The First Tier Tax Tribunal decision which was issued during the week, and which can be found here, was a surprise to many. The decision was a majority one and the dissenting opinion was based on an entirely different interpretation of the law. In light of the National Audit Office report published coincidentally this week, and about which I wrote a couple of days ago, criticising HMRC for its failure to deal properly with avoidance cases, I would now expect there to be an appeal, despite my original view being different.
This piece though is about the relationship between the FTT and the SPL Independent Commission under Lord Nimmo Smith.
Surely, comes the cry from many in the media, and from supporters of Rangers, the SPL Commission must be abandoned? After all, goes the argument, the FTT decided that Rangers were not guilty of anything. How can the SPL Independent Commission arrive at a conclusion which is different?
The short answer is that it can, but as my regular reader knows, I don’t generally do short answers.
To consider the question properly, we need to look at the questions each panel is looking at.
What Was the FTT Considering?
This is answered at Paragraph 3 of the FTT decision.
“It is the tax implications as affecting the benefits to the employees which fall to be considered. In effect the issue is whether the payments into trust or the benefits taken by the employee fall to be taxed as emoluments of their employment, with PAYE and NIC liabilities arising for the employer.”
So the question was not whether these sums were received by the employee – there is no doubt that they were – but whether, under the labyrinthine Income Tax rules, the sums paid counted as emoluments or earnings and thus were liable to Income Tax under Schedule E.
The majority opinion was that they were not, whilst the dissenting opinion was that they were.
At Paragraph 220, the majority said:-
Thus we cannot accede to Mr Thomson’s proposition that payment of monies into the trust represents payment of emoluments or earnings. We do not consider that the trust structure and loans can be disregarded or their legal effects elided and we elaborate on this in the context of Ramsay in the succeeding paragraphs. There was not an absolute transfer of funds from employer to employee on that view, and hence PAYE and NIC liabilities do not result.
At Paragraph 231 the majority continued:-
The trust/loan scheme is essentially straightforward. It does not include a complicated sequence of stages. The extent of the employer’s obligation is to make a payment into trust. The trust structure and loans bear to be of legal effect. Loans were discretionary although in fact they were (almost) invariably granted. But that was the extent of the employee’s benefit. Whether the arrangement is viewed commercially or legalistically, the inexorable conclusion, in our view, is that the payments into trust became a loan and no more. They were not paid over absolutely and so do not become earnings or emoluments.
Therefore, the question was whether these “payments”, which they undoubtedly were, were “emoluments or earnings” for tax purposes. The majority decision was that they were not.
What Is The SPL Independent Commission Considering?
Rule 4.5 of the SFA’s Registration Procedure Rules provides inter alia:-
“All payments to be made to a player relating to his playing activities must be clearly recorded upon the relevant contract and/or agreement. No payments for his playing activities may be made to a player via a third party”.
The Commission described the EBTs as follows:-
“Payments made by or for [Oldco] into an employee benefit trust or trusts for the benefit of Players, including the Specified Players, employed by [Oldco] as Professional Players, Registered and/or to be Registered as Professional Players with the Scottish Premier League and Playing and/or to Play for Rangers FC in the Scottish Premier League and payments made by or for [Oldco] into a sub-trust or sub-trusts of such trust or trusts of which such Players were beneficiaries, payments by such trust or trusts and/or sub-trust or sub-trusts to such Players and/or for the benefit of such Players and any and all arrangements, agreements and/or undertakings and the like or similar relating to or concerning any of such Players and payments.”
The charges allege that Oldco and Rangers FC breached the relevant Rules of the SPL, and those of the SFA, by failing to record EBT payments and arrangements in the contracts of service of the Specified Players and/or other Players and by failing to notify them to the SPL and the SFA. There is one Issue directed only against Rangers FC, alleging that the club was in breach of the Rules by playing ineligible players. The fourth chapter alleges that during the period from 15 March 2012 Oldco and Rangers FC failed to co-operate and to respond to requests for documents.
You will notice that the words “emoluments” or “earnings” do not appear in the definitions as regards football’s rules.
Instead the crux of the matter has two elements:-
- were payments “to a player relating to his playing activities” recorded in the contract notified to the SFA/SPL; and
- were payments to a player for “playing activities” made by a third party?
A finding that payments were NOT recorded, or that payments were made by a third party would constitute a “guilty” verdict.
Is the Independent Commission Bound To Accept the FTT Evidence?
No. There will be some duplication of evidence, particularly of documentation, but Lord Nimmo Smith and his colleagues will not, I suspect, be panning on spending almost a full month hearing the case (although they will sit for that long if needed).
There are likely to be witnesses, but nowhere near the multi-coloured numbers seen at the FTT.
The SPL Commission could reject evidence of a witness which had been accepted by the FTT. Partly this is because the FTT was not in agreement regarding all of the witnesses, and indeed the majority opinion makes surprisingly little reference to the witnesses.
The cases are looking at different issues. It is like a driver who faces a criminal charge of careless driving. He and other witnesses give evidence in the trial, and he is found not guilty. However, he has been sued by the other party in the accident, and the civil case continues with the same witnesses giving evidence of required, because the two hearings are deciding different issues, although based on the same factual matrix.
The Commission could reject evidence accepted by the majority, and indeed by all, of the Tax Tribunal.
Did The FTT Hear Any Evidence Which Bears on the Issues?
What are we looking for?
We are seeking evidence of:-
PAYMENTS for FOOTBALLING ACTIVITIES made to players, and whether or not these were declared to the football authorities; and
PAYMENTS for FOOTBALLING ACTIVITIES made to players by THIRD PARTIES.
I have copied the relevant extracts from the judgement, both from the majority and dissenting opinions, and they can be found, at length at the foot of this piece. I take the evidence as referred to by the FTT in order of the witnesses referred to. The reader will be aware that the judgement was anonymised.
Remember, the SPL Independent Commission is NOT concerned with the intricacies of the tax legislation. Instead, as Lord Hoffman said, and as was quoted by Dr Poon, the meaning of the word “payment” is dependent on the context within which it is found.
