The tax issues are the most important parts of the Rangers mess at present.
Anyone looking for detailed information about this issue ought to be looking at the Rangers Tax Case Blog.
However, as a service to my reader, I thought I would do a potted summary. Here goes.
(As always, I am happy to be corrected and enlightened regarding the issues here. Feel free to comment below.)
The Big Tax Case
Who would have thought that the initials EBT would become so common in football discussions? The Employee Benefit Trust was a mechanism used by some businesses to pay their employees and contractors in a “tax efficient” way.
Put very simply (as this is a very complex area) the employer set up or contributed to a separate Trust. Legitimate use of an EBT allows employees to approach the Trustees for a loan or similar payment. As long as this payment could not be identified as a contractual right, (ie what HMRC refers to as “disguised remuneration”) then neither Income Tax nor National Insurance need be paid on it.
To make a scheme legitimate therefore, there would need to be no evidence that the employee was entitled to anything from the EBT, and in addition, it would be prudent if, every so often, the Trustees were to reject an employee’s application for funds.
The “loans” to the beneficiaries of the trust would be non-repayable or repayable on such lengthy terms that they were in fact never to be repaid. The jargon term used was “lend and forget”.
In the late 1990’s there was a surge in the use of these EBT’s. Many were marketed by a company owned by Paul Baxendale-Walker. He had written a book on the topic with eminent tax QC Andrew Thornhill, a name which will re-appear below.
Mr Baxendale-Walker has some extreme views on tax. As he said in a BBC Money Programme episode in 2006:-
“I’m actually helping to cure people of various ills, various cancers,” says Mr Baxendale-Walker. “Because tax is a cancer that will kill your business if it’s not treated. So I see myself as a doctor too.”
A Fictional and Fictitious Example
It is often best to look at an example to see how the scheme might work, and how it could have gone wrong.
As an example of the benefits, let us take a football team – Melchester Rovers. The manager, Roy Race, has decided that his team needs an influx of top quality players. Sir Sam Barlow, the Chairman, is conscious of the need to pay economic wages. How can this be done?
Sir Sam, who made his fortune in the international liquorice markets, meets Mr Baxendale-Walker who extols the virtues of the scheme to him. Sir Sam signs up Melchester Rovers for one of these “off the peg” schemes – the “Melchester Rovers Tax Efficient Trust” is set up, and he goes shopping for players, after having paid Mr Baxendale-Walker’s firm a lot of money for the scheme.
Sir Sam sits down with the Signor Clemenza, the agent for a couple of Italian star players. They each want paid £1 million per year to sign for Melchester Rovers, and, as Ruud Gullit is reputed to have told Ken Bates regarding his salary demands when Chelsea manager, it is to be paid “netto”.
Sir Sam quickly works out that, to pay each player £1 million “netto” it will cost Melchester Rovers around £1.75 million each, taking account of tax and NI.
But Mr Baxendale-Walker’s scheme gives the answer.
If each player, Luigi and Roberto, has a contract which pays him £100,000 per annum gross, then the tax and National Insurance payable on this, including the employer’s contribution, will be around £55,000. If it is agreed, with a nod and a wink, that the players will each be able to receive £955,000 per annum from the Trust as “loans” which will never be repaid, then Melchester Rovers have just saved themselves almost £1.5 million per annum in tax and NI, and Luigi and Roberto each are getting their £1 million “netto”.
As the payments to the Trust by Melchester Rovers do not count as wages, then they do not reduce the profits, and therefore might lead to an increased liability for Corporation Tax, but, as Melchester have lost millions of pounds over the years in the pursuit of success, they have huge accumulated losses to set against any profits, and therefore that consideration is irrelevant.
There is only one problem. Clemenza is not stupid. How, he asks, will his players be assured that they will be given the “loans” and more importantly, what if the Trust asked for them back?
Here Sir Sam makes the fatal mistake. He, along with Roy Race, Blackie Gray and other executives, have already been benefiting from the Trust. As the Trustees are their best friends from the golf club, and as Sir Sam is a Trustee of other schemes run by his friends, they know that the Trust will never look to get this money back. Clemenza points out that he does not trust anyone, unless they are Family.
Sir Sam comes up with the solution, but without asking Mr Baxendale-Walker, or anyone else. He provides Clemenza with a letter for each of the players on Melchester Rovers notepaper, confirming that the loans will never have to be repaid, and that, if they are ever called upon to repay them, Melchester Rovers will refund the Trust. Clemenza is happy, as are his players, and he persuades the “sweetie billionaire” that, with the money he has saved, he could actually afford another of his players, Wilhelm, an experienced Dutch international.
As the years pass, Melchester Rovers remain hugely successful, and fulfil Barlow’s boast that, for every ten pounds spent by their archrivals, Melborough, Melchester will spend twenty.
These schemes are so effective and efficient that a number of top quality players sign for Melchester over the years, and everything is rosy.
However, a fateful error occurs. I print below the text of an Internal HMRC Memo detailing what happened.
“HMRC Memo – Mildly Secret – Only to be read by Executive Officers and Maintenance Engineers
From Hector, the Inspector
To Lecter, the Collector
Hi Hannibal!
I wanted to report on my visit to Melchester Rovers. I know that ever since you took over the EBT department in Tax Towers, you have wanted to nail Melchester and Sir Sam Barlow, especially as you want to see Melborough win the league from your seat in the directors’ box. Well, good news!
We were in for a routine inspection, or as you said, “lift every carpet in the place till you find something”. You won’t believe it! In the “Personnel” filing cabinet in their office we noticed a folder labelled “HMRC MUST NOT SEE THIS FOLDER”.
