So, farewell then, to the Rangers Tax Case (Big); unless HMRC appeals the impressively-detailed decision published last Tuesday. In which case, we’ll be here for years. The First Tier Tribunal (Tax) decision was a victory for Murray Group Holdings. The ‘oldCo’ Rangers parent company accepted there was a tax liability attached to a minority of its measures to avoid such tax and appealed successfully against all the assessments by HM Customs and Excise (HMRC) they disputed. As a result, those assessments “fall to be reduced substantially.” How “substantially” was not specified. But it will be “substantially” less than the £24m (plus interest and any penalties for late payment) most commonly estimated as the underpayment of tax since the ‘Employee Benefit Trust’ story first broke in the Scottish Herald newspaper in April 2010.
File me under ‘nerd’ if required, but I find publication of detailed legal judgments, combined with a will to penetrate the legalese in which they are written, worthwhile exercises – especially in cases, such as this, where my opinion was wrong. I’ve found myself more conversant in legalese than I was before reading the judgment… as demonstrated by my use of “more conversant” at the start of this sentence. I hope to be at least partly out of this habit by the end of the article. Sorry, in the meantime. The concept of a “majority” decision, when such rulings are derived from case law and evidence, is also a fascinating one. And this judgment demonstrates how conflicts can emerge from different emphases on law and evidence.
The majority decision emphasises case law, as you might expect from a view formed by the major legal expert on the panel, Kenneth Mure QC. The minority decision emphasises the written and oral evidence presented to the tribunal, as you might expect from a view formed by the tax expert on the panel, Dr Heidi Poon. The third panel member was Bachelor of Law. Scott Rae. And the three of them could muster more legal and taxation expertise than you could shake a stick at. Ordinarily, this would lead to a consensual decision encapsulating all relevant aspects of the law. In this case, though, the wide range of expertise led to a wide range of interpretations and opinions, hence at least some of the delay in producing the decision and the need to provide an appendix which is about 50% longer than the judgment itself.
The tribunal considered the “tax implications as affecting the benefits to employees” participating in the “Remuneration Trust established by the Murray Group for the benefit of its employees and their families.” The issue for decision was whether payments into or benefits taken from the Trust “(fell) to be taxed as emoluments.” “Emoluments” are “benefits, profits, wages or salaries received as compensation for being employed or holding an office.” The majority decision was that payments into the trust did not fit that category, and were thus not liable for tax (PAYE) or national insurance (NIC), because, put simply, they were judged to be loans. The Murray Group, “(consisting) of around 100 companies,” set up the trust mechanism in 2001 and Rangers Football Club participated as one of those companies. The companies paid money into the trust “with a direction to the Trustees that a sub-trust be established and funded for the family of a particular employee.” Said employee, a player or member of the executive management in Rangers’ case, could access the funds by way of a “loan facility (at commercial rates on a discounted basis).” Such “loans” were not deemed earnings or emoluments, and therefore not liable for PAYE or NIC.
Not everyone considered the Trust a “tax avoidance” scheme. One witness considered it “a means of retaining and rewarding loyal employees,” especially the ones who were good at football, too – “so far as Rangers was concerned, it enabled the club to attract players who would not otherwise have been obtainable.” The key consideration in the majority decision, though, was whether trust payments or loans were “placed unreservedly at the disposal of the employees.” The “inexorable conclusion” of the majority was that “the payments into trust became a loan and no more.” “We cannot accede to the proposition,” the decision continued, “that payment of monies into the trust represents payment of emoluments or earnings…there was not an absolute transfer of funds from employer to employee…hence PAYE and NIC liabilities do not result.” While HMRC believed that inverted commas firmly belonged around the word “loans,” the majority decision noted that HMRC’s counsel, the wonderfully-named Roderick N Thomson QC, “did not argue that they were a ‘sham’, or, crucially, that they were irrecoverable.” Indeed, the decision makes more than one reference to the “significance” of this stance.
The loans are indeed “recoverable.” All but a very few are still outstanding, as “the term would normally be for 10 years.” The “expectation” of loanees, the tribunal ruled, “is to no more than a loan.” It would, therefore, be interesting to see what happens when these terms expire over the coming years. “Expectations” also emerged from one witness that repayment did not have to be made “during his lifetime.” One witness insisted that while “he believed it could be continued and in effect become a ‘revolving’ facility.” Or, as another witness suggested, in a phrase which could have graced a Monty Python sketch: “a loan, not repayable until death, would ordinarily be available to the player.” Oddball as the concept of a “revolving” loan repayable “on death” sounds, it was technically true. A player could expect his loan to be a “renewable facility.” And one of the consistently championed benefits of the facility was that it offered “inheritance tax advantages as representing a debt on (the participant’s) estate.” The prospect of a loan request being turned down was next to zero, which led to questions as to whether the Trustees properly exercised their “discretionary powers” over such requests, or simply did the Murray Group’s bidding.
