While we’re on the subject of tax, the UK government tax collector, HMRC, announced today that it would appeal against the Tribunal decision in the Rangers tax case.
The tax case was instrumental in bankrupting the company that owned Rangers football club, which as a result led the football club being reformed under the ownership of a new company, and obliged to enter the Third Division of the Scottish Football League (see an earlier blog on the rights and wrongs of this).
The case concerned Employee Benefit Trusts (EBT). These have been used as a legal means of tax avoidance by many companies in the UK, much to the annoyance of HMRC. The basic point is that you pay income tax (PAYE) on earnings, but not on a loan. So clever tax experts figured out that if you ran/owned a company, set up a trust for your own benefit, and arranged for the company to pay loans to the trust, which you could then use as income, you wouldn’t have to pay PAYE. The catch is that in principle the loans would be repayable if the company asked for the money back, whereas obviously salaries are not. But then if you controlled the company, you could be sure that the loans would never have to be repaid. As I say, clever. Of course, HMRC is apoplectic about these schemes, and wants them made illegal, but right now they are legal.
Rangers used EBT schemes to “give money to players” throughout the 2000s, in effect meaning they got their players tax free. HMRC’s case was that in reality these were not real loans, so it is inconceivable that a player would ever agree to pay them back- it just makes no sense. But apparently this didn’t impress a majority of the Tribunal, which held that since the EBT was drawn up legally, that was enough: “the loans were recoverable”.
The decision is 145 pages long, and lightened only by the
Pulp Fiction Reservoir Dogs anonymisation of the trust beneficiaries: “Mr Blue, Mr Yellow, and Mr Green, Mr Black, Mr Magenta, and Mr Red”. Disappointingly there is no Mr Pink, though “Mrs Crimson” may or may not be flattered by the choice of colour.
This is one of those cases where legal formalism comes up against economic reality. It surely makes no sense to say that players from ten years ago are going to repay what they were paid just because under the strict letter of the law the payment was dressed up as a loan.
But if HMRC loses the appeal, this does raise the interesting, albeit hypothetical, question of what would have happened to Rangers if the case had never been brought. Maybe they would never gone under.
But more practically, maybe other clubs will adopt this practice- turning the UK into a football player tax haven.