The Commissioners for HMRC v MR Currell Limited

The Rangers litigation related to an employee benefit trust set up by a member of the Murray group of companies, entitled the Remuneration Trust. Where a group company wished to benefit an employee using the trust it would make a cash payment to the trust and recommend the trustee to resettle the sum on a sub-trust, also requesting that the income and capital of the sub-trust be applied in accordance with the employee’s wishes. The trustee would invariably comply with the request. The employee would be appointed as the protector of the sub-trust and would provide a letter of wishes asking that income and capital be held and applied as he desired, and that on his death the funds should be held for a specified member or members of his family.

In virtually all cases a loan application was also made to the trustee by the relevant employee, and the trustee almost invariably exercised its discretion to grant a loan of the full amount in the sub-trust. No security was taken in respect of the loans, the first trustee having been replaced by a more “compliant” trustee after requesting security in respect of some loan applications. In contrast, the second trustee’s approach was “lax”. The expectation of the parties was that the loans would not be repaid at their 10-year terms but would remain outstanding for life, so reducing the value of the employee’s estate for inheritance tax purposes.

Although the role of protector was expressed to be a fiduciary one, the employee had extensive power not only to appoint and remove trustees but also to alter the provisions of the sub-trust, change the beneficiaries and appoint a different protector. In Rangers FTT the majority had also found that players who moved abroad had been able to “unscramble” the arrangements and obtain an absolute right to the funds. In Rangers SC Lord Hodge observed at [27] that the power to replace the protector with, for example, the employee’s wife, may have enabled the employee to be nominated as the beneficiary, extinguish the loan and bring the sub-trust to an end.

There were two relevant categories of employee, footballers and senior executives. For footballers the trust mechanism and the amounts involved were agreed at the time of engagement, via a side letter to the contract of employment which included a provision that the footballer would be appointed as protector of the sub-trust. Lord Hodge concluded at [23] that it was clear that the sums paid to the trust and on to the sub-trusts under the side-letter arrangements represented remuneration for employment, and noted that the majority of the FTT had concluded that the combined payroll and trust arrangements were presented as a “take it or leave it” deal to prospective employees.

Although the same trust mechanism was used, the position of senior executives was different in one respect. For them, the trust mechanism was used in relation to annual bonuses. The majority of the FTT had found that there was no contractual right to those bonuses before they were awarded. They were discretionary. Lord Hodge observed at [31] that the bonuses were nonetheless “paid as a reward for the work which the employees had carried out in their capacity as employees”. I would add that in Rangers FTT the majority had found at [103] that there had been a prior practice of paying annual bonuses to executives based on work performance and profitability. In effect, the trust arrangement replaced that.

In the FTT HMRC sought to challenge the genuineness of the loans. The majority decided that the scheme was effective because the arrangements were not shams and the employees had received only loans. In upholding that decision in Rangers UT, Lord Doherty observed at [63] that the majority of the FTT had endeavoured to take a realistic view of the facts. The end result was that the employees received loans, not earnings.

HMRC adopted a different approach before the Inner House of the Court of Session, arguing that the payments to the trust involved a redirection of the employees’ earnings and were taxable on that basis. That argument was accepted (Advocate General for Scotland v Murray Group Holdings Ltd [2015] CSIH 77, [2016] STC 468). One of the employers, RFC 2012 plc, appealed to the Supreme Court.

Lord Hodge described the issue for decision as whether an amount that is remuneration (or a reward for services) is taxable as an emolument or earnings when it is paid to a third party in circumstances in which the employee has no prior entitlement to receive it ([1], [35] and [36]). This reflected the nature of the argument in the Supreme Court. As Lord Hodge recorded at [34], the argument put for the taxpayer was that it was “not sufficient that the payment of money arises from the performance of the duties of an employment”, and that money paid to a third party “does not amount to the payment of earnings or emoluments unless the employee already has a legal right to receive the payment and it is paid at his direction”.

Lord Hodge concluded that there is no general legislative requirement that the employee should either receive or be entitled to receive remuneration in order for that reward to be taxable. Rather (at [41]), the general rule is that “the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party”. This is subject to three exceptions, namely i) benefits within section 62(2)(b), where the statute prescribes receipt by the employee; ii) “where the employer uses the money to give a benefit in kind which is not earnings or emoluments”, in relation to which special rules apply; and iii) cases where the employee acquires only a contingent interest.