We thought nothing of it until, as we were about to leave, the Director of Finance at Melchester said “You’re all done? Glad you didn’t look at the secret folder!”
I therefore thought this might be worth investigating. Lo and behold, the folder contained 37 separate letters, all on Melchester notepaper and signed by Sir Sam himself. Each letter tells the player to whom it is addressed that “Don’t worry about the wages we are paying you through the Trust as a loan – we confirm that you will never have to pay it back.”
I suspect this might be useful in showing that the EBT has been operating improperly.
Kind regards,
Hector.”
From that point the walls of Mel Park come tumbling down. HMRC demand settlement of millions of pounds in unpaid tax and National Insurance, together with interest and penalties. Sir Sam’s letters are the “smoking gun” proving that the Trust “loans” were “disguised remuneration”. It is not known if Melchester Rovers’ Director of Finance “sleeps with the fishes”.
Back to Reality
It is alleged that Rangers players and perhaps officials too may have benefited from the relevant EBT by receiving what was truly taxable income through it.
Whilst the Trust in question was set up covering a number of companies in the Murray International Holdings empire, assessments of tax regarding Rangers employees would come to Rangers.
The interests of Rangers are being represented by Mr Thornhill QC. As part of the terms of the takeover or Rangers by Mr Whyte, the control of the appeal lies in the hands of Murray International Holdings, not Mr Whyte and Rangers.
As the case progressed, there were various references to “favourable” legal advice.
Often legal advice and the “spin” placed upon it, depends on the question asked.
If Mr Thornhill was asked if Rangers would “win” the appeal, then it all depends on what one means by “win”.
For example, on one view, a decision which reduced Rangers’ liability by £1 would be a “win” (though a Pyrrhic one). Some might view a “win” as being Rangers escaping with no liability at all, and any sum having to be paid as being a “defeat”.
There has been a “win” so far, as Rangers have been able to continue operating, and spending, whilst this potential bill hangs over the Club.
When the issue arose, and assessments of tax were issued by HMRC, these were appealed to the First Tier Tribunal (Tax). This Tribunal has considered the case over a lengthy period, with many adjournments, before the case concluded just over a week ago (on 18th January).
The Tribunal was held in private, possibly on security grounds, but it is expected that the judgment will be published, and even though the hearing was private, it is not necessarily the case that the judgment would be anonymised. A decision is expected in March or April 2012.
The case took so long, it is understood, because each individual payment from the Trust would have had to be looked at. Rangers appeal is against an assessment totalling around £36 million pounds in unpaid tax and interest and a later hearing would be needed, in the absence of agreement, to establish penalties. Penalties can run to 100% of the unpaid tax in particularly heinous examples. Speculation has been that, in Rangers case, penalties might run at about 50%.
What Happens After the FTT(T) Decision?
If the FTT(T) finds that any tax is due by Rangers, they can appeal, but only on a point of law, to the Upper Tribunal. However, appealing solely to delay payment is not possible. On a decision of the FTT(T) the tax assessed by the Tribunal is payable. If the Upper Tribunal finds that the amount assessed is too high, then the taxpayer can be refunded. It is up to HMRC if it wants to push for payment pending an appeal. Standing how it appears Rangers, particularly under new ownership, have treated the taxman, I find it hard to see how any leeway will be extended to them.
As far as settlement goes, there has been some speculation that a “cosy” deal, allowing Rangers to repay the tax over a number of years, might be out in place. I see no possibility of that. HMRC’s own guidelines permit repayment of unpaid tax over a maximum of 1 year, as long as all other tax affairs are fully up to date, and there is no history of defaults or delays. That would not seem to be the case with Rangers, and even if they were allowed say three years to repay a sum in excess of £30 million, how could they possibly do so, stranding their owner’s comments about the multi-million pound “black hole” in their finances without the tax case!
What Does HMRC Really Think of EBT’s?
The Government published a detailed look at the issues of “Disguised Remuneration” prior to changes in the 2011 Finance Act to clamp down on what the tax authorities see as abuse.
As the document says:-
“In many cases, these third party arrangements allow an employee to enjoy the full benefit of a sum of money paid or assets provided while arguing that, because of the structure of the arrangements, there is no legal right to the money or assets. This argument is used to support a proposition that income tax and national insurance contributions (NICs) are due (if at all) only on the use of the money or assets during the period of the employee’s employment and not on their full value.”
So even “legitimate” use of EBT’s to reduce tax liabilities has ended.
The Government estimates that these measures will increase tax revenues by around £500 million per annum. It was thought that there were around 5,000 employers and 50,000 employees benefiting from these schemes.
As the consultation document stated:-
“The objective of this legislation is to prevent the avoidance or deferral of income tax and NICs on employment income. It will impact on employers and intermediaries who use trusts or loans to reward employees with a view to avoiding or deferring paying tax and NICs. The data which HMRC has on known arrangements suggests that there is a broad range of employers who have implemented these arrangements – around 5,000. The type of businesses thought to be involved ranges from large employers in the financial services industry to single-employee limited companies.”
Conclusion
The Big Case, at least stage 1, has ended. Judgment is awaited.
From all that has been publicised, it seems inevitable that Rangers will be left with a substantial bill to pay. At that stage, will Mr Whyte and his cohorts be able to extend matters further?
Perhaps Mr Whyte could offer HMRC something from his massive personal wealth as security for the debt, thus allowing Rangers to continue on their way to a 55th League title?
NB Please note that many of the characters mentioned in the above piece have been created for literary and comedic purposes, and no similaity with any person living or dead should be implied.
Random Thoughts Re Scots Law by Paul McConville 