It is not disputed that many Rangers players over a ten-year period received loans, all but one of which has never had a penny repaid.
There is no doubt that Rangers and MIH entered into these schemes to reduce their tax bill, and to be able to sign players they would otherwise have been unable to afford. There is no suggestion that these EBTs were established for any purpose other than avoiding tax. This is in the same way as many of the celebrities who bought forests in Scotland in the 1980’s and who have invested in film companies over the last few years were not enthused by a love for arboriculture or cinematography, but were looking to gain tax advantages.
If it is accepted that these players have received payments, as I submit it must, then are these for footballing activities?
I suggest that the presumption has to be that footballers are paid for footballing activities, unless the contrary can be shown. It was not, for example, a charitable decision by Rangers to lend money to indigent and itinerant footballers from all over Europe!
As the evidence detailed below makes very clear, there was a deliberate decision by Rangers not to notify the SFA/SPL of these arrangements. Nor, as pointed out by Dr Poon, was there any effort to ask the football authorities what should be done.
A sceptic might ask what is wrong with a team lending its player money. There are a number of issues.
One is that a loan which has never to be re-paid is not, in the real world, a loan but a gift.
Secondly, the law already has, in the context of taxation of income, strict rules to regulate the tax advantages given to an employee by receiving a “soft loan”. In fact, it was the existence of that regime which persuaded the majority not to take the Ramsay approach and to look behind the formalities. The clear implication of their decision is that, without the “soft loan” regime being enshrined in legislation they could have treated the “loans” as emoluments or earnings. (Which is not to say that they would have, but that they could have.)
Thirdly, if loans by football clubs to players did not have to be declared, then this would allow unscrupulous owners to lower their wage bill, on paper, and this too could assist their players if fined, as their weekly salary would be far less.
Therefore, it seems very clear to me that numerous Rangers players were paid millions of pounds as part of a scheme to reduce the tax bill of their employers, and that these payments, which were not in the contracts disclosed to the SFA/SPL, amount to a breach of the rule.
Let’s look for a minute at the situation where Rangers say ”Lord Nimmo Smith, with the greatest of respect, we did not pay our players anything over and above their contracts. Instead, we funded a Trust which in turn set up various sub-trusts and it was the independent Trustees of those sub-trusts who paid the money to the players. Effectively they were borrowing from their families”.
Does that not suggest that these are payments for footballing activities coming from a third party?
As Mr Thornhill, Rangers/MIH’s eminent and excellent QC submitted, referred to by the majority:-
“What was the legal reality created in each case? In the case of footballer’s side-letters, these were contractual. They were part of the remuneration package. The Tribunal, Mr Thornhill submitted, had to decide what legal relationships had been created especially under the Remuneration Trust.”
I have added the emphasis. The case is open and shut, surely? If the Tribunal only had regard to the extracts I have posted below, then I find it hard, without twisting the meaning of words in a way of which Lewis Carroll’s characters would have been proud, for it to reach anything other than a “guilty” verdict.
What Will Happen?
On the face of it, with Mr Green and Duff & Phelps having refused to participate in the process, the Commission would gather in January and the Commission members would have to act as “contradictors”.
Might Mr Green change his mind and send his lawyers into battle?
The problem is that that would be seen by some as surrender by him to the “corrupt” SPL. As I have said repeatedly, it makes it very difficult to argue with the result where you have refused to take the field of play.
The tactics are clear. The spin-meisters are out in force with the line that a win in the Big Tax Case = vindication by this Commission.
The question is whether the SPL decides to back down by withdrawing the charges, or if it keeps going into a hurricane of negative press coverage. After all, the SFA was meant to reconvene the Carloway Appellate Tribunal to sign off on the disciplinary processes resolved earlier this year. That never happened.
There is every chance, I suggest, that the resolve of the SPL gets worn away by the unremitting waves of ill-informed and inaccurate invective which will continue up to the Commission sits. However, having declared that a prima facie case had been made out, and with Rangers refusing to participate, it is hard to see how it could back down with any credibility intact.
At a point when there are baying hordes (metaphorically) of Rangers supporters chasing after RTC and demanding that he be identified and gaoled; that all of the poress who reported the case be forced to apologise and be sued; and that the justified awards won by RTC and Mark Daly be stripped, one remembers one of the prime motives for RTC starting his/her/their blog – that the media coverage in Scotland of issues surrounding Rangers was generally of a very poor standard, as summed up in the phrase “succulent lamb”.
There is no doubt that it is back on the menu, and with all of the trimmings!
Posted by Paul McConville
Please note – nothing I say above implies nor should be taken as suggesting that the former Rangers directors and management engaged in cheating or deceit. However, the SPL Commission case is simply about whether or not they followed the rules. For ten years, it appears to me that they did not.
Extracts from the FTT Judgement
Mr Red, A Senior Member Of The MIH Group’s Tax Function
Para 9 – “He accepted that it (the Trust) had the attraction of providing a larger sum for the employee and his family given the savings in PAYE and NIC liabilities. It served to incentivise the employees.”
Para 11 – “Football players had tended to be recruited on the basis of a “net of tax” package. Part was a wage/payroll payment subject to PAYE and NIC, and the balance a payment tax-free into trust which (ordinarily) could be accessed by means of a loan agreement with the Trustee, which was recorded in a separate “side-letter” entered into at the same time as the player’s contract. … (The side-letter) did not in his view have to be disclosed as part of the player’s remuneration package to the football authorities. It was not a financial entitlement, he insisted, nor did it represent, in his view, a payment to a player.”
Para 15 – “Crucially the mechanism of the Trust and sub-trusts provided a cheaper way to produce a certain net amount. Mr Red strove to argue that the employee (including the footballers) did not elect between a payroll payment, made net of tax, and a trust “benefit”.”
Mr Yellow, A Member Of The Senior Management Team Of MIH
Para 17 – “He conceded the description of (the Trust) as “tax avoidance” and agreed that it offered tax advantages.”
