Save your Pennies and the Titles will Follow…

22 Apr

“For every fiver Celtic spend, I’ll spend a tenner” -Sir David Murray

Sir David Murray’s quote was once a bragging right for one half of Glasgow, but now serves as a taunt by the other.

It is actually a misrepresentation.

There is recent case authority in Scotland that provides guidance as to how the First Tier Tribunal may rule in the ‘big tax case’ against Rangers. HMRC has already ruled that Rangers owes the Revenue to the tune of around £24million in tax. Rangers have appealed this to the FTT. The decision is imminent.

In the case of Aberdeen Asset Management v Revenue and Customs Commissioners (1 Feb 2012), Aberdeen Asset Management had started a “discounted option scheme” to provide remuneration on top of base salary to some of its employees.  Under this “discounted option scheme”, Aberdeen Asset Management  established an offshore Employee Benefit Trust (EBT) and transferred to it a large amount of money. Furthermore, they created an Isle of Man “money box” co with a £2 share capital  for the employee and the trust subscribed for the two shares.

One share was paid for at a nominal cost, but the other at a very substantial premium which might range from about £100,000 to more than £1 million. The company’s authorised share capital was increased by £10,000 and it then granted to a family benefit trust, which had been set up for the employee, an option to subscribe for 10,000 ordinary shares in the company.

An employee participating in the scheme held the ‘beneficial interest in the ‘money box’ and was able to receive substantial cash loans at low interest rates which would not be required to be repaid.

Sound familiar?

In reality, the employee was able to receive substantial additional financial benefit. This is important because the emphasis was placed by the First Tier Tribunal after seeing evidence that the both the employee received significant financial benefit and the employer understood this to be immune for income tax and national insurance contributions.

Had the company thought the payments were not immune to NI and income tax, then every time AAM paid a cash bonus to an employee,  then National Insurance and income tax would have been owed on the identical amount. This puts the emphasis on the employers purpose in establishing the EBT.

In this case, Aberdeen Asset Management argued that the overall effect of the transaction was the receipt of shares, not money.  However, the FTT and the Upper Tier tribunal (on appeal) both ruled that the shares in the money-box company transferred to an employee were therefore a readily convertible asset, so that Aberdeen Asset Management was, for the purposes of the PAYE regulations, obligated to make payment on the amounts.

Much has been written about the Rangers players of the first decade of the second millennium participating in the EBTs. Much of what has been written as been based on whether or not the second contract existed that was hidden from the SPL/SFA.  As far the FTT is concerned, I think this is the wrong way to look at it.

As far as the FTT is concerned, the question is not whether or not the players got loans as payment under a second contract, but whether or not the EBT was setup in order to help Rangers Football Club pay those players without paying income tax or national insurance.

Let me explain.

In the Aberdeen Asset Management case, the FTT ruled there had been a composite transaction made up of  series of steps starting with  the establishment of, and transfer of money into, the EBT and ended with the transfer of the shares to employees.  The structures  simply operated to channel additional remuneration from employer to employee. The form and shape of the additional remuneration or benefit might have changed from the time it left Aberdeen Asset Management’s control to the time it came under the employee’s control but the substance of what was being provided did not.

The facts, viewed realistically, “showed unequivocally” that control was vested in the employee who had access to the pot of money contained within the corporate money box. The scheme was ruled to be nothing more than a mechanism to pay cash bonuses and that was a form of payment that the statutory provisions, construed purposively, were designed to catch.

The FTT expressly uses the term, “purposively”, which means that any court of tribunal must look at the purpose of the legislation in order to determine how any particular nuances of a case before it should be construed.

The shares were a payment which was taxable and subject to the PAYE and national insurance contributions regimes.

We must look at the Rangers case in light of this ruling.  (I use nice round figures for ease and for emphasis, not as a factual representation)

Lets say Rangers sign a player Billy Smith (fictional, of course) for a wage of £1million a year. (I like to use nice, round figures.) RFC tell Billy that he will be paid from two sources. First Billy signs a contract for £500,000. RFC, in turn, would  pay NI and income tax to HMRC at the rate of about 50% or £250,000. Billy gets about 20,833 a month deposited into his bank account monthly in take home pay.

No problem there. However, RFC then place £250,000 into a ‘money box’ in the Isle of Man or Virgin Islands. Billy can then withdraw £20K a month out of it as a loan that he never has to repay. The effect is that Rangers is then off the hook for paying £250,000 in NI and Tax.

In this scenario, Billy was able to take home a £500,000 a year wage, after tax.

Lets look at in a different way.

Lets say Celtic sign a player named Tim Smith (fictional, of course) for a £1million a year. He is paid from one source – his club’s account.  Celtic would be obligated to pay the revenue around £500K in income tax and National insurance, at roughly 50% income and NI rates.

Timmy would get about £500,000 in take home wages. Tim would still get a take home wage of about £41,666 a month.

However, in the scenarios above Celtic would have had to to pay the Revenue £500K in income tax and National Insurance. Rangers would only have to pay the Revenue £250K.

The players were not substantially better off. Rangers were.

The point I am making with this is this. The club benefited more than any of the players did. The club was saving a fiver for every fiver Celtic spent. The club could then spend this fiver on buying other players, ensuring participation in Europe, TV monies, cup runs, even 9-in-a-row.

If this is the case, and as expected the FTT rules on this matter in the coming days, the judgement will be dissected and analysed by those in the business to no end. Yet, if the ruling does go against Rangers, this will mean they were effectively able to invest in players by cheating the tax man…

If this is the case, would you agree to a CVA on PAYE and VAT for a pennies on the pound?

