12 September 2017 by Russell Cockburn
Also: UK government delays Making Tax Digital and Taylor Review proposes changes for employment contributions.
The UK courts have finally ruled on the long-running and much-awaited Rangers FC tax case. This involved the use of employee benefits trusts to reduce the employer’s exposure to employees’ tax and national insurance liabilities.
The employer made payments to trusts, which then made loans to the footballers. While in the earlier stages of the case at the tax tribunal and in the lower courts, the emphasis was on the technicalities and the strict legalities of the mechanisms used by the club to achieve it aims.
As the case moved up the courts the emphasis shifted to examine the true nature of the eventual payments to the footballers and whether the loans ought to have be categorised as the footballers’ earnings from the outset.
The Supreme Court, the highest in the UK, eventually concluded the latter. The true nature of the loans was that the footballers had simply received earnings from their work, which should be liable to income tax and national insurance contributions.
In reality, the money had been paid over to the employees as reward for services carried out during the course of employment and in such circumstances the identity of any intermediary recipient could be disregarded when the true nature of the ‘earnings’ was examined.
“The decision will clarify many other cases that have been held up awaiting this outcome”
The inevitable result from this conclusion was that the footballers should have been taxed via the normal employers PAYE mechanisms on these payments and so the club owed a substantial debt to HMRC.
In this case the employer went into liquidation and HMRC’s realistic chance of recovering the money it is owed is significantly in doubt. The more important issue here is that the decision will clarify many other cases that have been held up awaiting this outcome.
It is an important and emphatic victory for HMRC in its long-running dispute with businesses and the tax profession over the veracity of such tax avoidance arrangements. Now the case is finished, it is likely to result in a significant number of settlements with the tax department.
The key point that comes out of the judgment is that the court took the perhaps simplistic view that tax law in the UK imposes an income tax liability on ‘remuneration’ that has been paid to the employee, no matter who is the actual initial recipient and even where that initial recipient is an intermediary third party.
There can be little doubt that this decision is a landmark in the UK courts’ modern attitude to tax avoidance, especially in light of the recent negative attitudes among politicians, the media and the public at large to structured tax avoidance.
Many individuals and businesses that have used such schemes in the past will now have to reach settlements with HMRC and the department will no doubt trumpet this judgment as an important victory in its battle with the tax avoidance industry.
How much actual cash it recovers as a result of the decision remains to be seen.
It is unsurprising that the second finance bill of 2017, following the summer election, is to reintroduce almost all the tax proposals and provisions that were drooped from the first one in the run-up to the general election in June this year.
Notably for corporate businesses, all the provisions covering changes to corporation tax loss relief and the availability of a deduction for corporate paid interest are to be brought back into the statute as originally proposed and from the original 1 April 2017 start date. This is as most commentators expected, although there was a chance that they might have been delayed until next April.
However, there will have been a sigh of relief from the accounting professions and its client small and medium businesses, following the government’s decision to defer the introduction of its Making Tax Digital project for two years until 2020.
Whether this is due to the vociferous lobbying over recent months or the pointed comments from some senior politicians on select committees matters little.
More important is the fact that this delay should give accountants and their clients much needed extra time to prepare for the introduction of quarterly updating from accounting software. The software industry will also have more time to get its act together, as it has been desperately trying to do in the face of inadequate information from HMRC, and individual taxpayers have valuable extra time to get used to using Personal Digital Tax Accounts.
This is a very welcome change of approach from HMRC, despite its appearance late in the day.
The recent publication of the Taylor Report on modern working practices will give may HR departments and PAYE practitioners pause for thought – or at least it should do!
Its general conclusions, described by Matthew Taylor in his interview with Governance and Compliance, arguably go further than many expected, and put forward some genuinely innovative and potentially far-reaching proposals for change in the world of work. These include the tax status of employee and individuals who currently work as freelancers or under looser arrangements.
The report’s main focus is on the rights and entitlements of the ‘worker’ and from the tax perspective the most interesting proposal is to change the emphasis for the definition of worker over to the new ‘dependent contractor’ category.
Alongside this is the move to write new legislation that would make it easier for employers and HRMC alike to determine whether such a worker or contractor is an employee or genuinely self-employed.
“The recent run of cases involving people operating in the gig economy has shown how complex this issue has become”
If this could be achieved it would go a long way to resolving a long-standing area of dispute between HMRC, employers and their advisers: whether someone is employed or self-employed. There are many in these professions who would dearly love clarity on this issue.
The recent run of cases involving people operating in the gig economy, such as delivery and taxi drivers, has shown how complex this issue has become and how difficult it is to distinguish between the different types of workers.
Others might suggest that some organisations have chosen such ‘employment’ methods and business models to deliberately blur the lines – and to possibly exploit their workers.
This is difficult to say with any certainty – and I would not go that far – but anything that makes it easier for employers to avoid getting to trouble with HMRC on this issue is surely to be welcomed.
Whether or not the Taylor proposals are followed through with remains to be seen, but they make interesting and essential reading for anyone in business that has to deal with these matters on a daily basis.