Red card offence: HMRC could force ex-footballers using tax avoidance EBTs into bankruptcy

Following the Supreme Court’s ruling in 2017 that payments in excess of £47 million made to Rangers’ footballer players between 2001 and 2010 through an Employee Benefit Trusts scheme (EBT) should be classified as “earnings” (and not loans), hence were taxable, failure to agree a settlement plan with HM Revenue & Customs (HMRC) by 5 April 2019, could lead to bankruptcy petitions being presented against more ex-footballers using EBTs.

If any of the ex Rangers players in particular (and other footballers in general who have been recommended such disguised remuneration schemes) failed to agree a repayment plan with HMRC earlier this month and settle their large tax bill, HMRC are entitled to issue bankruptcy petitions against the remaining debtors.

What are Employee Benefit Trust Schemes (EBTs)?

Employee Benefit Trust Schemes (EBTs) have been used by employers as an alternative form of employee remuneration to cash bonuses utilised as sub-trusts to provide long-term benefits to employees (specifically to save tax). EBTs have been subject to a number of Court decisions instigated by HMRC, where it has been widely found that they are in effect a form of disguised remuneration and as such are tax avoidance schemes.

Supreme Court: EBTs are tax avoidance schemes

The Supreme Court in RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland (2017)- colloquially known as the “Rangers big tax case”, supported HMRC’s position that payments made to Rangers’ employees under the football club’s EBT loan scheme were indeed classified as “remuneration” and consequently such earnings were subject to Income Tax and National Insurance contributions.

It was alleged that the football club between 2001 and 2010 used an Employee Benefit Trust to pay its’ employees. This functioned by the club paying sums (which were an equal sum to their employees’ salary), in to a trust set up for the benefit of the employees. Following which, the trust would lend money via a loan to the employees, thus placing the salary outside the tax regime requiring employees and employers to make National Insurance contributions and pay Income Tax.

As an aside, it should be noted Lord Hodge’s leading judgment clearly opens the door to a judicially bolder approach to interpreting tax legislation. Unlike members of the First-tier Tribunal and Upper Tribunals (who are specialists in tax) and are more likely to examine the minutae of tax legislation by applying a literal meaning, members of the Supreme Court have taken a much more purposive approach to interpreting tax legislation. His Lordship submitted that tax legislation should not be read literally by judges, but purposively instead- i.e. regard should be had to the purpose of the legislation. The effect of this is that tax advisers’ recommendations of “tax loopholes” will come under increasing judicial scrutiny.

Former players forced to declare bankruptcy following HMRC’s subsequent tax bill

Following the decision in 2017, former Rangers‘ captain Barry Ferguson declared himself bankrupt with debts in excess of £1.4 million following HMRC’s tax bill after he was allegedly paid over £2.5 million in EBT money.

Records at the Accountant in Bankruptcy (the insolvency service in Scotland) show that Mr Ferguson’s bankruptcy was discharged on 21 July 2018 following co-operation with the Official Receiver.

If any of the ex-Rangers players that were party to the EBTs did not agree to a repayment plan with HMRC (or settled the tax bill), they are at risk of HMRC serving a statutory demand and issuing bankruptcy proceedings. Given that the case law is in HMRC’s favour, with the judiciary taking a purposive interpretation of the tax legislation, it is likely that HMRC will be more bullish in ensuring those that have exploited tax “loopholes” settle their tax debt.

Disguised remuneration settlement opportunity expired on 5 April 2019

Disguised reumeration is defined in HMRC’s policy paper as “tax avoidance arrangements that seek to avoid Income Tax and National Insurance contributions by paying scheme users their income in the form of loans”

HMRC’s settlement opportunity for users of disguised remuneration schemes (which include EBTs) expired on 5 April 2019. Therefore, anyone that has not yet negotiated a settlement plan with HMRC leaves themselves at risk of HMRC issuing a statutory demand immediately with bankruptcy proceedings to follow.

Despite the ramifications of the Rangers tax case, HMRC in the Finance Bill 2017 nevertheless introduced a new Disguised Remuneration tax charge for all EBTs where no settlement has been agreed with HMRC. This means any disguised remuneration loan outstanding as at 5 April 2019 will be treated as a remuneration and subject to National Insurance and Income Tax contributions.

Potential professional negligence claims against financial advisers

Following HMRC crackdown on disguised remuneration schemes and subsequent judicial backing, if anyone was advised to enter into schemes such as EBTs by a financial or tax adviser, a potential professional negligence claim could exist, especially in circumstances where little to no warnings were given as to the potential risks of entering into such schemes.

Legal advice should be sort as soon as possible as the Limitation Act 1980 sets out that a claim in negligence must be brought within 6 years from the date on which the cause of action accrued i.e. the latest date such products could have been sold would be 2013. If over 6 years have passed, if you have suffered loss as result of a tax avoidance scheme you may not be able to bring a claim (indeed this was the case in Halsall and others v Champion Consulting Ltd and others [2017] EWHC 1079 (QB)). However, under section 14A Limitation Act 1990 you may still have a claim 3 years after the date of knowledge. It is imperative to seek legal advice as soon as possible, and our professional negligence team will offer you advice on your options.

Contact our Leading City of London Bankruptcy Lawyers

Anyone who is (or suspects they are) part of a disguised remuneration scheme, should seek legal advice as soon as possible from our tax team. If a tax debt is owed, you are at risk of HMRC serving a statutory demand immediately and issuing bankruptcy proceedings against you. If insolvency proceedings have started (or you suspect will start against you if you owe money to HMRC), you should contact us as leading bankruptcy solicitors as soon as possible for independent legal advice. Our bankruptcy team works in tandem with our tax disputes and professional negligence team to obtain the optimal result for you.

Our expert Bankruptcy Solicitors & Barristers provide professional and specialist legal advice to guide you to the best legal outcome. Our team of London lawyers are based in Middle Temple adjacent to the Royal Courts of Justice. For your case assessment and for more information about our legal services get in touch using our online form, ☎ 02071830529 or email us on bankruptcy@lexlaw.co.uk.
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