The tribunal made a number of unflattering observations about the evidence of a “director of Trident, the managing trustee of the Remuneration Trust.” She was referred to in the decision as “Mrs Crimson,” possibly in recognition of the colour of her face as she gave evidence. The “criteria for the granting and extension of loans…remain unclear,” the tribunal noted. “(They) do not appear to be reflected in any records relating to the grant of loans, with no specific information on the debtors’ remuneration, means and future prospects. Indeed, no considered decision about a loan recorded in a formal minute was produced in the course of the hearing.” However, the tribunal accepted the evidence from Murray Group barrister Andrew Thornhill QC, who was “resigned to criticisms of Mrs Crimson’s evidence” but “insisted that there was an effective trust structure, however lax the administration might be.” Loans may have had a repayment date of the twelfth of Never (which, as we know, is a long, long time). But, Thornhill added, they “were bilateral and recoverable.” And he made extensive use of case law where “the issue was whether payments by the employer…constituted emoluments or earnings.” The ruling in that case was that “they did not.” And, crucially, “their decision was not appealed by HMRC.”
The tribunal placed great emphasis on this case law. They said that “loans were discretionary, although in fact they were (almost) invariably granted,” adding that “we do not regard the liability to make repayment as a remote contingency.” And their ruling was clear. Loans “were made in pursuance of discretionary powers and remain recoverable and represent debts on their estates.” “They were not at any time held absolutely or unreservedly for or to the order of the individual employee.” So no liability arose for PAYE and NIC. At the risk of getting over-technical, Dr Poon could be described as “having none of that old cods.” The majority decision referenced “a sharp contrast between the approach of (Rangers’) counsel who stressed the legal consequences of the trust structure and loans and Mr Thomson’s argument, which relied on an intricate factual tapestry, woven from witness evidence and documentary records.” This neatly encapsulated the differing approaches of the two sides. And Dr Poon’s “dissenting decision” showed just how “intricate” the “factual tapestry” was. “I have found it impossible to do justice to the evidence in a short document,” she claimed. And she wasn’t wrong.
She offered plenty of extra “findings-in-fact and in-law”, which “accorded greater coverage to the admitted documentary evidence” than the majority decision, claiming that “a body of evidence that is not narrated in the majority decision…is of critical relevance in forming my view of the transactions in their real terms.” In this, she was guided by case law which asked “whether the relevant statutory provisions were intended to apply to the transaction, viewed realistically.” She gave example-upon-example of specific contributions to specific sub-trusts, purporting to demonstrate that said contributions were emoluments wrapped in “camouflage clothing,” hiding their true, taxable nature. The precise financial details of one player’s sub-trust demonstrated, according to Dr. Poon’s arithmetic, that all such payments were regarded as “gross salary” for the purposes of calculating an agreed agents’ fee of 5%. Her opinion and calculations were based on his “understanding of the negotiation process for a pay deal,” concluding at the end of seven fact-packed, headache-inducing paragraphs that “the amounts under the trust arrangements formed part of the player’s overall entitlement of ‘gross income.’” She also suggested that “the role of the trustees was essentially passive” and that their “principal function was to process the loans” without appearing to “exercise any discretion.”
“The timing of events in most cases,” Dr. Poon added, “meant that they would not have been able to exercise any discretion.” One player obtained “an indemnity for departing trust payments before the trustees had supposedly made a decision.” Dr. Poon later questioned the need to grant indemnities at all: “If the agreement…was merely the availability of the loan facility through the trust arrangements, why should there be a perceived need for tax indemnity?” Some of Dr Poon’s concerns about the Trust arrangements were cast in far plainer language than your average ‘legalese.’ “Moving in and out of roles like a character in a panto,” she said of employees who appeared to act in conflicting roles as protectors and beneficiaries of their own sub-trusts. One leading Rangers witness was deemed “incredible” in the true sense of the word, while another was criticised for his ability to recall precise conversations from “an incident some six years ago” while unable “to answer questions put to him on other occasions due to a lapse of memory”; redolent of Rupert Murdoch at a parliamentary select committee.
Dr Poon, unsurprisingly, found Mrs Crimson “an ineffectual witness,” And “her ineffectualness, ironically, was an effective testimony of the subservient position of her role as trustee.” Dr. Poon also detailed attempts by a senior Rangers executive to have his salary increase “paid through the trust” as a “discretionary bonus…as I do with players.” After a process made convoluted by internal misunderstandings, the executive’s salary increase was paid through the Trust. But he issued further instructions that a letter addressed to him from a fellow executive “that stated my contractual increase” should be returned to a Human Resources Department manager “for her to shred.” Dr Poon thought this “symbolic of the process of re-naming an agreed contractual entitlement.” There was no mention of whether the executive’s salary the following year included the “contractual increase,” or whether it really was a one-off “discretionary bonus.” But it was noted that the executive wanted the evidence that this was a “contractual increase” shredded.
