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.
Very succinctly described Stefan. Must point out thought, it was Reservoir Dogs and not Pulp Fiction 🙂
Damn! That’s what happens when economists try to slip in cool social trivia
Even worse, this is what happens when economists write articles without reading the tax code first- it appears that the government closed the EBT loophole in the 2011 Finance Act. Thanks to @thecroakgang for the steer:
Employee Benefit trusts, settlement opportunity
HM Revenue & Customs (HMRC) is offering employers who have used Employee Benefit trusts (‘EBT’) (and similar arrangements) the opportunity to resolve outstanding enquiries. These arrangements seek to minimise the Income Tax and National Insurance charge on remuneration to employees and directors and may also generate a claim for Corporation Tax deductions for payments into the trust. The Finance (No. 3) Bill 2011 published on 31 March 2011 introduced new legislation to put beyond doubt that such arrangements or schemes do not work. HMRC’s view on these schemes under existing legislation was notified in Spotlight 5 and published in November 2009.
HMRC is inviting employers, companies and other users of these arrangements to settle without recourse to litigation. This will minimise costs to both customers and HMRC. Employers and companies concerned with how their arrangements will be affected by the new legislation can respond to this opportunity to obtain certainty about their tax liabilities.
Employers or companies willing to reach a financial settlement with HMRC will be invited to discuss how this might be achieved. Any settlement will depend on the facts of the case, in particular whether the contributions to the trust have a link to employment or not.
Dave Hartnett, Permanent Secretary for Tax at HMRC, said today ‘This initiative reflects HMRC’s determination to seek to resolve disputes without going to litigation where that can be done without detriment to the Exchequer and within the clear boundaries of the law. HMRC’s pro-active approach to customers gives them the opportunity to discuss their cases with us and work in partnership to establish how the facts of their case fit within the proposals. For this reason I would encourage customers to come and talk to us’.
Maybe it is out topic here but it is closest to the topic I have a question about. The question of Monaco and its tax privileges compared with the other clubs in French league was recently made actual. If I understand this article correctly http://www.sofoot.com/monaco-vers-l-abolition-des-privileges-167981.html total costs of Zlatan Ibrahimović net salary would be 92 million anually for PSG and 14 million for Monaco. Did I understand it right, is it a right information and, if it is and if you have a bit of time, could you please explain some details about it? And what are your thought on Monaco’s situation? Thank you.