UT (Tax & Chancery) UT/2023/000098 - [2024] UKUT 00404 (TCC)

The Appellant’s ground of appeal is based on the FTT having made an error of law at [36] and [37] when it held that a genuine loan of money with real repayment obligations can comprise earnings in the amount of the principal, and that the Loan to MC comprised earnings.

We have set out [33] to [37] in full above, but repeat the FTT’s summary at [37]:

“37.

In summary, therefore, it is our view that as a matter of law there is nothing which prevents a genuine money loan on commercial terms conferring a benefit on the borrower. It is our view that in the vast majority of cases in practice, such a loan will confer a benefit. And in the context of this case, the Loan conferred a benefit on MC. Its payment to MC, therefore, was potentially within the ambit of section 62 ITEPA Whether it was earnings depends on the substantial reason for its payment.”

HMRC’s written submissions were based on this part of the FTT’s reasoning not being “of central importance” to its conclusions. HMRC did not, at that stage, put forward any reasons why these paragraphs did not involve an error of law by the FTT. At the hearing this had prompted Mr Elliott in opening to suggest that it appeared that HMRC did not contest that these paragraphs involved an error of law. However, Mr Waldegrave made it clear in his oral submissions that it was HMRC’s position that these paragraphs did not involve an error of law (with their alternative submission being that they were obiter and not part of the reasoning of the FTT such that any error of law was not material). As set out more fully in our summary of Mr Waldegrave’s submissions above, it was HMRC’s position that, whilst it is fact-sensitive, a loan could amount to a payment of earnings and the Loan to MC did amount to such a payment. In setting out that only certain loans would constitute earnings, Mr Waldegrave gave the example of a loan that was “genuine” but, viewing the facts realistically, was unlikely ever to be repaid.

Mr Elliott took us through the statutory regime relevant to the identification and taxation of amounts as earnings, which includes the benefits code (and within that the loan benefits code), s188 and s455 CTA 2020. We agree with Mr Elliott that these provisions would be unnecessary, and the exemptions contained therein ultimately ineffective, if it were the case that Parliament intended that any or the vast majority of loans by an employing company to an employee would constitute taxable earnings in the amount of the principal of such loan. As David Richards LJ stated at [3] in Apollo Fuels, when addressing whether the cash equivalent of the leased car, calculated in accordance with Chapter 6, was to be treated as part of the employee’s earnings, “Goods or services supplied to an employee for full value would not ordinarily be regarded as conferring a benefit on the employee or as involving the receipt of income by him…Of course, it is open to Parliament to deem the value of such goods or services, or indeed anything else, to be income, but one would expect Parliament to do so in clear terms…”.

Mr Waldegrave relied on the decision of the Supreme Court in Rangers SC, whereas Mr Elliott submitted that this decision was of no assistance to HMRC for this purpose and relied instead on the decision in Rangers UT.

The Rangers appeals concerned the consequences of a trust arrangement which had been used by several companies within a group for the remuneration of footballers and other employees (sometimes referred to as executives). In outline, the arrangement operated as follows (and references to paragraphs are to paragraphs of the decision in Rangers SC):

HMRC assessed the taxpayer companies to income tax and NICs on the sums which were paid into the trust and lent to employees.

In Murray Group Holdings Ltd v HMRC [2012] UKFTT 692 (TC) (“Rangers FTT”) the FTT held, by majority, that the scheme was effective. The majority decision recorded at [186] that the issue before the FTT was whether the term earnings (or emoluments) extends to the loans made to the executives and footballers under the trust arrangements. The majority concluded that the steps were not a sham, and the employees had received only a loan of the moneys which had been paid to the trusts.

That decision was upheld by Lord Doherty sitting as the UT in Rangers UT. The UT recorded at [18] that the primary position for HMRC was that the composite transaction resulted in payment of earnings being made when moneys were transferred to the sub-trust; in the alternative that it resulted in payment of earnings when loans were advanced to employees. Lord Doherty set out his conclusion as:

“64.