Lord Hodge described the second exception as being:

The first and third exceptions are of less direct relevance, but it is worth noting that the cases considered in relation to them, Tennant v Smith (Surveyor of Taxes) [1892] AC 150 (“Tennant v Smith”), Abbott v Philbin (Inspector of Taxes) [1961] AC 352, Heaton (Inspector of Taxes) v Bell [1970] AC 728, Edwards(Inspector of Taxes) v Roberts (1935) 19 TC 618, Smyth(Surveyor of Taxes) v Stretton (1904) 5 TC 36 and Forde and McHugh Ltd v Revenue and Customs Comrs [2014] UKSC 14, [2014] 1 WLR 810 were described by Lord Hodge at [49] as concerned with the “source or the nature of the right which the employee received” rather than the identity of the recipient. In contrast, as he explained at [50], Hadlee v Comr of Inland Revenue [1993] AC 524 (PC) “supports the view … that a charge to income tax on employment income can arise when an arrangement gives a third party part or all of the employee’s remuneration”.

Lord Hodge then considered cases addressing whether there had been a payment of earnings, in particular Garforth (Inspector of Taxes) v Newsmith Stainless Ltd [1979] 1 WLR 409 (“Garforth”) and Aberdeen Asset Management plc v Revenue and Customs Comrs [2013] CSIH 84, [2014] STC 438 (“Aberdeen”), and concluded that two decisions of the Special Commissioners, Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062 and Dextra Accessories Ltd v MacDonald [2002] STC (SCD) 413, were wrongly decided. He observed at [54] that Walton J’s “gloss” on the meaning of payment in Garforth (“money placed unreservedly at the disposal …”) had wrongly been treated as establishing a principle.

Lord Hodge summarised the position as follows:

Turning to the facts, Lord Hodge then explained at [61] to [66] why it was that payments into the trust were a component of the remuneration of the footballers and other employees. Footballers had two contracts, their contract of employment and the side letter relating to the trust. The focus of the negotiations that led to those arrangements was on the net remuneration available. Every time a footballer wanted to use the money in his sub-trust he was given a loan, so he was able to access cash when he wanted it. The expectation was that he would not have to repay the loan during his lifetime and, on his death, the funds would go to his family. The footballer selected the beneficiaries of the sub-trust and as protector he could determine who the trustees were and also its beneficiaries. The trust administration was lax, as required for the scheme to operate as intended, allowing the entire fund to be lent to the employee without any security. The scheme was designed to give access to the money without delay should the footballer so wish. The charging provisions are drafted in deliberately wide terms “to bring within the tax charge money paid as a reward for an employee’s work” ([64]). Further, the chance that the trustee might not agree to set up a sub-trust or might not give a loan did not alter the nature of the payments to the trust, since it was legitimate to look to the “composite effect of the scheme as it was intended to operate”: Inland Revenue Comrs v Scottish Provident Institution [2004] UKHL 52, [2005] 1 WLR 3172. Footballers were prepared to take the risk, and the fact that the risk existed did not alter the nature of the payments to the trust.

The same reasoning applied to executive bonuses:

Finally, Lord Hodge explained at [68] to [72] that he was not persuaded by the assertion that other provisions in the legislation militated against his view. The provisions referred to included the special rules taxing beneficial loans in Chapter 7 of Part 3 of ITEPA, which Lord Hodge said could not apply if the sums paid into the trust were emoluments in the first place, because otherwise the taxpayer would be taxed twice ([69]). The legislative code for emoluments has primacy over the benefits code in relation to loans. In addition, the (subsequently introduced) disguised remuneration rules in Part 7A ITEPA could not affect the interpretation of the prior legislation.

Although HMRC sought to present this case as being on all fours with Rangers SC, there is a fundamental distinction. The issue there was whether amounts were precluded from being taxed as earnings because they were paid to a third party. That is clear throughout the decision, but is obvious from the way that Lord Hodge described the issue and from his summary of the taxpayer’s argument ([56] above).