Mr Violet, A Former Rangers Manager
Para 27 – “Mr Violet explained that he had received from Rangers in addition to his contract of employment, a separate document in respect of “his” sub-trust. His concern was in securing a satisfactory overall financial “package”. He understood in general terms that he could access monies in the sub-trust by way of loan and that ordinarily the Trustee would be agreeable to this. He had used the loan facility and had not expected to have to make repayment during his lifetime. He did in fact make a repayment of £82,000 on one occasion. This had enabled the Trustees to purchase a holiday flat in Scotland.”
Para 28 – “Mr Grey had advised Mr Violet to seek a tax indemnity from Rangers in respect of trust benefits, which was granted.”
Para 29 – “His annual salary there was disclosed as £560,000. He was asked whether that sum coincidentally represented his basic pay plus the grossed up (or “pre-tax”) value of the Trust benefits. Mr Violet seemed to think that it was his salary exclusive of loan benefits. (The terms of his contract included potentially substantial bonuses).”
Mr Grey, A Solicitor Specialising In Football Agency Work And Sports Law
Para 31 – “Mr Grey confirmed that the SFA requires disclosure of the terms of a footballer’s contract but that does not extend, as he understands, to payments from a remuneration trust. While payments from the player’s Club must be disclosed, including benefits in kind such as cars and accommodation, benefits from Third Parties, such as a sports company, need not. However, there is no formal SFA ruling in respect of remuneration trust benefits.”
Para 32 – “He acknowledged that the use of the remuneration trust enabled the Club to negotiate a more beneficial deal in as much as PAYE and NIC liabilities were mitigated.”
Para 33 – “Mr Grey spoke also to his negotiation of a contract for Mr Purple with Rangers. The aspects of basic wage, bonus and appearance money were discussed. … The concluding offer by Rangers was of two elements, half in salary and half in benefit form from the Remuneration Trust. The contract providing for the salary and a separate document, referred to as a “side-letter”, bore the same date. His client was interested in the total global figure. Mr Grey did not consider that the terms of the “side-letter” required to be disclosed to the SFA. It did not represent a benefit from the Club.”
Para 35 – “… in response to questions from the Tribunal Mr Grey indicated that when dealing with Rangers, he had never experienced having to advise his clients on an option between a trust benefit and an alternative “net of tax” payment. The opportunity to play for Rangers represented an important career development for his clients, and the financial “package” in totality was usually irresistible.” (Emphasis added)
Mr Black, Who Provided Strategic Guidance To The Individual Companies In MIH
Para 36 – “(The Trust) was valuable in incentivising employees in providing larger sums for their and their families’ benefit in view of the tax savings. Mr Black did not consider the Trust as a means of tax avoidance, but rather as a means of retaining and rewarding loyal employees. So far as Rangers was concerned it enabled the Club to attract players who would not otherwise have been obtainable.” (Emphasis added)
Para 38 – “At the start of each football season he would meet with his manager to decide on which players might be possible recruits. The manager would have an approved budget for this purpose. The selected player would be offered a contract incorporating standard SFA terms and in favoured cases also a “side-letter” in respect of possible Trust benefits.”
Mrs Crimson, A Director Of Trident, Managing Trustee Of The Remuneration Trust And Sub-Trusts Relating To The Murray Group
Para 44 – “She understood that the Murray Group had become dissatisfied with Equity’s (the previous Trustee’s) hesitation in certain cases to advance unsecured loans to the recommended “beneficiaries” out of the relative sub-trust’s funds. She explained that Trident was prepared to be more amenable to such requests.”
Para 45 – “She maintained that it was reasonable to advance a loan of an amount up to the applicant’s payroll wage.”
Mr Silver, A Spanish Football Agent
Para 49 – “Mr Silver acted on behalf of Mr Inverness in 2004 when he joined Rangers. He explained the remuneration “package” which he had concluded on his client’s behalf. It comprised a salary of £130,000 per annum, a guaranteed bonus of £100,000, and a variety of other benefits. In addition the “package” included possible inclusion in the Remuneration Trust for a “recommended” amount of £118,000. The negotiation was not lengthy: the package was proposed on a “take it or leave it” basis. …In response to the Tribunal Mr Silver insisted that any benefit from the Remuneration Trust was a distinct matter: it could not be exchanged for another benefit. While the £118,000 benefit was expected, it was not 100% certain.”
Mr Gold, A Former Rangers Player, Now Assistant Coach For A National Age-Group Football Team
Para 51 – “(He) gave evidence of the re-negotiation of his employment contract with the Club. In addition to his original salary being continued, contributions to the Trust would be made totalling £500,000. These again would be held in trust. Mr Gold was content with the offer and did not seek to re-negotiate its terms.”
Mr Purple, Works In The Media And Formerly A Professional Footballer
Para 52 – “His contract was negotiated by Mr Grey and then subsequently re-negotiated at a time when the Trust was in use. A major change then was that half of the “consideration” would be paid into the Trust but could be accessed by way of loan arrangement.”
Mr Indigo, A Board Member Of Rangers Since 2000
Para 59 – “He acknowledged that he was aware of the overall content of arrangements made with players and did not consider these to be “secret”. He believed that the Trust had been used to pay appearance money and bonuses.” (Emphasis added)
Mr Magenta, CA Who Worked On Football Administration Matters Within Rangers
Para 64 – “At that stage he was not involved in negotiations with football players and his understanding of the Trust’s purpose was that of making tax efficient payments to them. Initially the trust mechanism had been used to make bonus payments, securing (only) a NIC advantage.”