In my opinion it is clear that the FTT did not accept the conclusions which the appellants urged upon them. The majority … held that the end result was that the employees received loans, not earnings. There was neither payment of earnings, nor was there an equivalent of payment in the form of moneys being at the unreserved disposal of the employee. The employees could not, without the intervention and co-operation of beneficiaries, obtain absolute entitlement to the moneys. The majority held that the loans were recoverable, and that recovery was not a remote contingency of the sort that ought to be ignored. … Read in the context of the decision as a whole I think the fair reading of the final sentence of para [226] is that, taking a realistic view of all the facts, the end result is a loan and nothing more. The FTT had indicated at a number of points that a ‘purposive’, ‘commercial’, and ‘realistic’ approach was being taken. They concentrated on whether there was more than a loan: whether there was there some further arrangement. They accepted there was an element of orchestration between employer and employee but they held that such orchestration as there was did not result in it being within the employee’s power to obtain anything greater than a loan. That appears to me to be a conclusion which was open to the FTT.”

Having addressed the decision in Aberdeen Asset Management, Lord Doherty then stated:

“67 Given the FTT’s findings that the reality of the transaction was that the employees had loan access to the funds, but not more, their conclusion that there was not unreserved disposal cannot be faulted.”

The Advocate General for Scotland on behalf of HMRC then appealed to the Inner House of the Court of Session, the decision of which is Murray Group Holdings Ltd v HMRC [2015] CSIH 77 (“Rangers CS”). Lord Hodge subsequently recorded at [3] of Rangers SC that the argument advanced for HMRC before the Court of Session was “a legal argument which had not been presented to, or at least had not been developed before, the tribunals, namely that the payment of the sums to the remuneration trust involved a redirection of the employee’s earnings and accordingly did not exclude those earnings from the charge to income tax”. The decisions in Rangers CS and Rangers SC, allowing HMRC’s appeal in Rangers CS and upholding that decision in Rangers SC, were then reached on the basis of that argument. This is clear from Lord Hodge’s decision where he had stated at the outset in [1] that the fundamental question raised is “whether an employee’s remuneration is taxable as his or her emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself”, referred to the legal argument which was made by HMRC at [3] and [34], and at [36] stated that “The central issue in this appeal is whether it is necessary that the employee himself or herself should receive, or at least be entitled to receive, the remuneration for his or her work in order for that reward to amount to taxable emoluments”. Having examined the provisions of the primary legislation, and addressed the wider purpose of the legislation, Lord Hodge then set out the “general rule” at [41] that “the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party”.

Whilst we need to consider the detailed reasoning further below, we agree with Mr Elliott that the decision in Rangers SC does not support HMRC’s position on this issue. The Supreme Court was addressing whether the payment which was made to the principal trust constituted earnings; although we do recognise that the Supreme Court’s decision on this issue was made in the context of a trust arrangement where the funds were then lent to the employees, ie the fact that the employees received a loan “and nothing more” (Lord Doherty at [64] in Rangers UT), albeit one which was not expected to be repaid at term but would be renewed and repayable out of the estate on death (Lord Hodge at [21] in Rangers SC), did not on the facts prevent the payment to the trust being found to be earnings.

We have concluded that HMRC’s submissions in support of [33] to [37] of the Decision are not supported by the legislative regime or the authorities (including for this purpose not only decisions such as Apollo Fuels but also the decision in Rangers UT).

We recognise that Mr Waldegrave sought to characterise the issue of whether the making of a loan constitutes a payment of earnings as being “fact-sensitive”, and identified that this may be determined by asking whether, viewing the facts realistically, the loan is unlikely ever to be repaid. The difficulties with these submissions in the present appeal are:

We do not consider that viewing the facts realistically to determine whether the making of the Loan to MC constitutes a payment of earnings assists HMRC. Whilst warning against misplaced reliance on judicial glosses in relation to the concept of “payment”, in Rangers SC Lord Hodge described at [52] and [53] the gloss of “money placed unreservedly at the disposal” as a practical and sensible one. In Aberdeen Asset Management the money held by each cashbox company was at the employee’s unreserved disposal, and they could have taken the steps required to obtain absolute entitlement to the money, even though what they owned was shares in the relevant company. Here, MC has an obligation to repay the Loan, and even when taking account of the findings of fact made by the FTT as to the arrangements being prewired (which included the purchase of the Shares and the loan by KC to the Appellant) and the finding that the loan from KC to the Appellant was repayable to her whenever she wanted, and the FTT’s conclusion that this could be used for their “mutual benefit”, the position remains that MC owns the Shares and has a liability to the Trustee. The money lent to him was not placed unreservedly at his disposal.

The making of the Loan to MC was not a payment of earnings to him. The FTT made an error of law in concluding at [37] that in the vast majority of cases in practices a loan will confer a “benefit” on the borrower, that this Loan conferred a benefit on MC and that its payment to MC was potentially earnings (depending on the substantial reason for its payment).