At least by the time the dispute was before the Supreme Court, it was simply not in issue whether the payments to what was (after all) called the Remuneration Trust were themselves earnings. Rather, as the UT observed in this case at [126], in Rangers SC it was accepted by the taxpayer that the payments to the trust were remuneration. In sharp contrast, that is the very issue in this case. The issue in Rangers SC was instead whether the additional requirement of payment (see [20] above) could be met where the recipient was a third party. It was held that it could, and that this was not precluded by cases such as Garforth.

It follows that Rangers SC is of relatively limited assistance. It is common ground between the parties in this case that payments may be earnings even if made to a third party.

It is also common ground that, as shown by the position of the executives in the Rangers litigation, it is not necessary for the employee to have had a prior legal right to the amount in question. Discretionary bonuses paid to a third party with the “agreement or acquiescence of the employee or as arranged by the employee” (Rangers SC at [58], see [61] above) may be taxed as earnings. In response to one of HMRC’s criticisms of the UT’s decision, I observe that, read as a whole, it is apparent that the UT understood that point, and what it said at [127] of its decision should not be interpreted otherwise.

Nonetheless, some relevant guidance can be derived from Rangers SC.

First, Lord Hodge’s second exception from the general rule that payments to third parties may be remuneration relates to benefits that are not convertible into money. The examples given by Lord Hodge include loans (see [58] above). I return to this at [96] below.

Secondly, in considering the first and third exceptions Lord Hodge described the authorities to which he referred as concerned with the “source or nature” of what was received. That indicates the key issue in this case. The question is whether the Payment was in the nature of an emolument derived from Mr Currell’s employment.

Thirdly and most significantly, despite the point being uncontroversial in that case Lord Hodge carefully explained at [61] to [66] why it was that the amounts paid to the Remuneration Trust were in fact remuneration. In doing so he focused on the nature of the amounts in question (paid either pursuant to a contractual entitlement agreed upon engagement, or otherwise given in respect of the employee’s work), the fact that the sums were available to be accessed whenever the employee wanted with no need to repay the loans during the employee’s life, and the effective control of the sub-trust by the employee, such that he could determine which family members would benefit from the funds when the loans were ultimately repaid.

Mr Ghosh put the argument that the Payment comprised earnings in two principal ways. The first, to which he returned on a number of occasions in opening, was to the effect that the Loan was for work done, the payment to the EBT was made to fund the Loan and therefore the Payment was also for work done. This argument is essentially the one accepted by the FTT at [57].

The second, which Mr Ghosh focused on more in reply, was that the Payment was earnings because the overall arrangement provided Mr Currell with tax-free access to £800,000 in cash, in a world in which he had previously been under-rewarded for his work.

I cannot accept either argument. The first involves a non sequitur. The fact that the Loan was made “because of the work which [Mr Currell] had done” (see [14h)] above) does not turn a payment made to fund it into an emolument. Yes, the FTT (in effect) found that the Loan was a benefit arising from Mr Currell’s employment. But the Payment was not an emolument simply because it funded that benefit.

It is necessary to return to basic principles. Section 62(2) ITEPA codifies earlier legislation and case law. What is taxable is remuneration or a reward for services as an employee: Rangers SC at [35]. The test was previously expressed, in what was then Schedule E, as being whether there was an emolument (defined to include salaries, perquisites and profits) that arose from employment. Under Schedule E tax was charged on the “full amount … received in the year”, although as is the case now the timing of receipt was prescribed, and included the point when a payment was made (Rangers SC at [5]). Nevertheless, the charge focuses on what the employee gets: it is, after all, a tax charge on his or her income.

As already discussed, the issue in Rangers SC was whether it was necessary for the employee himself or herself to have received, or at least be entitled to receive, the remuneration. It was held that receipt by the employee was not required, provided the amount was paid elsewhere with the employee’s agreement or acquiescence. But that does not avoid the need to determine whether the amount in question in fact falls within section 62(2). In Rangers SC it was common ground that the payments to the Remuneration Trust were indeed remuneration, Lord Hodge nonetheless explained in some detail at [61] to [66] why that was so on the particular facts. The analysis would have been a lot simpler if it had been the case that the loans to the footballers and executives that were almost invariably made from the funds received themselves determined that the payments were earnings. But that is the argument that is being put here.

