Rangers: the Supreme Court's purposive tax view
Studying the Supreme Court’s judgment in the Rangers case, Donald Drysdale finds that it points clearly to a bolder, more purposive approach to interpreting tax law.
Supreme Court ruling
On 5 July 2017, as widely reported in the popular press and in professional tax journals, the UK Supreme Court published its judgment in the case of RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) (Appellant) v Advocate General for Scotland (Respondent) (Scotland)  UKSC 45.
This determined, in favour of HMRC, an appeal by the taxpayer against a judgment by the Court of Session in Edinburgh. The case concerned an aggressive tax avoidance scheme involving an employee benefit trust (EBT) for the benefit of employees of a number of group companies, including Rangers Football Club.
History of the case
A management services company in the group had established a principal trust which had then been used as the basis of the scheme, which involved a large number of sub-trusts for the benefit of the families of employees of certain group companies. An employee could obtain a loan from his sub-trust which, it was alleged, would provide him with a tax-free sum greater than a payment of salary net of tax deducted under PAYE.
By a majority decision in 2012, the First-tier Tribunal ruled in favour of the taxpayers, holding that loans made to a number of employees (before certain changes in the Finance Act 2011 took effect) were genuine loans and not assessable emoluments. On appeal by HMRC, the Upper Tribunal upheld this ruling.
The majority ruling by the First-tier Tribunal and the decision of the sole judge in the Upper Tribunal were both based on tax legislation dealing with earnings from employment on the one hand and loans to employees on the other. In each case the statutory provisions specified a particular tax treatment. In the case of earnings, the Tribunals considered it appropriate to adopt a ‘purposive’ interpretation. However, this was circumscribed by the existence of specific charging provisions in respect of loans and other benefits. Where a loan was provided, it was held that the statutory tax consequences for a loan should apply, even if it were not repayable until death. There was no need to construe the substance of the loans as effective emoluments.
HMRC appealed again, and the judgment of the Upper Tribunal was overturned by three judges sitting in the Inner House of the Court of Session . They found unanimously in HMRC’s favour, holding that the funds were ultimately derived as consideration for the employees’ services and on that basis were properly to be considered emoluments or earnings.
Now five judges sitting in the Supreme Court have unanimously confirmed the Court of Session’s verdict. While the precise repercussions for individual players may be unclear, the judgment is unlikely to have any grave repercussions for Rangers Football Club itself because it is now under different ownership. However, it comes as bad news for any employer who made use of EBTs and failed to settle with HMRC following changes made by the Finance Act 2011.
There is also a more general issue of much wider interest. Lord Hodge, delivering the Supreme Court’s judgment, explained that it reflected a recent judicial shift in the interpretation of taxing statutes – a definitive move from a literal to a more purposive approach.
The Supreme Court’s approach
Lord Hodge traced the new purposive approach to a speech in Barclays Mercantile Business Finance Ltd v Mawson  1 AC 684, in which Lord Nicholls of Birkenhead had expounded the true principle established in W T Ramsay Ltd v Inland Revenue Comrs  AC 300 and the cases which followed it. Lord Nicholls had explained that the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose.
Lord Hodge quoted Lord Nicholls as saying that the essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve a number of elements intended to operate together) answered to the statutory description.
Lord Hodge went on to quote Lord Reed’s statement in UBS AG v Revenue and Customs Comrs  1 WLR 1005 that the new approach extended, to tax cases, the purposive approach to statutory construction which was orthodox in other areas of the law. The courts must now adopt such an approach to the interpretation of the taxing provisions and identify and analyse the relevant facts accordingly.
Lord Hodge observed that Parliament, in enacting legislation for the taxation of emoluments or earnings from employment, had sought to tax remuneration paid in money or money’s worth. He could see nothing in the wider purpose of the legislation on taxing emoluments which excludes, from the tax charge or the PAYE regime, remuneration which the employee is entitled to have paid to a third party.
The majority decision of the First-tier Tribunal was swayed by the possibility that steps in the scheme might not proceed as originally planned. For example, the trust company as trustee of the principal trust might not agree to set up a sub-trust, or as trustee of a sub-trust it might not give a loan of the funds of the sub-trust to the footballer. Lord Hodge, relying on Lord Nicholls in Inland Revenue Comrs v Scottish Provident Institution  1 WLR 3172, took the view that, in applying a purposive interpretation of a taxing provision in the context of a tax avoidance scheme, it is legitimate to look to the composite effect of the scheme as it was intended to operate.
Where a Tribunal reaches a majority decision, only the ruling of that majority forms the Tribunal judgment. However, in this case the First-tier Tribunal published the dissenting opinion as an appendix to their judgment, and it is interesting to note that it anticipated the purposive approach later taken by the Court of Session and the Supreme Court.
Impact on tax avoidance schemes
In considering the Supreme Court’s decision in the Rangers case, it would be foolhardy to overlook the sharp divide between the deliberations of the lower tribunals and those of the higher courts.
Judges in the First-tier and Upper Tribunals are largely tax specialists, who spend most of their days analysing the minutiae of tax legislation. By contrast, judges in the Court of Session and the Supreme Court have wider and more varied experience, and in this case they chose to take a broader view of the way in which taxing statutes should be interpreted.
The purposive approach could have a significant impact on taxpayers’ and tax advisers’ future appetites for pursuing tax avoidance schemes. Ignore it at your peril.
Article supplied by Taxing Words Ltd