Para 65 – “From 2004, Mr Magenta had become involved in negotiating players’ contracts and explaining the Trust’s functions to them. Mr Black would negotiate a broad agreement in principle but which was not legally binding. Mr Magenta’s task was negotiating a “deal” in finalised form, usually incorporating a salary (liable to PAYE and NIC) and an additional trust provision, benefiting the player’s family and affording loan facilities to him. This had tax advantages of reducing PAYE liabilities, yet provided the same total net benefit to the player and his family.” (Emphases added)
Para 66 – “Mr Magenta spoke to documentation setting out the “benefits” payable to players. There was a distinction, he insisted in cross-examination, between contractual payments and payments into trust. He spoke to a series of documents recording these. He insisted that there was no obligation on Rangers to report trust payments to the SFA and in cross-examination maintained that notwithstanding Rule 4 of the SFA regulations a trust payment need not be disclosed to them. Only payments from the footballer’s Club qua employer needed to be registered, he insisted.”
Para 68 – “Mr Magenta was questioned closely about “side-letters” and benefits payable in terms of these. “Side-letters”, he said, were part of the “package” offered to players but were distinct from the player’s contract. The “side-letters”, Mr Magenta insisted, did not have to be disclosed to the football authorities. The SFA rules did not extend to payments from third parties, and this, in accordance with an earlier decision by the Club, would include any trust benefits as being distinct from payments in terms of the player’s contract.” (Emphases added)
Mr Scarlet, A Senior Official At Rangers
Para 72 – “In his negotiations with players for Rangers Mr Scarlet worked with Mr Magenta. He would be involved in finalising precise contractual terms after an outline “package” had been negotiated with Mr Black. The value of a sub-trust arrangement was, he would explain, that contributions to it could be made free of charges under PAYE and NIC. These contributions in full could then be made available by loan to the player. Larger sums effectively could be released and the term of a loan extended.”
Para 73 – “According to Mr Scarlet the precise contractual terms of a player’s engagement had to take account of bonuses and other benefits such as accommodation and travel expenses. Where a trust contribution was negotiated and a sub-trust proposed, a letter of undertaking would be prepared. … Such arrangements were cheaper for Rangers in view of tax and NIC savings. If trust contributions could be staggered, Mr Scarlet explained, that had cash flow advantages for the Club and also helped to retain the player. Trust contributions, he added, would not be disclosed to the Scottish Football authorities.” (Emphasis added)
Para 79 – “Mr Scarlet was then asked about the matter of “side-letters”. When engaging a player a decision would be made about the total sum to be paid. Mr Scarlet had difficulty in remembering details of the division of this total between payroll and trust payments but acknowledged that there could be 50:50 apportionments between wage/payroll and trust payments. In response to the suggestion that a player’s remuneration was one package, Mr Scarlet explained that there were three components generally – a salary, bonuses and Remuneration Trust benefits. The Remuneration Trust benefit, as Mr Scarlet understood, did not have to be registered with the SFA or SPL. He himself had not been a party to the decision not to register these details.” (Emphasis added)
Para 83 – “In conclusion, Mr Scarlet was pressed about the apparent artificiality of paying players substantial sums via the Trust mechanism, even of amounts exceeding the payroll portion of their benefits. It was noted that players (and Mr Scarlet) had sought and obtained from Rangers indemnities against possible tax liabilities on trust payments.” (Emphasis added)
Inspector 2 For HMRC
Para 98 – “(He) noted also that in instances tax guarantees or indemnities had been granted to players. The terms of other documentation had suggested to him that trust payments were regarded by Rangers as “salary”. Inspector 2 had concluded that there was a degree of artificiality in the arrangements whereby an employee, as “protector” of his own sub-trust, would apply for a loan from the sub-trust a few days in advance of the relative trust deed being executed. Further, there was little evidence of the Trustee’s exercising discretion in relation to the grant of loans. The applicant/employee was not interviewed: his circumstances were not investigated: the loans were often substantial in relation to the employee’s salary. The process of seeking the loan had been initiated by Mr Red, of Murray Group, not, it seemed, by the individual player. In instances where disablement insurance had been negotiated for players, the amount of cover tended to include both direct wage payments and payments into trust.” (Emphasis added)
Para 103 – (xi) In the case of the Group’s employees other than footballers, they had no contractual right to a bonus.
(xii) In the case of certain footballers the terms of engagement were commonly recorded in two documents, one being a contract of employment, the other being described as a side-letter. The latter would provide ordinarily for the constitution of a sub-trust in name of the footballer. While the SFA required players’ contracts to be registered with it, Rangers did not consider it appropriate to have side-letters registered.”
Mr Thornhill’s Submissions
Para 126 – (With reference to the Sempra case) loans were readily available, on a long-term basis, with a liability to pay interest. An Inheritance Tax advantage was available if the loan remained unpaid at the employee’s death. Each employee had his own fund or “pot” allocated to him and held by the trustees. They were largely co-operative with the company’s wishes. No loan applications were refused. Generally it was not expected that loans would be repaid. If they were, the proceeds would still be held by the trustees for the employee’s family’s benefit. The total indebtedness increased over the years: in one case it exceeded 20 times the employee’s salary.”
Para 127 – “Mr Thornhill noted specifically the principles set out in para 139 of Sempra. Payment takes its meaning from its statutory context. Placing money unreservedly at the disposal of an employee is equivalent to payment. It states in terms – “Bearing in mind the definition of emolument, the placing of a perquisite or profit unreservedly at the disposal of an employee can also be equivalent to payment. However, the concept of payment is a practical, commercial concept and, for the purposes of the PAYE system, payment ordinarily means actual payment, that is a transfer of cash or its equivalent and not merely the discharge of the employer’s obligation to the employee”. Later at para 142 the Special Commissioners refused to accede to HMRC’s invitation to find that the payments by Sempra into trust had been placed unreservedly at the disposal of the employee and that that was equivalent to payment to the employee.”
Para 127 – “The Special Commissioners concluded at para 144 that “… when the [Appellant] made payments to the trusts, no transfer of cash or its equivalent was placed unreservedly at the disposal of the employees. That means that there was no payment by the Appellant of emoluments or earnings giving rise to an obligation to deduct income tax and pay it to the Revenue”.”
Para 128 – “Nor was there a payment of earnings in the footballer cases on the basis of an obligation to make payment into trust with a recommendation to the trustee to set up a sub-trust being fulfilled.”