I have no difficulty with the FTT’s conclusion that the Loan was provided because of Mr Currell’s work, and in that sense the provision of the Loan could be seen as a reward for services. But the Payment was not in the nature of a reward for services just because its function was to fund the Loan and the Loan was made because of Mr Currell’s work. Whether the Payment itself had the character of remuneration is a separate question. Put another way, the need to fund the Loan explains why the Payment was made but not what it was. It does not determine its nature.

An illustration of this is provided by the facts of Wilkins (Inspector of Taxes) v Rogerson [1961] Ch 133. An employer had decided to offer employees a gift of an item of clothing as a Christmas present, made to the employer’s order by a named tailor. Mr Rogerson took up the offer and had a suit made at the cost of £14 15s. The employer contracted with and paid the tailor.

Mr Rogerson was assessed to tax on £14 15s as income under Schedule E, but the Special Commissioners reduced this to tax on £5, being the second-hand value of the suit. This court agreed. As Lord Evershed MR explained at p.144, what Mr Rogerson got was a present of a suit. This was not a case of an employee’s debt being discharged by the employer. The receipt of the suit was taxable because it could be turned into money by selling it (see Tennant v Smith).

The logical consequence of Mr Ghosh’s argument is that Mr Rogerson was correctly assessed to tax on £14 15s. That was the amount that his employer paid to a third party (the tailor) to fund the provision of the benefit to him. But it has never been suggested that Wilkins v Rogerson was wrongly decided, and it was not.

Other examples may readily be identified. As discussed further below, the provision of a loan to an employee does not generally give rise to an emolument, most obviously because of the existence of the repayment obligation. Instead, as noted at [21] above, a loan at a rate of interest below the official rate will generally give rise to a charge under Chapter 7 of Part 3 of ITEPA by reference to the difference between the official rate and the rate actually charged.

Loans to employees may be made for a variety of reasons. One mundane example discussed at the hearing is a season-ticket loan. Suppose that, instead of making such a loan directly to an employee, an employer puts a third party – whether an employee benefit trust or, say, another group company – in funds to make it. If Mr Ghosh’s argument were correct, then I can see no reason why the payment to the third party, at least if made outright rather than by way of a loan, should escape tax as an emolument of the employee. The loan to the employee is, it can be assumed, provided because of the employee’s work (indeed, to allow him or her to get to work), and the purpose of the payment is to fund the loan. Such an arrangement – the employer making a payment to a third party with the intention that the third party would make a repayable season ticket loan to an employee – would on this analysis have a materially different tax result to the provision of a loan directly by the employer to the employee. And that would be so even where, as in this case, the payment and the loan are entirely “prewired”.

It is necessary to approach the matter with a degree of common sense. In Revenue and Customs Comrs v Apollo Fuels Ltd [2016] EWCA Civ 157, [2016] 4 WLR 96, [2016] STC 1594 (“Apollo Fuels”) this court rejected an attempt to tax employee car-leasing arrangements where the employees paid the full market rate for the use of the vehicles, observing at [3] that income tax is a tax on income, and that such a counter-intuitive result would require Parliament to express itself in clear terms. In the same way here, unless compelled by clear legislation or binding authority I would not hold that a payment made to fund an employee benefit (or indeed something that is not in fact taxable, as in Apollo Fuels) is itself a taxable emolument. In particular, Rangers SC is not authority for that proposition.

The second argument Mr Ghosh relied on was that the Payment was earnings because the overall arrangement provided Mr Currell with tax-free access to £800,000 in cash, in circumstances where he had previously been under-rewarded for his work.

I cannot see how this can assist HMRC. Mr Ghosh stressed the access that he said Mr Currell would have to the cash lent back by Mrs Currell to the Company, referring to [36(13)] in the FTT’s decision (as to which see [16] above). But Mr Currell would presumably have had much readier access to the cash if Mrs Currell had retained it rather than lending it back to the Company, which evidently needed it for working capital purposes.

