Employee payments can’t be trusted

November 9, 2015
Employee payments can’t be trusted

The fall-out from the liquidation of Rangers FC continues. In this tax case, the Court of Session held that payments the Rangers group of companies made into a trust for the benefit of their employees, including the players, qualified as employment income. If income is derived from an employee’s services, it is defined as employment income and assessable under the PAYE regulations, even if the employee agrees that it is redirected to a third party.


The taxpayers are members of a group of companies whose parent company is Murray International Holdings Limited, and whose subsidiaries included RFC 2012 PLC (in liquidation) (formerly The Rangers Football Club PLC).

In the tax years from 2001/02 to 2008/09 the taxpayers entered into a trust scheme designed to avoid payment of income tax in respect of a number of employees – namely, executives of the club and professional footballers. Discretionary executive bonuses and payments under footballers’ terms of engagement were both paid into a trust known as the Employee’s Remuneration Trust (Principal Trust).

The Principal Trust was set up by a member of the Murray Group, and it was used as the basis of a scheme involving a large number of sub-trusts. A Murray Group company would pay monies into the Principal Trust with a direction that a sub-trust should be established and funded for the benefit of the family of a particular employee. After a sub-trust was created, usually in the name of the particular employee, that employee would be asked to complete a Letter of Wishes naming the family members they wished to benefit from the trust on their death.

At the same time, the employee would also complete a loan application requesting that the monies be advanced on loan to them by the trustees of the sub-trust. The trustees would then lend the employee the money that had been advanced to the sub-trust from their employer. This would provide them with a tax-free sum that was greater than a payment of salary net of tax deducted under PAYE.  The loan would be repayable out of their estate, reducing its value for inheritance tax purposes.

Whilst in theory the Principal Trust set up these sub-trusts at its discretion, the employing company would advance monies, and, without exception, they would establish a sub-trust in the name of the employee. One hundred and eight such sub-trusts were established and those transactions resulted in assessments by HMRC to income tax under the PAYE system.


During the tax years from 2001/02 to 2008/09, income tax on employment income was governed by two separate regimes.

For the years 2001/02 and 2002/03, the relevant legislation was contained in the Income and Corporation Taxes Act 1988 as amended. Under section 19, the payment of emoluments was subject to income tax.  “Emoluments” were defined in section 131(1) as including “all salaries, fees, wages, perquisites and profits whatsoever”.

From 2003/04 to 2008/09 the legislation governing income tax on employment income was replaced by the Income Tax (Earnings and Pensions) Act 2003. Section 6 imposes a charge to tax on “employment income”, which is defined by section 7 as including earnings.

The central concept of the tax regime governing employment income is the payment of emoluments or earnings. Under both regimes an employer making payment of income assessed to tax is obliged to deduct income tax in accordance with the PAYE regulations.


HMRC’s argument was that the cash payments made by the employer to the Principal Trust were part of the remuneration packages of the employees, comprising bonuses for the executives and salaries for the footballers, which had been earned for their services as an employee.

HMRC argued the payments to the Principal Trust represented a mere redirection of monies earned through work, which still fell under the definition of employment income and thus income tax should have been paid on the sums.


The Court of Session agreed with HMRC that the payments to various trusts, and the application of monies paid, amounted to a mere redirection of earnings which did not remove the liability of income tax. The key feature of an emolument and of earnings is that they represent the product of the employee’s work – their personal exertion in the course of employment. If income is derived from an employee’s services, it is an emolument or earnings, and is assessable to income tax, even if the employee requests or agrees that it be redirected to a third party.

Accordingly, the Court of Session allowed HMRC’s appeal.

Karim Amijee, Trainee Solicitor, Michael Simkins LLP

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