Para 134 – “Quite simply, the issue was whether funds were put unreservedly at the disposal of the employee. They were not, Mr Thornhill insisted. In the present case – as in Sempra – the loans might be viewed as “soft” loans: they were on attractive terms, unsecured and for substantial sums. But they were not artificial: they were the object of the transaction and the intended end result. “Payment” could not be extended to cover such a loan arrangement.”
Para 139 – “What was the legal reality created in each case? In the case of footballer’s side-letters, these were contractual. They were part of the remuneration package. The Tribunal, Mr Thornhill submitted, had to decide what legal relationships had been created especially under the Remuneration Trust.” (Emphasis added)
Mr Thomson’s Submissions
Para 161 – “Side-letters, of course, had not been registered with the football authorities, the SFA and SPL. The spirit of their rules was that the whole contract terms should be registered. Suspiciously, no evidence was led as to who decided that the benefits in terms of the side-letters should not be registered. Non-registration of side-letters was incompatible with both authorities’ policing and disciplinary powers. For example any fines imposed on players would customarily reflect the disclosed wage. Nondisclosure would thwart the authorities’ powers.”
Para 162 – “Mr Grey had indicated correctly that payments from promotional and other commercial bodies need not be registered, but the side-letter payments, Mr Thomson argued, were not from such a third party but from the Club and for playing football. The Rules required the widest declaration of benefits, he submitted. It seemed that Mr Grey was unaware of the trust being used for “appearance money”, he observed.”
Para 163 – “On any view, Mr Thomson argued, Rangers could have sought a ruling from the SFA or SPL about disclosure of side-letters but, clearly, they had chosen not to do so. There was a conscious decision to conceal their existence, and that extended even to the Club’s auditors. … Significantly, while Rangers granted numerous indemnities in respect of players’ potential tax liabilities, these documents did not refer expressly to side-letters, Mr Thomson added.”
Para 171 – “The monies paid into the trust did not reflect the various companies’ profits. Rather, they reflected obligations in the side-letters issued. A curiously high fraction of a football player’s income was paid via the Trust as compared with payroll.”
Para 178 – “The employees were specifically excluded as beneficiaries of the trust arrangements, yet “soft”, non-commercial loans were granted to them. Loans on such a basis were a breach of trust. Trident operated the Trust as a money machine. No loan requests were ever refused: information about debtors’ ability to repay was never sought, particularly important where interest was discounted and loans were likely to be extended. Mrs Crimson seemed unaware that half of players’ “remuneration” was in certain instances paid via the Trust. Also, she did not appreciate that certain substantial loans were advanced on the occasion of certain players’ employment with Rangers ending, after which their earning capacity (and ability to repay) was likely to diminish.”
Para 207 – “Firstly, the arrangements on engagement may be considered. … Characteristically the prospective players and their agents focussed on a net figure. This could be maximised via the trust mechanism, and moreover could only be afforded by the Club that way. A “deal” would be offered by the Club only on a “take it or leave it” basis, which we accept.”
Para 208 – “The format spoken to was of a contract of employment, with remuneration paid subject to PAYE and NIC and additionally a “side-letter” providing for a discretionary trust payment. We consider that the side-letter’s obligation does not amount to an emolument. Again, it falls within the description of “a discharge of an employer’s obligation to an employee”.”
Para 209 – “Finally, Mr Thornhill noted five cases where peculiarly trust payments were made in respect of guaranteed bonuses. These relate to Messrs Selby, Inverness, Doncaster, Barrow, and Furness, as confirmed by his instructing solicitor’s letter of 29 September 2011. The Appellants concede that in these cases there is a sufficient nexus with a contractual right to create a tax liability.”
Dr Poon’s Dissent
Page 62 Para 7 – “Except in the case of Mr Gold’s sub-trust contributions, there was a straight-in, straight-out correlation between the contribution into a sub-trust and the sum loaned to the protector/employee of the sub-trust. A global picture of the movements of funds is therefore: contributions into the main Trust (after payments of trustees’ fees and expenses) entered the various sub-trusts; all sums entering the 5 sub-trusts left as loans to the protector/employees of the respective sub-trusts, except in the case of the four payments into Mr Gold’s sub-trust.”
Page 71 Para 35 – “The side-letters showed a form of contractual arrangement, and they proved linkage between the sums contributed into the sub-trusts at the appointed dates and their withdrawal as loans from the sub-trusts as contemporaneous transactions. The contractual aspect and the linkage between the amounts of contributions to the main Trust and the sums loaned had been repeatedly raised in the enquiry correspondence. A fair conclusion to be drawn from the circumstantial evidence on the one hand, and Mr Red’s oral evidence on the other, is that the side-letters had been actively concealed. The reason for the concealment might have been, in Mr Red’s view, the side-letters could be incriminating evidence against the impression of the trust operation that he had been trying to give.”
Page 74 Para 45 – “The evidence indicates that the role of the trustees was essentially passive, whose principal function seemed to be that of conveying designated sums of money from the Appellants to designated employees as instructed by the loan requests. It was a ‘process’ in which the trustees’ principal function was to process the loans; they did not seem to exercise any discretion. Indeed the timing of events in most cases meant they would not have been able to exercise any discretion, such as Mr Coventry obtaining an indemnity for departing remuneration trust payments before the trustees had supposedly made a decision. Money arrived around the same time into the main Trust as the receipt of the loan requests and letters of wishes (for the first application of loan). A record in November 2006 shows funds being transferred for loans to three individuals before the trustees would have the chance to make a decision ; Appellants’ request to ‘process payments’ as soon as the funds were transmitted meant there would have been no time for the trustees to consider the matter; loans were post-dated to give an appearance of the order of events being in the correct sequence; evidence of deliberation by trustees to be recorded in the minute was not borne out.
