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July 27, 2017

Rangers v HMRC – EBT Struck Down by Supreme Court

The Supreme Court has upheld the decision of the Scottish Court of Session in what has become known as the ‘Big Tax Case’. 

The Court found that an employee benefit trust (“EBT”) scheme which redirected employees’ earnings by way of loans from a series of trusts was ineffective for avoiding income tax and NICs.


  • The appeal was brought by the liquidators for RFC 2012 Plc (“RFC”), the former corporate owners of the Rangers FC.  RFC itself went into administration in 2012 with and the club itself is already under new ownership.
  • RFC was involved in a tax avoidance scheme designed to remunerate employees of the club.
  • As part of this scheme, RFC would pay a lump sum to a principal trust and would recommend to the trustees that they resettle the sum into a sub-trust for the benefit of a specific employee.  In theory the trustees had discretion regarding this resettlement however, in practice, they always followed RFC’s wishes.
  • Each sub-trust would favour a specific employee who was also the sub-trust’s protector with the power to appoint and remove trustees and nominate beneficiaries.
  • The sub-trust would in turn lend all of the cash it received to the employees. It was understood that the loan would only be repaid from the employee’s estate once they had died.
  • No securities were required from the employee/protectors.  When a trustee tried to request a security, they were replaced by another trustee.
  • Therefore the scheme was designed to not only avoid income tax/NIC during an employee’s lifetime, but to also reduce the amount of inheritance tax payable on their death.

The operation of this scheme was set out in ‘side letters’ to the main employment contracts.  The Court was provided with copies of these letters and was told they were considered as part of the negotiation for football players.

The Case

Both the First-Tier and Upper Tribunal found in favour of RFC however the Court of Session overturned these and found in favour of HMRC when a new line of argument was advanced by HMRC.

HMRC’s argument was that income derived from an employee’s work should be subject to income tax/NIC even where an employee requests or agrees that the income is redirected to a third party.

The Court of Session agreed and held that the payments made by RFC to the principal trust derived from employees’ work and should therefore have been subject to tax/NIC. This became known as “the redirection principle”.

RFC challenged this finding and argued that the redirection principle could only apply if the employees had a legal right to the payment and it was paid at their discretion.  Therefore as the employees never had a legal right to the sums paid to the principal trust, no liability arose.

The Decision

The key issue for the Supreme Court was whether it was necessary for an employee to receive or be entitled to receive remuneration in order for that remuneration to be subject to income tax and NICs.

The Court held that as a general rule there was no requirement for receipt or entitlement.  In fact the legislation was often silent on the identity of the recipient, with ‘taxable person’ simply defined as the person whose employment the earnings relate to.

Therefore the legislation was wide enough to capture remuneration paid to third parties.

Other rules applied to the taxation of perquisites (“perks”), benefits in kind, and contingent benefits.  These are different to the general rule however the payments by RFC fell within the scope of the general rule first.

Therefore the Court dismissed the appeal and found in favour of HMRC.


HMRC are now expected to issue follower notices to users of similar schemes.  HMRC’s EBT settlement opportunity was withdrawn in July 2015, however it is still possible to disclose such schemes through other disclosure avenues.

Contact us today to discuss your tax requirements.
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