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15 Responses to “Save your Pennies and the Titles will Follow…”

  1. mleiser April 22, 2012 at 4:52 PM #

    Reblogged this on Web.3D.Law.

  2. Manticlops (@manticlops) April 23, 2012 at 9:04 PM #

    Great read, though where you say- “Much has been written about the Rangers players of the first decade of the second millennium participating in the EBTs.”…

    Other than Davie Weir, I’m not sure any Rangers players were around back then.

    • mleiser April 23, 2012 at 9:05 PM #

      Very funny. Point taken! thanks for the feedback…

  3. Rob April 23, 2012 at 9:56 PM #

    Simply put, Rangers cheated every club they played against during the period in question…expect them to get of Scot free in relation to the Scottish footballing bodies taking action…they wont find HMRC so accommodating however

    • missteeray April 23, 2012 at 10:36 PM #

      It was not cheating. It may turn out to have been stupid, but it was not cheating.To clarify, the means by which players were paid may have been immoral but the paying of monies to an EBT is not illegal nor is it cheating. The management of the EBT scheme may have been illegal, that will be decided by the FTT(T), but again it was not cheating. From any angle you look at it, RFC’s use of EBTs to pay its players was not cheating. Illegal perhaps due to mismanagement, but not cheating.

      • mleiser April 23, 2012 at 10:38 PM #

        I don’t agree. No-one is suggesting EBTs are illegal. Knives aren’t illegal either. What is illegal is the manner in which you use them. If you use EBTs in a manner out-with the law, one is cheating – cheating the tax man. Aberdeen Asset Management v Revenue Commissioners is proof of this..

      • Carntyne April 23, 2012 at 11:04 PM #

        No matter how often or how clearly Rangers fans have it explained to them, they just don’t understand or want to understand.

        If the standard of proof in a criminal trial was the same as in a civil court, Rangers would not only be owing back tax, but the directors might be facing a custodial sentence.

  4. Donald Morrison April 23, 2012 at 10:26 PM #

    Excellent analysis.

  5. George G June 21, 2012 at 7:27 PM #

    Informative to an extent (mainly the aberdeen case, if what is stated is correct) however if a player is paid 1 million per year, 50% of it through first nirmal method then why is it only 250k in an ebt…it would be 500k which equates to roughly 42k per month “loan” resulting in a monthly wage of around 63k compared to 42k for celtic player so the player is substantially better off. Dont understand why your highlighting players supposedly not better off.

    • web3dlaw June 21, 2012 at 7:37 PM #

      the point i was making was that Rangers could get away with paying the same amount to players and having money saved afterwards that they could reinvest in the club. if they contract with a player to pay 50% more than Celtic did the legal way, then they actually are saving 50% of the difference in which they could turn around and buy other players, etc.

      • web3dlaw June 21, 2012 at 8:15 PM #

        YES, BUT I am using an example where both players are rated at 5 and paid the same, a £1million pounds. This is the example I use in the post. This is where the confusion lies with your argument.

  6. Henry Clarson June 22, 2012 at 1:10 AM #

    A very interesting blogpost. It took me a few moments before the point sank in. Even now I’m not sure that I’ve grasped it properly.
    One interpretation makes Rangers’ policy even sneakier than I already thought it was – it seems to suggest that the club actively deceived the players into believing that the money which was deducted from their gross pay went to the exchequer whereas it actually stayed in Minty’s coffers.
    Would that be the right understanding of the article?
    That might explain why Billy Dodds claimed that his EBT payment had already had tax deducted from it before it was paid into the trust. It also squares with reports that I’ve read in the past about players (from any club) negotiating contracts on the basis of what they required as net take-home pay. Such players didn’t concern themselves with how the financing was structured so long as they could trouser a certain amount of money on pay day; they left it up to others, including their agents, to work out the details. So the player could be genuinely in the dark, having trusted his financial advisors to sort out all of the legalities on his behalf.

    On the other hand, if that’s how it worked, surely employees would notice a shortfall in their PAYE and NI contributions when they received their annual tax statement? They must have had some knowledge that something wasn’t right and a certain amount of complicity would be required between club and player in order to obscure the mechanism from the taxman; unless, again, they simply didn’t bother to check their own accounts or ensure that their business affairs were being handled properly by their expert advisors.

    • George G June 22, 2012 at 1:23 AM #

      Henry clarson…absolutely spot on…we dont know who knows what….however as you mentioned surely these players know as we all do the rough estimate of taxation and so theyd surely.know there paying a lot less than what most would think to be paid. playets arent going to admit paying little tax as it may seem dishonest. however if it is a legal.way then why shouldnt they? we would all do the same just like jimmy carr paid as little tax as possible…i dont see why he should be villified..wed all do tje same.r.

    • web3dlaw June 25, 2012 at 10:03 PM #

      I think so Henry. It is an assumption that the employer will pay your taxes for you. Thats why employees can never be liable for tax due from an employer. I think Billy Dodds was making his case as in – “hey I have nothing to do with any extra cash coming my way” like HMRC was going to be chapping on his doors! I think that Rangers knew what they were doing and didn’t deduct the cash to reinvest in the club, or to pay SDM a dividend.

Trackbacks/Pingbacks

  1. EBts | Web.3D.Law - June 21, 2012

    […] For an example of how the financial doping allegedly committed by Rangers, see my previous post on how EBTs hypothetically benefitted a club here.  […]

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