Page 75 Para 47 – “It emerged in cross-examination that control of the Appellant companies over the application of funds was apparent. It was not the case, as Mr Red claimed that ‘the Board were not made aware of the way in which the trustees had used the funds’. The Board seemed to have directed the trustees to allocate funds to sub-trusts according to the loan requests as part of the agreement with Trident, and to make loans to the employees without any questions. The loan requests and the protectors’ letters of wishes were the only extant documents for all the sub-trusts. There was no proof of any vetting of suitability, any request for security, any examination of ability to repay loans, any check on their credit worthiness – the loans were made as a matter of course, with no consideration other than ‘processing’ the loan requests. The facts proved contrary to Mr Red’s claim that ‘the company has no control over the funds in the Trust and could not communicate wishes as to how they would like the Trustees to consider using their discretionary powers to apply the funds contributed to the Trust’.” (Emphasis added)
Page 75 Para 48 – “In most cases, the loan requests seemed to have predated the allocation of funds into the sub-trusts, and in some instances, had pre-dated the date of the deed for the set up of the sub-trust.”
Page 76 Para 49 – “There is no substantive evidence to support the claim of discretionary powers being exercised in granting loans to the protector/employees. There is an inextricable link between the loan requests and the allocation of funds into individual sub-trusts. The loan requests arrived around the same time as the contributions into the main Trust, and seemed to function as instructions to the trustees for 5 the two steps in this process: (1) which sub-trusts were to be allocated money from the funds arriving into the main Trust; (2) how much was to be allocated to each designated sub-trust so as to meet the amount on his loan request. … There is no evidence of any exercise of discretionary powers in the granting of loans.”
Page 79 Para 60 – “The terms and conditions related to these loans advanced to the employees as protectors of their sub-trusts characterise the reality of the funds that have been made to the employees as ‘loans’. From the documentary and oral evidence, the following features can be ascribed to the loans:
- No security had ever been requested or required for the hundreds of thousands of pounds borrowed;
- No scrutiny was undertaken of the purpose for which the loans were requested;
- No vetting of borrowers or assessment of means was carried out;
- The loans were expected to be renewed indefinitely and to remain as liabilities against the employees’ estates;
- It was the understanding of all parties involved – Appellants companies, trustees and employees – that the loans would never be expected to be repaid against the wishes of the employees;
- The interest rate was chosen at a percentage (1.5% or 2% because of Deepwater’s involvement); and according to Mrs Crimson, the rate did not vary with changes in the LIBOR rate, so the trustees were committing themselves to the same rate of interest over the term of 10 years;
- No interest had ever been paid during the term of any of the loans; again it was the understanding of all participants that the interest would never be called upon to be paid during the lifetime of the employees who had borrowed the sums;
- The interest element was designed to be rolled up indefinitely, to remain as a ‘paper’ debt and to augment the overall indebtedness of the employees’ estates, thereby conferring a bigger reduction against inheritance tax.
Page 79 Para 61 – “The certainty that the loan would be renewed and never be required to be repaid was expressed by various witnesses as follows:
- Mr Black: ‘When my first loan is up in mid-2011, I will decide either to pay back the loan or re-negotiate. Whatever I feel is appropriate at that moment.’
- Mr Grey: ‘I could not conceive of any situation where the loans would require to be repaid.’
- Mr Violet: ‘I expected that the trustees would renew the loan with the result that the loan would carry on until I died, which would produce an inheritance tax benefit. Therefore, while I knew these were loans, I never thought I would pay anything back during my lifetime.’”
Page 84 Para 74 – “Before the introduction of the remuneration trust scheme, appearance money, match bonuses, championship bonuses, and contingency bonuses for qualifying in competitions for the footballing employees were detailed in a schedule that formed part of their contracts. The terms of these additional payments to their basic salary took up the equivalent of an A-4 page in this schedule. As the use of the remuneration trust became more wide spread, in the contracts for players with a sub-trust in place, the clause for the terms of bonus payments was reduced to stating that the club would pay the player ‘a bonus in accordance with the schedule agreed from time to time’. Mr Red in his evidence acknowledged the practice of appearance money being paid by the trust mechanism, particularly in the latter part of the period.” (Emphasis added)
Page 84 Para 75 – “The Appellants have declared by way of a letter dated 29 September 2011 that five players: Mr Selby, Mr Inverness, Mr Doncaster, Mr Barrow, and Mr Furness had their guaranteed bonuses paid to them via the trust mechanism. This was in respect of a guarantee that the players would receive a certain amount each year in squad bonuses under the terms of their written contracts. The Appellants have not confirmed the amounts concerned for these five players in terms of their guaranteed bonuses, and have qualified that the agreement is made without concession to any liability.”
Page 87 Para 82 – “The process in respect of how a remuneration package was structured using the trust mechanism is as follows:
- Negotiation for the engagement of footballing employees, or re-negotiation of an existing contract, hinged on reaching an agreement of the ‘net’ figure of remuneration. The ‘net’ figure meant the annual equivalent of remuneration after deductions of income tax and national insurance contributions.
- The net figure, once agreed, enabled a written contract of employment to be drawn up. Along with the terms of engagement would be the headline salary, stated as the grossed up equivalent of the agreed ‘net’ annual remuneration. The contract of employment is the document that was lodged with the SFA and SPL as part of the compliance procedure.
- In cases where the Remuneration Trust arrangement was used, the agreement would have two parts: the employment contract and a letter of undertaking, usually signed on the same day. The letter of undertaking is referred internally within the group as ‘the side-letter’, and stated that the employer would undertake to contribute specified sums at specified dates into the employee’s sub-trust. The side-letter was not lodged with the SFA or SPL.
- In a two-part agreement, the ‘net’ annual figure thus agreed would often be split half way, with 50% of the net total being grossed up as the headline salary in the contract of employment, and the other 50% making the total of the specified sums for contribution into the sub-trust stated in the side-letter. For example, if the net annual was agreed at £1m, it would mean £500,000 would be grossed up and paid through payroll, and £500,000 as annual contributions into the sub-trust, in bi-annual or quarterly instalments.
- When the appointed dates in accordance with the relevant side-letters came up, Rangers would make contributions into the main Trust. Several sums might become due at around the same time, and they would be batched for payment into the main Trust.