This exposes the key point. The provision of a loan, at whatever rate of interest, provides access to the cash lent, but that cannot be considered in isolation from the repayment obligation. The existence of that obligation is critical. What is obtained is the benefit of the funds provided, but subject to an obligation to repay. The fact that the money went back to the Company cannot assist HMRC in demonstrating that the Payment was taxable, any more than the retention of the proceeds of the Loan by Mrs Currell, or indeed by Mr Currell, would have done. If anything, and given that the entire arrangement was “prewired”, the fact that the Loan proceeds were returned to the Company might suggest that nothing had really happened.

Adding the label “tax-free” does not take matters further. A statement of what may or may not be the tax result cannot determine the correct characterisation of the transactions.

The FTT’s observation that Mr Currell was “under rewarded” (see [31] above) also does not assist. The FTT had earlier found that the Payment did not replace remuneration and that there was no evidence that, if the £800,000 had not been paid by way of a loan, it would have been paid as remuneration ([14g)] above). Consistently with this, while the FTT had found at [15(9)] that there was “a culture of paying sizeable bonuses” to the contract managers, it made no such finding in relation to Mr Currell.

I understand how Mr Currell could be described as “under rewarded”, but that does not demonstrate that the Payment was remuneration. It could explain the Loan – as the FTT found that it did – but it does not permit the further inference that the Payment was remuneration. I would add that it is commonplace for entrepreneurs in Mr Currell’s position to take modest salaries, leaving wealth to build up in a family owned company. Funds extracted from the company are not necessarily remuneration just because salaries have been paid at below the market rate.

The facts considered by Lord Hodge in Rangers SC were very different to the facts of this case. Here, the Loan was found to be one that was not only genuine and secured, but one which Mr Currell understood that he had an obligation to repay and had the funds to do so, rather than it being understood that it would remain outstanding for his life. The Loan was not repaid because by the maturity date HMRC had already opened an enquiry into the arrangements and had issued the determinations, leading to concerns that further tax would be due on the £800,000 if it was used to fund bonuses. On repayment of the Loan, the funds would be held by a trust for the benefit of employees and their relatives generally, not by a sub-trust for family members which was effectively controlled by the borrower through a protector mechanism and which had a “lax” trustee. Further, and unlike the payments to the footballers (which were contractually agreed) and the executives (where there was a practice of paying annual bonuses), the £800,000 would not otherwise have been paid as remuneration. The culture of paying bonuses applied only to the contract managers.

In truth, what Mr Currell got was the Loan. This was not a case of diverting remuneration to the EBT.

As already mentioned, Ground 3 seeks to maintain that the Loan itself comprised a payment of earnings. HMRC do not seek to support the FTT’s conclusion that the “vast majority” of employee loans were taxable in this way. Rather, their main objective with this ground seems to be to obtain clarification from this court that, in some circumstances, a loan could comprise the payment of earnings, and to suggest that the UT erred in suggesting otherwise (a suggestion which I am satisfied that it did not make). The argument that this particular loan comprised earnings was advanced very much as a fallback.

I need not say much about this. As a general proposition, the advancement of a loan will not amount to a payment of earnings, at least in the amount of the principal of the loan. There are two reasons for this.

The first and most obvious reason is the existence of a repayment obligation. What is provided is access to funds, subject to that obligation. The benefit is limited to the use of the funds, and it is uncontroversial that that benefit is generally taxed under Chapter 7 of Part 3 of ITEPA, by reference to any shortfall below the official rate of interest: see the discussion by the Special Commissioner in O’Leary v McKinlay (Inspector of Taxes) [1991] STC 42 (“O’Leary”) at p.46. Vinelott J effectively approved the Special Commissioner’s reasoning at p.51, albeit in the context of on-demand loans.

The second reason, which is also referred to in O’Leary, is this. As is now reflected in section 62 of ITEPA but was first established by Tennant v Smith, benefits in kind may be taxable as earnings only where they can be turned to account. Where a loan is made it is not the loan itself that can be turned to account. Rather, what the employee can turn to account is the funds raised. The benefit lies in the use that he or she can make of the proceeds of the loan. This point is also consistent with Lord Hodge’s second exception in Rangers SC, where he referred to benefits, including loans, that cannot be converted to money: see [58] above.

