In the tax years 2001-02 to 2008-09 the taxpayer company, which ran a professional football club, was part of a group of companies which operated a tax avoidance scheme for payments to its executive officers and, in the case of the club, its senior footballer employees. In the case of the latter, each footballer was paid a salary through payroll but the club made additional payments to the scheme, as recorded in a side letter, whereby it undertook to make additional payments to an employee remuneration trust with a recommendation that the trustee exercise its discretion to re-settle the sum paid on to a sub-trust for that particular footballer, who was appointed protector of the sub-trust with power to change both the trustee and beneficiaries of the sub-trust. The footballer would complete a letter of wishes as protector, naming the family members benefiting on his death. It was envisaged that he would be able to borrow the entire fund settled on the sub-trust for an extended term on a discounted basis, with provision for renewable terms, so that repayment of both capital and interest might be deferred until death and so reduce the value of his estate for Inheritance Tax purposes. The taxpayer company used the same trust mechanism to make discretionary cash payments to the executive officers. Without exception the requested sub-trusts were established and in all but one case loans were advanced as envisaged. The payments were assessed by the revenue as being either emoluments within Schedule E in section 19 of the Income and Corporation Taxes Act 1988 (in respect of the tax years 2001-02 and 2002-03) or, in respect of later years, earnings within section 62(2)(a)(c) of the Income Tax (Earnings and Pensions) Act 2003 and so liable to deductions by the relevant employing company for, inter alia, income tax under the pay-as-you-earn (“PAYE”) system, under regulation 6 of the Income Tax (Employments) Regulations 1993 or regulation 21 of the Income Tax (Pay as You Earn) Regulations 2003. The companies appealed against those assessments. The First-tier Tribunal, by a majority, held that any purposive approach to the legislation to reflect the legislature’s intent to tax remuneration paid in money or money’s worth was curtailed by the existence of statutory provisions for the taxation of loans and trust income, that the trust structure and loans were genuine legal events with real legal effects, and that the employees benefiting from the trust and loan arrangements did not obtain an absolute legal entitlement to the moneys. It found that in such circumstances the payments were neither emoluments (or earnings) nor “payments” liable to deductions by the employing companies, relying in part on case law that a payment was made for the purposes of PAYE only if the money were paid to or at least placed unreservedly at the disposal of the employee. On the revenue’s appeal the Upper Tribunal (Tax and Chancery Chamber) upheld that decision. On the revenue’s further appeal the Inner House of the Court of Session, allowing the appeal, held that income which was derived from an employee’s work qua employee was an emolument or earnings and assessable to income tax and that the payments into the principal trust should have been subject to PAYE. The taxpayer company appealed.
Held, appeal dismissed. (1) When construing a taxing provision the court was to focus on the actual statutory wording rather than rely on any judicial gloss placed on a similar expression in earlier case law which confined it to particular circumstances. The court was to give the taxing provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then decide whether the actual transaction answered to the statutory description. Where appropriate, the court could find the existence of a general charge to tax having priority over provisions imposing a specific tax charge (paras 11–15).
(2) Applying those principles to the legislation in issue, income tax on emoluments or earnings was due on the payment of money by an employer to an employee as a reward for his or her work as an employee. Focusing on the statutory wording, neither section 131 of the 1988 Act nor section 62(2)(a) or (c) of the 2003 Act provided that the employee himself or herself had to receive the remuneration. The charge to tax on employment income therefore extended to remuneration for employee paid to a third party, save in the cases of (i) gratuities within section 62(2)(b) of the 2003 Act, (ii) benefits in kind within the benefits code of Part 3 of Chapters 2=11 of the 2003 Act, or (iii) payments dependent on the occurrence of a contingency. Notwithstanding judicial gloss on the word “payments”, there was no general rule or principle that a payment was made for the purposes of PAYE only if paid to, or placed unreservedly at the disposal of, the employee. Accordingly, given the breadth of the wording of the tax charge and the absence of any restrictive wording in the primary or subordinate legislation, there was no rationale for excluding from the scope of the tax charge on emoluments, or earnings from employment, remuneration in the form of money which the employee agreed should be paid to a third party, or where he arranged or acquiesced in a transaction to that effect (paras 35, 41, 49–50, 51, 54, 58–59).
(3) Applying the legislation so construed to the transactions in question, the scheme was designed to give each employee access to, and use of, the money paid into the principal trust, if he so wished, and to provide that the money, if then extant, would ultimately pass to his nominated family members. The chance that the trustee of the principal trust might not agree to set up a sub-trust, or as trustee of a sub-trust might not agree to a loan request, did not alter the nature of the payments to the principal trust, given the composite effect of the scheme as it was intended to operate. The scheme did not fall within any of the exceptions where remuneration for an employee paid to a third party was not taxable. Therefore the sums paid to the trustee of the principal trust for each employee in question constituted taxable emoluments or earnings for that person. Such tax charge had primacy over any specific tax charge on employment-related loans. Accordingly, the taxpayer company ought to have made PAYE deductions from the payments, and was liable to the revenue as a result (paras 61–67, 69, 72).
Per curiam. The parties to the appeal having agreed that the determination of the appeal in relation to income tax will govern liability to NICs, there is no need to consider separately the legislation relating to NICs (para 9).
Andrew Thornhill QC, Roddy Dunlop QC (of the Scots Bar), Mark Studer and Jonathan Bremner (instructed by Brodies LLP, Edinburgh) for the taxpayer company.
Julian Ghosh QC (of the English and Scots Bars), Mark Herbert QC, Joseph Goldsmith and Barbara Belgrano (instructed by Office of the Advocate General, Edinburgh) for the revenue.