- The trustees would allocate the contributions coming into the main Trust to the designated sub-trusts. The allocation of funds into the sub-trusts was done solely with reference to the loan requests from the employees. The amount of loan requested by an employee would determine the sum to be allocated, and it would be into the sub-trust of which the employee had been made the protector. The despatch of the loan requests was coterminous with the transfer of the head sum into the main Trust. On its first application, a loan request would be accompanied by a letter of wishes; thereafter, the loan request would be the only document for the ‘transaction’.
- The trustees would grant the loans invariably, and the sums allocated into the sub-trusts would be transferred into the personal bank accounts of the protector/employees as the final step in this process.
- For players with a sub-trust, the scheme had also been used on some other occasions, for example, for bonuses on winning a match, or in a termination of employment situation.”
Page 88 Para 83 – “In some instances, the proportion of a player’s remuneration going through the trust mechanism was more than 50% of the ‘ballpark figure’. Some examples suffice: (a) Mr Selby (73) received £460,000 through the trust per annum and £300,000 net through payroll; (b) Mr Dundee (76) with £200,000 p.a. from trust and around £100,000 net from payroll; (c) Mr York (61), Mr Cardiff (65), Mr Birmingham (87) and Bath (88) all received substantially more through the trust arrangements than through payroll. From Inspector 2’s Witness Statement, the period from June 2002 to 31 August 2005 saw 51 new players signed for Rangers First team squad, 30 of them joined the Remuneration Trust scheme. Of the 21 who did not join the scheme, 14 came through the youth ranks, and 7 others were with the club for short spells. Since 31 August 2005, 52 players have signed for Rangers FC first team; only 7 of them have joined the trust scheme.”
Page 89 Para 86 – “I asked Mr Purple what he understood to be his package with Rangers, compared to the package he received from his next club when he was sold on by Rangers before the end of his second contract. Mr Purple’s reply was clear and direct:
‘The total package at Rangers, … was the equivalent to £16,000 plus £4,000 appearance. And when I was going to [the next club] I think it was, … £11,000 salary and £2,000 or £3,000 appearance.’
In his Witness Statement (para 12) Mr Purple stated that when he was going to the next club, he ‘was going to be on a lower salary’. In Mr Purple’s understanding, the ‘ballpark figure of £16,000’ was the benchmark of his salary entitlement comparison; it was not just the weekly basic wage of £8,000 under his second contract. As both Mr Purple and Mr Grey understood, it was the basic wage £8,000 plus the remuneration trust payments of £8,000 weekly gross equivalent that formed the ‘ballpark figure of £16,000’. In stating that he was going on a lower salary in his Witness Statement – a contractual entitlement in the sense of emolument – Mr Purple was comparing a like for like between the £16,000 from Rangers and £11,000 from the next club. In Mr Purple’s understanding, the £8,000 gross equivalent from trust payments was part of his emolument with Rangers.”
Page 90 Para 91 – “An example of the figures involved can be given by the simpler case of Mr Inverness, in Mr Scarlet’s email to Mr Magenta, and it reads as follows:
‘Please find details as requested updating you further on the conversation last week. The player I was in negotiations with overseas last week has been secured on the following terms:
- Contractual salary, £300,000 gross pa.
- Guaranteed bonus, £100,000 gross pa.
- Remuneration Trust, £180,000 net pa.
- Appearances: Remuneration Trust, £1,200 net per game, total £48,000.
- Cost per annum, £396,000.
Within the above is the built-in percentage that [another club] would have owed to the player of the transfer fee.’”
Page 91 Para 92 – “Another example comes from the supplementary Witness Statement from Inspector 2, HMRC officer, as an addendum to paragraph 7.79 in respect of sub-trust 79 for Mr Newport. The supplementary statement relates the details of a facsimile dated 31 March 2004 from Mr Scarlet on behalf of Rangers to Mr Gloucester, Mr Newport’s agent. The content of the facsimile is as follows:
‘… Further to discussion this morning, I can confirm to offer the following terms and conditions.
- 2 year contract 2004/05 and 2005/06
- £10,000 gross per week
- £5,000 gross per competitive match played
- Relocation expenses of £8,000
- 5% of gross salary will be paid as agent’s fee
Please sign below to confirm your acceptance.’”
Page 91 Para 93 – The facsimile was in effect an offer of terms and stipulated the amount on which the agent’s fee would be based. The offer was ‘translated’ into two documents: an employment contract with Mr Newport signed on 1 July 2004, and a side-letter dated the same. The terms of the signed contract and the side-letter gave effect to the equivalent of gross weekly total of £10,000 in the following manner:
- Gross salary at £270,000 per annum, which equates £5,192 per week;
- Remuneration trust payments: £300,000 over the two-year period, which equates £2,885 per week;
- Trust weekly payments grossed up with tax at 40% equate £4,808 per week;
- Gross weekly salary of £5,192 plus grossed up trust weekly equivalent of £4,808 to arrive at the gross weekly total of £10,000.”
Page 92 Para 95 – “In each of the examples given, the pay negotiation was trying to arrive at an agreed figure for the player’s earnings, either in net or in gross terms – ‘the ballpark figure’. In the minds of all the parties concerned: Rangers, the player, and his agent, it was a package for earnings that had been struck. The structuring of the pay deal using the trust mechanism came after the overall income entitlement had been agreed. From the oral evidence of Mr Purple and Mr Grey, the player and his agent were in perfect agreement as to how they regarded the trust payment component – as part and parcel of the ‘ballpark figure’ in the pay deal. The internal communications from Mr Scarlet, of which those quoted above are a mere fraction, also indicate that he was Rangers’ representative in these negotiations to arrive at a ‘ballpark figure’. He would appear to be either the person who made the decision, or was influential in the decision regarding the use of the trust arrangements in structuring an agreed pay deal.” (Emphasis added)
Page 102 Para 120 – “When the legislation under Part 7A of the ITEPA, as inserted by section 26 of Schedule 2 of FA 2011 (on Disguised Remuneration), took effect from April 2011, the Appellants unilaterally ended the trust arrangement on the two still current obligations under the side-letters (to Mr Guildford and to Mr Maidstone). The sums of contributions supposed to enter the sub-trusts were then grossed up through the payroll. The Respondents produced as evidence two similar letters dated 3 May 2011 from Mr Scarlet on behalf of Rangers to Mr Guildford and Mr Maidstone. The letter to Mr Maidstone, for whom sub-trust 112 was set up, referred to the side-letter of 10 November 2008 and stated that a further sum of £322,000 over and above what had already been made to his sub-trust would have been recommended in accordance with the terms of the side-letter, and continued as follows:
‘Unfortunately, the law has changed and the old arrangement carries no benefits at all. Instead, therefore, the Board propose to make additional payments of £260,000 in May 2011 and £410,000 also in May 2011 directly to you. It’s the Board’s understanding that such payments will be subject to deductions for Income Tax and National Insurance Contributions, the net result being that you [Mr Maidstone] will receive payment of the amount which would have gone into the Trust.’”