She was particularly damning of Rangers’ intermittent failure to provide documentary evidence, stating: “It is significant and informative that no compromise agreements are made available as evidence,” before explaining – at length, naturally – their importance and why it could be assumed that such agreements, referenced in other written evidence, existed: “The stakes”, i.e. players’ salaries, “were so high that such legal agreements would have been essential…it is reasonable to presume (they) existed… non-production… does not mean they did not exist. It is likely that (they) are not produced to avoid evidence of a direct contractual link between termination settlements and the sums contributed into the sub-trusts of the said players.” She concluded: “It remains another unsatisfactory aspect where the Appellants have not discharged their onus of proof.” This onus of proof on the Murray Group, “to meet the balance of probabilities standard” is not referenced in the majority decision. And she had plenty to say on the “underlying nature” of trust payments, particularly in relation to bonuses paid upon Champions League group stage qualification in 2006. “All players in the squad” had identical entitlements. So, she asked, “if the loan were a genuine loan, why would players who received their bonus through the Trust mechanism be content to obtain a loan and forego their outright entitlement of earnings?”
Like Dr. Poon, I cannot do justice to the evidence in a short article, or even this borderline-interminable article. I certainly cannot pretend to understand all the issues raised by the decision. And I concede that my continued puzzlement at the decision can be attributed to my ignorance as much as its nature. I still believe, however, that there is tremendous value in publishing legal decisions in such detail. And whilst the lack of a “legalese phrase book” can be a problem, it is one worth taking time to surmount.
So, who really won?
Personally, I find “Rangers won the tax case” to be acceptable shorthand. Legal pedants would point to “Murray Group Holdings and others” as the winners, because that’s what it says on the decision. But, for me, the real winners are the fair-minded Rangers fans who have possibly gritted their teeth to near-dust as their club has been accused of all kinds of everything over recent years. Some of those accusations are answered by this decision. And if said Rangers fans continue feel like going “hahahahahahahahahahaha” on occasion for some time to come, I certainly would not blame them.
Would Rangers’ CVA have succeeded if the FTT decision had pre-dated it?
No. I was part-way through an arithmetical calculation to determine whether the £21.4m HMRC were owed by the old Rangers company would have constituted 25% of the entire creditors’ vote – i.e. enough to block the CVA’s passage – when I happened on this quote from Duff & Phelps’ 10th July report to creditors: “Any CVA proposal requires the support of 75% or more of creditors (by value) who vote…The size of HMRC‟s vote, even excluding those liabilities arising from the Tier 1 Tax Tribunal provided HMRC with an effective right of veto in the event that they did not wish to support the CVA.”
So when former Rangers director and “Borders-based financial high-flyer” Paul Murray told the Daily Record newspaper’s Keith Jackson last Wednesday that “had HMRC’s £75m claim not been there, hanging over the club, then they would not have been able to block the CVA,” he was, pardon the legalese, talking bollocks. In fact… what, exactly, was Paul Murray talking about in the Daily Record last week? Murray has been a regular star of “Exclusive by Keith Jackson” articles in the Record throughout the Rangers saga. He gave his thoughts on the FTT decision exclusively to Jackson last week. And his demonstrably incorrect CVA thoughts were not alone.
Murray “called for court-appointed liquidators BDO to launch an urgent, wide-ranging probe into the circumstances surrounding the events which eventually saw Rangers go under.” And he said: “I believe BDO have a moral and legal responsibility to look at the whole chain of events, stretching back two maybe even three years.” He wasn’t wrong. But it seemed to escape his attention that HMRC rejected the Rangers CVA and insisted on BDO’s appointment for precisely that reason. As stated in the afore-mentioned July 10th report, HMRC rejected the CVA proposal “in order to allow the subsequent appointment of liquidators (who) have a number of investigatory powers not available to administrators, which will provide the opportunity to pursue former directors of the company accordingly.”
Murray added: “Also, there has to be some explanation given for exactly why it took so long for the tribunal to deliver its verdict. When I left the board in May 2011, we expected a verdict to come that July, just two months later.” It seems to have escaped his attention that the tribunal didn’t finish hearing evidence until January of this year. So, without time-travel powers – and not even first-tier tax tribunals are THAT powerful – a July 2011 verdict was impossible. And the very fact that the tribunal could not come to a unanimous verdict would have lengthened the process. If Murray is a “financial expert”, as the Record called him last week, I don’t feel quite so bad about guessing the outcome of the tribunal incorrectly.
Would Rangers have gone into administration in the first place had the FTT decision pre-dated it?