I do not exclude the possibility that, in some limited circumstances, the provision of a loan may amount to a payment of earnings in the amount of the principal of the loan. That would most obviously be in a case of sham or where it was otherwise never intended that the “loan” should be repaid, such that the true agreement is not one of loan (compare, for example, Antoniades v Villiers [1990] 1 AC 417). HMRC relied on the decision of the FTT in OCO Ltd vRevenue and Customs Comrs [2017] UKFTT 589 (TC) as going further than that, but that case needs to be approached with some caution. It was decided before Rangers SC was handed down and is not obviously consistent with the decisions in Rangers FTT and Rangers UT. The FTT also found that the scheme in that case only made sense if repayment did not occur, such that there was no realistic possibility of repayment being demanded ([342] to [346]). Further, the point was not necessary to the FTT’s decision.

In contrast, the Loan in this case was a genuine one. There was no finding that it was advanced on the understanding that it would not be required to be repaid. Mr Waldegrave’s submission that Mr Currell had practical control of whether repayment was required is not made out on the facts, and would in any event be insufficient as a matter of law. On the facts, the loan was made by the Trustee, an independent entity. Even if the Trustee had been entirely reactive to the Company (a finding that the FTT made only in relation to the award of employee bonuses: see its decision at [15(34)] and [16(9)]), Mr Currell did not have sole control of the Company. Further, there is in any event no authority for the proposition that the fact that the borrower controls the lender is sufficient to alter the legal character of a loan. It is not. I would add that, were it otherwise, the legal status of the entirely commonplace transaction of a loan to a parent company could be called into question.

HMRC sought to support their case by reference to Garforth and Aberdeen. However, these cases address the question of payment, not whether the amount in question is earnings (Garforth at p.410; Aberdeen at [4]). This was the context in which those cases were considered by Lord Hodge in Rangers SC.

In conclusion, I would dismiss the appeal.

In the particular circumstances of this case, it is appropriate to add some further observations about the issues raised by the appeal.

HMRC are obviously of the view that Mr Currell should not have been able to “access tax-free cash” from the Company in the way that he did. Parliament evidently agreed. If the transactions had been implemented only a short time after they were, the charge that HMRC seek to impose in this case would have arisen on the Loan under the provisions of Part 7A of ITEPA (often referred to as the “disguised remuneration” rules), which were inserted by Finance Act 2011. Further, changes were made by Finance Act 2013 to the “loans to participators” rules in Part 10 of the Corporation Tax Act 2010 (“CTA 2010”) which prevented companies from using avoidance arrangements to sidestep the tax charge those rules impose when a loan is made to a shareholder of a closely controlled company (see now section 464A CTA 2010).

It is of course right that HMRC should consider whether arrangements implemented before these changes fail under the pre-existing law. But, however proper HMRC’s motives are, caution is required to avoid a risk of over-reach, with consequential risks to legal certainty. A close inspection of the trees can risk a failure to distinguish the overall wood.

I appreciate that, before the facts were found by the FTT, the distinctions from Rangers SC may not have been fully apparent. Once they were, however, the position changed because it was clear that tax on the Payment could not be sustained except by reference to the Loan.

That in turn has led HMRC to argue, in effect, that the full £800,000 is taxable as earnings simply because it was paid via a third party, even where it would not have been so taxable if it had been lent directly to Mr Currell, and indeed in circumstances where the more obvious analysis might be that, viewed realistically, the “prewired” Loan should be treated as made directly by the Company. It has also led HMRC to argue that a loan can be earnings merely because the borrower has practical control of its repayment. As Mr Elliott fairly pointed out, those propositions are both novel and unsupported by authority. If either gained traction it would cause considerable uncertainty.

The potential consequences of HMRC’s arguments are not difficult to see. For example, owner-managed companies (which, it should be borne in mind, must self-assess their tax liabilities) would have to consider whether the longstanding practice of allowing directors to draw on loan accounts in fact gives rise to immediate PAYE and NIC obligations. Groups that fund service companies that employ staff would have to consider whether those funding payments also result in an immediate earnings charge when they are used to confer benefits such as season-ticket loans.

These are not unrealistic points. As Mr Elliott’s submissions skilfully demonstrated, they flow directly from HMRC’s arguments in this case, and Mr Ghosh did not provide a persuasive answer to them. As I have explained however, those arguments are wrong.