Page 102 Para 121 – “The occasion of Rangers winning the UEFA championship led to six sub-trusts being created for Mr Warwick, Mr Camden, Mr Islington, Mr Kensington, Mr Balham, Mr Brixton to pay their entitlement via the trust arrangements. An email from Mr Magenta to Mr Red of 21 June 2006 confirmed the names agreed with Mr Scarlet for the new sub-trust creation. Three players, who had sub-trust numbers already allocated to them as 95, 97 and 98, did not receive their UEFA bonuses through the trust arrangements in the end. Mr Magenta’s email gave direction to Mr Red to this end,
‘I have also agreed with Mr Scarlet to gross up the payment due to Mr Dorchester and to pay through Payroll amounts 5 due to Mr Hampstead and Mr Highbury therefore not requiring Trust to be set up for these people.’”
Page 102 Para 123 – “The fact that the trust mechanism and payroll were interchangeable on more than one occasion provides some circumstantial evidence regarding the underlying nature of the trust payments. The essence of the trust payments, under this interpretation, directs towards an income entitlement that is normally accorded to payments via the payroll. If the side-letters only provide the promise of a loan, why should there be a moment of ‘crisis’ when the trust mechanism was not there to process loans by the dates directed by the side-letters? If the UEFA championship bonus was the same entitlement for all the players in the squad, that entitlement should be identical to all. Why should some of these players only receive a loan through the trust arrangements while other players who did not have a sub-trust received the championship bonus through the payroll? If the loan were a genuine loan, why would these players who received their bonus through the trust mechanism be content to obtain a loan and to forego their outright entitlement of earnings through the payroll? One cannot help asking these questions, and the answers invariably lead to two suggestions: (1) that the employer and the employee demonstrated a mutual understanding of an underlying entitlement that a sum of money was to be made available by a certain time under the terms of the side-letter; (2) in the way that players were willing to ‘forego’ their UEFA bonus entitlement in exchange for a trust payment in the form of a loan suggests that in their minds, the loan was not a ‘real’ loan, and they were no worse off for receiving a trust payment addressed as a loan instead of a payroll payment.” (Emphasis added)
Page 108 Para 137 – “In 2005, Mr Evesham sustained an injury and was expected to be out of action for some months. The Board Report of February 2005 for Rangers Football Club Plc, Football Business Unit, recorded the player’s injury on page 4 and noted that after a six-week excess period the insurance policy to cover Mr Evesham’s wage costs would pay £24,365 a week. Extrapolating the weekly figure by multiplying with the fraction 365/7 gives an equivalent of annual wage costs of £1,270,460. The injury fell within the period of the third contract when the gross salary of Mr Evesham was stated at £667,000. It would appear that the insurance cover took into account the £667,000 and the £600,000 through trust payments to arrive at £1,267,000 per annum. For the season 2004/2005, Rangers did receive insurance payment for Mr Evesham of £388,722 for the period from 23 January 2005 to 30 June 2005, a total of 22 weeks, and discounting the first six weeks excess, the payment was closely matched to 16 weeks at £24,365, which should give a total of £389,840.” (Emphasis added)
Page 128 Para 187 – “That ‘unreservedly at the disposal’ is only meant to be a sufficient but not a necessary condition for a payment to constitute an emolument is an interpretation consistent with the observation Walton J makes in Garforth at [132d]: ‘that the word “payment” is a word which has no one settled meaning but which takes its colour very much from the context in which it is found.’” (Emphasis added)
Page 134 Para 198 – “One of Lord Hoffmann’s dicta is: ‘the income tax legislation was intended to operate “in the real world”, one is again referring to the commercial context which should influence the construction of concepts used by Parliament.’ The commercial context outlined above has influenced my construction of the concept of payment that should be applied to the trust arrangements. In the real world where the player and his agent try to command a price in terms of earnings, the clubs which buy and sell him have to reach an agreement about that price, and the insurer refers to that price to set the premium, the trust payments to the player are regarded in this real world as part of his earnings. A purposive construction of the income tax legislation is to give meaning to the trust payments in their commercial context, and in that commercial context, the trust payments have been regarded consistently as part of the player’s earnings.” (Emphasis added)
Page 135 Para 201 – “That the loans lack reality in the commercial context is not only borne out by examining the fact pertaining to the loans, but also independently vouched for by the opinion of third-party regulators, the Jersey Financial Services Commission (FSC). The regulators’ assessment represented a highly valid opinion from the ‘real world’ regarding the commercial reality of the loans. The original trustees Equity, on taking legal advice, asked the Appellants to introduce new measures to make the loans commercially ‘real’. Equity’s request was not complied with – it could not be complied with because the trust arrangements hinged on the fact that the loans are not meant to be commercially real. Put simply, the employees would not have entered the agreement to receive payments via the trust mechanism had the loans been commercially real. Trident replaced Equity because Trident was willing to operate the loan scheme under the terms of the Appellants to deliver funds to the employees wrapped in the legal garb of a loan with no commercial reality.” (Emphasis added)