It was this time five years ago that Rangers went into administration, for many it had been on the cards for a number of months with rumours circulating the Scottish giants over its financial problems.
The club was purchased by a Scottish businessman in May 2011 for £1. Although this deal came with stipulations, such as paying off the club's £18m bank debt and making further investment in the team, early into the new reign at the club, doubts and allegations began to surface relating to his business past. It has later been exposed that he did not pay the £18m bank debt as stipulated in the takeover deal, but instead secured a £27m deal with a ticketing company against future season ticket sales. In February 2012 the football club entered administration over non-payment of £9 million in PAYE and VAT taxes to HM Revenue and Customs.
HMRC were looking to appoint their own administrators over the company but the owner managed to appoint his chosen firm. It became a business story almost as much it did a football one, sports journalists more accustomed to writing about team news and injury updates where entering into uncharted column inches.
As a result of the administration Rangers were docked 10 points which effectively ended any chance of retaining that season’s title. Players and management staff agreed sizeable wage cuts and freezes in an attempt to prevent wholesale redundancies.
Within the four months after administration a host of names were mentioned as possible saviours of the club. Most of these gave up within a few weeks due to fan opposition or the financial position of the club being worse than anticipated.
A Company Voluntary Arrangement (CVA) was put forward which was later rejected by HMRC. After the rejection, the Administrators completed a going concern sale of the business and assets to a new company. When this new company failed to secure the club's previous place in the Scottish Premier League, Rangers were placed into the lowest division.
HMRC went on to argue that that around £48m in loans made between 2001 and 2010 from employee benefit trusts (EBTs) amounted to salary payments, on which the tax was due. HMRC lost its initial appeal in 2012 and that decision was upheld at a tribunal in 2014 again appealed by HMRC without success.
However, in November 2015, judges in Edinburgh found that the payments to various trusts set up in respect of executives and footballers employed by the old company amounted to ‘a mere redirection of emoluments or earnings' and was accordingly subject to income tax, therefore finding in HMRC’s favour on the third appeal.
Lord Drummond Young, one of the three judges who heard that appeal, said that if EBTs had not been in operation at Rangers, certain players ‘might well have taken their services elsewhere’ and said that it was ‘common sense’ and ‘self evident’ that the payments were related to work.
Presently BDO, as liquidators of the old company, are appealing that decision, on the grounds that the ruling has implications for many future cases.
The Supreme Court will look at three key issues. The first is whether the Court of Session erred in law in reversing the specialist tribunals’ decisions. Secondly, they will consider whether, in order for a payment to constitute earnings for PAYE and National Insurance contribution purposes, it is sufficient that the payment was derived from work done by a employee and/or that it formed part of the employee’s employment package. Finally, they will examine whether the powers which each employee held as protector of a trust had the effect that the funds in that trust were unreservedly at the disposal of the employee and were earnings for PAYE and NIC purposes.
HMRC appear to be determined to win the case, which will set a valuable legal precedent and discourage other companies from using such tax avoidance schemes.
So why is this such a landmark case? There are employers who used similar structures and those firms have lost the opportunity to use the EBT Settlement Opportunity and could therefore now be facing huge penalties and interest as well as the original tax liability. More significantly, the Rangers decision could impact on a number of perfectly innocent provisions such as an employee directing his or her employer to pay an amount into a pension, i.e. a salary sacrifice pension arrangement, as this could now be caught by the Rangers decision.
Whatever the Supreme Court decides shortly, it is possible that this decision could run on further and there could be a further appeal to the European Court of Justice.
Portland will keep readers updated on further developments as they occur…