The essence of the Rangers arrangement was that the club had paid monies into an EBT and onwards into some 108 underlying sub-trusts established for the benefit of players and other senior personnel. Between 2001 and 2010 loans of £47 Million were paid out of these sub trusts with, crucially, none of these loans ever being repaid.

The court considered the fundamental question as to whether an employee’s remuneration is taxable as earnings even when it is paid to a third party, and concluded that it was indeed the case. In addition, in relation to the players, who had each received a side-letter from the club (in addition to receiving their employment contracts where payroll taxes applied as normal) which outlined how the EBT was to be used, the court concluded that the “obligation” in the side - letter amounted to a ‘discharge’ of an employer’s obligation to an employee – in short, it formed part of the footballers remuneration.

As a Trustee, and one familiar with such arrangements (though I am not a lawyer!), I personally struggle with the fact that documentation can be in place - in this instance an employment contract and a side-letter - which specifies pre-employment the monies that a player would receive, but with an expectation that part of those monies would not be taxable!

So what does this mean going forward?

HMRC will understandably be very satisfied with the ruling as it demonstrates that their stance against aggressive tax planning is being supported by the courts, and no doubt will turn their cross hairs to the many similar cash-based EBTs where no employment taxes have been paid, opening the flood gates for potentially hundreds of similar cases.

Over recent years, both HMRC and the media have waged a very effective campaign against tax avoidance (both personal and corporate) with the result that arrangements that were commonplace have since been outlawed. Furthermore there has been a recognised shift in public opinion that not only should tax avoidance be frowned upon, but that it is morally unacceptable.

The impact on EBT arrangements is clear - those like the Rangers case will probably disappear within a few years and we are already seeing a reduction in cash-based arrangements. I also anticipate that attention will turn instead to equity-based arrangements where there are still possibilities to reward employees with equity participation and, depending on the exact nature of the plan, deliver some tax efficiencies. Such equity arrangements often work in conjunction with an EBT and as such are often seen by corporates as crucial to recruiting, retaining, motivating and remunerating personnel. This is underpinned also by the fact that HMRC are generally in favour of share ownership and research indicates that companies with wider share ownership amongst their personnel generally perform better financially.

Corporates do however need to be wary that equity arrangements need to be properly and effectively structured in order to deliver rewards that are commensurate with performance. Care needs to be taken to ensure that the marketplace minimises those instances where significant remuneration is achieved when the business is not performing well. If care is not taken, shareholders will increasingly raise objections and such arrangements will start receiving the bad press we have seen in the case of cash-based arrangements.

This should be avoided at all costs as we consider that share ownership is a positive thing, and if dealt with properly can provide a win win-win for businesses, staff and the tax man!

Mark Healey, Director