The move by the UK tax authority to clamp down on how soccer club Rangers used a tax-advantaged trust to handle employee remuneration highlights why businesses must get their affairs in order or face heavy bills, consultants Laven Partners have warned.

Rangers, a Glasgow club with a history dating back more than a century, has been put into administration. It faces a tax tribunal case launched by HM Revenue & Customs concerning how it used an employee benefit trust. Rangers could be left with a tax bill of up to £50 million ($80 million), Laven Partners said.

EBTs, broadly put, are discretionary trusts set up for employees, from which payments can be distributed at a later date, often in a highly tax-efficient manner when compared with more conventional ways of paying staff. Until the current Conservative/Liberal Democrat government tightened rules on use of these vehicles more than a year ago, EBTs had become a significant tax mitigation vehicle by companies. Ironically, the crackdown on EBTs is arguably at odds with regulatory pressure on banks to defer bonus payments to staff. (To view an article on the issue, click here.) 

“It is now important, more than ever, to be aware of any tax which the EBT might have unknowingly incurred and account for it properly. It is imperative that employers understand what the EBT should refrain from doing to avoid incurring unnecessary tax,” Laven Partners said in a recent note.

Hedge fund usage

As Laven Partners explained, EBTs are currently widely used in sectors such as the hedge fund industry.

“Historically, if structured correctly and run appropriately, the payments into the EBT should fall outside of usual emoluments of the employees and therefore would not be subject to income tax and national insurance. The benefit being that the EBT (often set up in low or neutral tax jurisdictions) would receive untaxed monies and assets that can be invested and grown tax-free for the benefit of the employees,” it said.

“As a further benefit the trustees can exercise their discretion and grant loans to employees who are not subject to pay NI on the loans and may only pay nominal tax on a small portion of the value of the loan as a benefit in kind or as withholding tax on interest paid to the EBT,” it continued. “In practice and on occasion such EBT loans have had no set repayment date and interest (if charged at all) has not been collected, resulting in a de facto payment of a bonus to the employee without the higher rate of tax being charged,” it said.

These “irresponsible loan practices”, Laven Partners said, prompted UK tax authorities to clamp down on the use of EBTs, while other measures have narrowed the scope of these structures.

Rangers

Laven Partners argued that in the case against Rangers,  HMRC “seems to be focusing on the club's use of an EBT set up in 2000-2001”.

In the Rangers case, footballers’ wages were being paid into the EBT to avoid PAYE and NI. “There are suggestions that Rangers overstepped the mark, and through general correspondence (emails, discussions, etc) between the club and its players as well as side letters to employment contracts there is apparently evidence suggesting that payments into the EBT were not discretionary but were contractual in nature and therefore should have been taxed as usual payments to employees at the point when paid into the EBT,” Laven Partners said.

The tribunal considering the Rangers case is likely to arrive at a judgement in March or April.

“There are thousands of EBTs in operation and registered with the HMRC. This case is a further sign that the HMRC does not like EBTs and they will raise enquiries when they have been misused,” Laven Partners added.