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I came across a news item earlier this year about Rangers FC and an ongoing tax enquiry into the football club’s use of an Employee Benefit Trust (“EBT”) to “remunerate” its players in a tax efficient manner. Having some professional experience of EBTs and sports clubs/players, I thought it would be interesting to take a brief look at the curious case of Rangers FC and the EBT.
Rangers’ tax problem goes back to the 2000/01 tax year, when the club purchased a perfectly legal tax scheme (Employee Benefit Trust “EBT”) from a firm of lawyers.
Generally speaking, a business can set up an EBT for the benefit of its employees and then transfer assets (usually cash) to the EBT. What then happens is the Trustee of the EBT who decides how to use the assets in order to meet the Trust’s objectives – in most cases the objectives are to seek to benefit the employees of the business that established the EBT.
More often than not, but not exclusively, the Trustee will receive a request for a loan back to the employees. The difference is that the loan is in perpetuity, i.e. no set repayment date, and the recipient of the loan (employee) pays a nominal amount amount of tax as a benefit in kind or a nominal interest rate as opposed to the higher 50% Income Tax rate and National Insurance. HMRC tried to close these down by pursuing long winded and expensive arguments through the courts. It failed. Then, last December it changed the underlying legislation, rendering EBT’s (for now) obsolete in terms of these loan arrangements.
Now bearing in mind that I have glossed over a lot of detail here, it is interesting to note a fundamental point. The loans must be loans in nature and intent with the likelihood of repayment, and not effectively payments masquerading as loans. It has been reported in the press that the problem for Rangers is that the payments were for contractual services by the players and they were in some form “guaranteed” never to be repaid.
I don’t want to rake over the finer points of the case. Both sides have some smart lawyers that have been retained (presumably without the use of an EBT!) and most notably Rangers FC have secured the services of Andrew Thornhill QC. No doubt the technical arguments will be scrutinised, and I do not pretend to know all the facts of case, so I do not presume to judge. Rather, I want to look at the potential problem facing Rangers if the unthinkable happens and Rangers lose their case to HMRC.
Why unthinkable? Simply because of the figures involved. A figure has been suggested as having been paid into the EBT over the years: £48m. Assuming this is correct, and if Rangers lose, it is likely HMRC will argue these are pre-tax earnings and the total tax bill could be circa £24m.
But it doesn’t end there. There is interest on the late payment of tax – some dating back to 2001 – and HMRC will almost certainly seek to impose penalties potentially amounting up to 100% of the tax – another £24m!
The tribunal is not the end of the road for Rangers should they lose. They should be able to secure grounds for appeal and, if HMRC lose, so should they. It is not necesarily likely that this will be the end if both sides decide to fight on.
However, what if Rangers were to eventually lose? I feel, there would be two potential repercussions.
The first is that the club will need all the commercial guile and skill of its new owner, Craig Whyte, and the Board to survive. A tax bill in excess of £50m has got to be a threat to it continued existence if not a threat to its Scottish top flight status.
The second is that HMRC will almost certainly use this as a publicity coup and will probably seek to extrapolate the judgement to others. Strapped as the Government is for cash, HMRC is the main weapon in the armoury of the Treasury in its fight to raise revenue from taxes. I don’t believe that HMRC will do so successfully because of the specific and individual nature of the points of this case but what a gilt-edged opportunity this might prove for them.
One thing I haven’t mentioned so far and perhaps my overriding concern in the curious case of Rangers FC and the EBT is the fans. More than anything, I feel for the supporters. I feel for the supporters of any club that finds its existence under threat through anything other than results on the pitch. Perhaps this could all have been avoided had football not taken such a drastic lurch away from its amateur-based roots and launched itself in the cut-throat world of commercial business.
theindispensableaccountant 