Possibly not. Commentators seeking to blame HMRC for Rangers’ demise, suggest ex-owner David Murray would have sold the club long before Craig Whyte emerged, but for that pesky potential tax liability. Rangers would have been a more attractive proposition had that liability been “reduced substantially.” Yet this potential liability did not make it into the public domain until April 2010. By then, Murray had already failed for two years to find a potential buyer for the club. And when Whyte emerged in November, the “accepted wisdom” was that tax liabilities were the Murray Group’s, not Rangers’. There may have been potential buyers deterred by the tax issue alone. But Rangers’ huge, if diminishing, bank debt was the major financial issue “hanging over” the club in those far-off, halcyon pre-Whyte days.
Is Charles Green right to say that the “validity” of the SPL’s Independent Commission is “undermined” by the FTT decision?
No… but he “would say that, wouldn’t he?” There are no references to particular Scottish Premier League (SPL) rules in the tribunal’s decision. And it is not in dispute that payments made through the trust mechanism were not disclosed to the football authorities. It is noted in the majority decision’s ‘findings-in-fact’ that: “while the SFA required players’ contracts to be registered with it, Rangers did not consider it appropriate to have side-letters registered.” A Rangers witness “insisted” in evidence that “there was no obligation on Rangers to report trust payments to the SFA.” However, the Commission will rule on possible breaches of SPL rules. Evidence to the tribunal may form part of an argument that SPL rules have not been breached (Dr Poon even awarded Rangers the 2006 “Uefa Championship” in her decision). The Commission may even make such a ruling because of that evidence. But that is for the Commission to rule. Far from “undermining” the Commission’s “validity,” it emphasises it.
Can HMRC appeal?
At the moment, HMRC can ask the tribunal judge (Mure) for “leave” to appeal, and have 56 days to do so, from October 29th, the formal date of the decision (nearly Christmas, if my arithmetic serves). Their scope for appeal is limited to points and interpretations of law, not disagreement with the decision. Given that there were wildly different interpretations of law within the tribunal itself, it would appear to the layman that HMRC should find such points and interpretations. But I thought they’d win the case in the first place, so…
Tax avoidance is a hot topic. But that debate has centred on morality, not legality. Moral dubiety is no more a ground for appeal than disagreement with the decision. Moral criticisms of HMRC for not seeking to appeal are irrelevant. HMRC want a legal judgment to assist them in other battles against tax avoidance schemes. HMRC will have to consider whether an appeal can realistically deliver such a judgment. The very existence of dissenting opinion suggests such a realistic chance may exist. So, I think they may well seek, and be granted, leave to appeal. But I thought they’d win the case in the first place, so…
What’s to be done about “rangerstaxcase” et al?
“String him/her/them up, I say, it’s the only language they understand,” seems to be the gist of the more (ahem!) committed members of Rangers’ support. A comment made last week on one of my Rangers blogs said: “It is a pity that all who made remarks about Rangers couldn’t be taken to court and heavily fined.” This appears to omit key parts of the legal process – investigations, evidence, charges… oh… and an offence in law having been committed (and it is worth considering the difference between criminal and civil law at this stage, as well). Apart from that… At least, Murray International Holdings had the decency to “instruct our lawyers to retrospectively review online and printed publications relating to the case to identify whether legal redress is either appropriate or necessary.”
But even their thinking appeared muddled, with conflicting references to “confidential information” becoming available and “ill-informed” debate – implying that the “confidential information” was not information at all. Obviously, the “Rangers Tax Case” blog is a particular target. Presumably, the Herald newspaper, which broke the story in April 2010, will also be a target… and the Telegraph newspaper’s Roddy Forsyth, who wrote last week: “had the information been divulged to this column, I would have had no compunction in using it on the same basis as the Rangers Tax Case blog – that it was of substantial public interest.” However, Murray’s own list of suspects is rather narrower: “MIH’s head office, the First Tier Tax Tribunal and HMRC, together with their respective advisers.” It might have been better if Murray had called for investigations earlier, but he may have had his reasons for not doing so. That apart, unless there’s been something other than “being wrong about the FTT’s decision”, then MIH’s stance would appear sound.
Why was the tribunal’s attempt to “anonymise” the witnesses so laughably inept?
On a final, lighter note, it might help pass the hours on a dull, wet day to see how long it would take you to identify the witnesses referenced in the report. It is fair to say that attempts to avoid identification of the witnesses failed – there were no prizes for identifying “Mr Black”, for example. Early witnesses were colour-coded, which gave us “Mr Green” – you can’t keep him away, can you? But after numerous versions of “purple”, it was clear that there were more witnesses than colours, especially as Pink was unused, which hints at a Reservoir Dogs-style argument among witnesses. So place names were used, which meant Mr Doncaster was a sub-trust beneficiary. Thankfully, there were more place names than witnesses. So there was no requirement to use leading characters from gritty 1970s police dramas, or mis-spelt names of American presidents. Otherwise we might have had a Mr Regan too.
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