some time to process this but have to go and do some real work for a day or two.

I think the key though is the taxation point being triggered at the instant the payment arises from the employer.

[webberg]

[I]
So, the question to me seems to me to be "how can HMRC transfer that liability to a user - if at all".

I think that if I were a user I would be feeling a little more confident (not loads, just a bit).

Also, what about NI implications ? I don't really see any mention of this, but if it is outside the NI regime then that could also at least provide some damage limitation.

A reasonable position.

There is precedent for PAYE liabilities due but not paid and where the employee to whom they relate has a controlling influence over the employer for the liability to transfer. In this instance, perhaps the managers/executives might be in that place, but the players?

Of more import is whether a PAYE liability arising in respect of employee A can be claimed as a credit by employee A even where the PAYE has not been paid?

Taking this a little further, if the PAYE has been assessed but not paid, is that different from a situation in which it should have been assessed but has not been because the time limit has now passed and/or the employer no longer exists.

Is it possible for a credit to be claimed by employee A regardless of whether the PAYE has been paid/assessed or even anybody realised it was due.

That's cold towel territory although I do have an opinion somewhere that touches upon this.

[webberg]

Some of the other questions

No. The judgement says "The only liability to income tax is on income earned by the trustees, for example by investment of the trust funds" but the case is not about this. Income of the trust would be taxed on the employee as investment income (since the judgement would suggest that it would be a settlor interested trust) and not PAYE/NIC. The employer is unlikely to recognise the investment income in its accounts and so it would not pay tax on it. CGT would be taxed on the employee for similar reasons.

That is right in this case since the Court of Session decided it was taxed the nanosecond before when the earnings were paid into the main trust. If they hadn't found that then the payment to the sub-trust would have been taxed as earnings or under the disguised remuneration rules. So the quote is right in the context of earnings having already been found to arise but would be completely irrelevant otherwise.
and
Same as above. If the Court of Session hadn't found that then the payment out had already been taxed as earnings or under the disguised remuneration rules. So the quote is right in the context of earnings having already been found to arise but would be completely irrelevant otherwise.

The 'deemed employer' and 'deemed salary' point is not relevant as the Court of Session said that the employer did pay the earnings. Assuming that there was not an offshore employer then this will be the million dollar question for some people.

Condition B seems hard for HMRC to sustain. If the company had a QC's opinion that no PAYE was due then Condition A would seem to be in point. So there would certainly seem to be a real risk that HMRC could pursue the individual for the PAYE. But there are obviously timing issues associated with this.

I would agree with the above generally.

There is a question about did the employee (and remember that they were all agreed to be employees) actually obtained value from the funds AS A TAXABLE EMOLUMENT.

Much has been made of the side letters. The argument is that these were either a contract of employment in their own right or part of the existing contract. But is it enough that they created earnings out of the contribution to the trust?

In order to be taxable, emoluments have to be received as value?

Although having written that statement I'm now having doubts. Emoluments and earnings from employment are generally taxed on an arising basis, i.e. they are taxable when they fall due to the employee by reason of having performed the duties required.

In the case of a discretionary bonus, that's generally when paid. In the case of a contractual bonus that's when the terms of the contract are met. (See the UBS case here).

I think I'm going to examine the "received as value" point in more detail tomorrow.

(The phrase is mine and not from a tax statute to my knowledge so please don't take this literally just yet).

[webberg]

So Graham, are you saying that the INOH assertion that loans to an employee from an EBT are not subject to income tax is incorrect??

I think I'm right in saying that the Rangers case only found that the employer should have deducted PAYE at the time of submitting funds to the Trust. It's not yet proven/ been through the courts whether the tax debt is transferrable to the employee if the employer can't/ won't pay because that wasn't what the case was about?

And as ASB says, if the employer no longer exists (as in oldCo Rangers), and the company was liquidated in a proper way with HMRC notified as a creditor- then HMRC would have to re-instate the now defunct companies to redeem any funds, which is hardly likely .....

So still some way of finality on this minefield for us poor punters??

What's HMRCs next steps do you think? Go after one of the footballers with a side letter to try to prove employee liability and try to redeem income tax?

ASB and Iliketax have made some extremely perceptive comments and it's going to take a while to think them through.

The old Rangers company still has some significant assets is my understanding and HMRC may well be able to pick up a fair number of pence in the pound. They have lost Crown privilege but are likely to be preferred creditors. I'm sure that this will be part of the considerations going through the liquidators mind.

There's also the question here that as the individuals were agreed to be employees and as contributions were made to one trust before being subdivided, is that enough to make the first trust an EBT?

Would other contractor arrangements mirror that arrangement and if not, are they EBT's or not? Would it be sensible if PAYE liability can be a credit to individuals (I'm uncertain on that for the moment - see above) to try and engineer trusts to be EBT's?

difficult questions.

[ASB]

The old Rangers company still has some significant assets is my understanding and HMRC may well be able to pick up a fair number of pence in the pound. They have lost Crown privilege but are likely to be preferred creditors. I'm sure that this will be part of the considerations going through the liquidators mind.

I think the liquidators job has probably got a lot harder, and longer.

Given HMRC are just ranking along with the other creditors they will get a bigger slice of the pie. The overall debts have gone up by the amount due to HMRC and the assets are unchanged.

But there is another issue - which gives rises to further (potential) liabilities. In at least some of the cases the side letters (or possibly all agreements) appeared to indemnify the recipients of the funds against HMRC taxes levied. Thus there will be - or at least should be to protect themselves - formal claims for each indemnity going into the company. These can only be assessed some time down the line when the recipients affairs are finalised with HMRC. (I doubt that any contractor arrangements contain indemnities from provider to contractor - more likely the other way)

I doubt whether that has any impact on the transferability or otherwise of the debt to the recipients, but if it is it increases the companies debts by that amount.

There is precedent for PAYE liabilities due but not paid and where the employee to whom they relate has a controlling influence over the employer for the liability to transfer. In this instance, perhaps the managers/executives might be in that place, but the players?

I understand Murray himself was a beneficiary. It seems it should (rightly in my view) be easier to transfer liability to him for his share due to the control he exerted. However, in terms of the players, it is a much more different level of control [I know it is different, but consider salary sacrifice for various things and the potential benefit this can bring, it is entirely normal payment structure]. In terms of a typical contractor type arrangement I think it tends to be more the latter than the former. In effect "this is how you receive your payments". Requesting the indemnities suggests that they were simply protecting their interests.

Is it possible for a credit to be claimed by employee A regardless of whether the PAYE has been paid/assessed or even anybody realised it was due.

That is 3 questions I think - but they may all boil down to the same thing. In terms of claiming credit before it has been paid I believe that is the case. The first case is a definite yes in my view. But has documentary evidence to say it has been deducted (payslip/p45/p60). Assessed/Realised it is due has to be more complex. I imagine it must eventually come down to how settlement of the liabilities is agreed. A situation I was in some years ago:-

A company I worked for made various payments to its employees which it believed were not taxable as any form of income. [They were centered around travel allowances, disruption payments and expenses]. Eventually it was decreed they were after a compliance check. The company paid up, the individual employees were not assessed (if they had been I assume some would have had additional tax to pay as higher rate taxpayers etc. There was certainly some fear of this happening since initially it seemed likely that everybody affected was going to need to resubmit their tax returns).

It's not the same thing, since the company was solvent etc, however it does suggest that there are likely to be considerable complexities.

[webberg]

Complexity is a certainty and I suspect the questions above are being considered by HMRC as well.

I'm thinking that we might take this into a private email exchange or a part of the BG forum?