Advocate General for Scotland v Murray Group Holdings Ltd

SECOND DIVISION, INNER HOUSE, COURT OF SESSION

[2015] CSIH 77

XA128/14

Lord Justice Clerk

Lord Menzies

Lord Drummond Young

OPINION OF THE COURT

delivered by LORD DRUMMOND YOUNG

in an appeal to the Court of Session

by

THE ADVOCATE GENERAL FOR SCOTLAND

Appellant;

against

a decision of the Upper Tribunal dated 8 July 2014

in relation to assessments to tax made on

(1) MURRAY GROUP HOLDINGS LTD; (2) MURRAY GROUP MANAGEMENT LTD; (3) THE PREMIER PROPERTY GROUP LTD; (4) GM MINING LTD; and (5) RFC 2012 PLC (in liquidation) (formerly The Rangers Football Club PLC)

Respondents:

Act: Ghosh QC, D Thomson; Office of the Advocate General

Alt: R Dunlop QC, Richardson; Brodies LLP (Fifth Respondents)

Alt: First to Fourth Respondents – non-participating parties

4 November 2015

[1] The respondents are members of a group of companies whose ultimate parent company is Murray International Holdings Ltd. The first respondent is a subsidiary holding company, and the other four respondents are members of what is referred to as the Murray Group of companies. In tax years from 2001/02 to 2008/09 the respondents entered into a series of transactions pursuant to a scheme designed to avoid the payment of income tax and National Insurance contributions (“NICs”) in respect of their employees. Those transactions have resulted in assessments by Her Majesty’s Revenue and Customs (“HMRC”) to income tax under the Pay As You Earn (“PAYE”) system and corresponding NICs. The respondents appealed against those assessments. Their appeal was heard before the First-tier Tribunal, who on 29 October 2012 upheld the appeal; that was the decision of a majority of the First-tier Tribunal (Mr Kenneth Mure, QC, and Scott Rae, WS); the third member of the Tribunal, Dr Heidi Poon, CA, dissented. The appellant appealed to the Upper Tribunal (Lord Doherty), which on 8 July 2014 refused the appeal and on 22 August 2014 granted permission to appeal on one ground to the Court of Session. Following that determination the appellant, who represents HMRC, has appealed to the Court of Session. The first to fourth respondents are now in liquidation and the fifth respondents, RFC 2012 PLC, are now the only party opposing the appeal. We should note that, although the appeal relates to NICs as well as income tax, it is a matter of agreement that our decision on the income tax issue will apply equally to NICs; consequently the discussion is confined to income tax and the PAYE system.

[2] The scheme as it typically operated may be summarized as follows. The second respondents (hereinafter referred to as “MGML”) set up a trust known as the Employees’ Remuneration Trust (hereinafter referred to as “the Principal Trust”). A company in the Murray Group which wished to benefit one of its employees made a cash payment to the Principal Trust in respect of that employee. The paying company recommended the trustee of the Principal Trust to resettle the sum in question on to a sub-trust, and would ask that the income and capital of the sub-trust should be applied in accordance with the wishes of the employee. The beneficiaries of the sub-trust were chosen by the employee, and were generally the members of his family. In practice the trustees of the sub-trusts invariably gave effect to the wishes of the employee. The employee would be appointed protector of the sub-trust, and the trustee of the sub-trust would then lend the employee the money that had been advanced to the sub-trust from, ultimately, his employer. The First-tier Tribunal held that the trustee of the Principal Trust had a genuine discretion as to how to apply the funds advanced to it, and the settlement on to the sub-trust merely represented the exercise of that discretion. Thus the benefit enjoyed by the employee and his family resulted from the exercise of a discretionary power by the trustee of the sub-trust. Such a payment was not a payment of emoluments or earnings, and was therefore not subject to income tax.

[3] HMRC contend that that interpretation of the transaction is wrong. They assert that the cash payment made by the employing company to the trustee of the Principal Trust was in consideration of services by the employee, and thus had been earned by the employee. The employee was content to take the risk that he might not benefit if the trustee of the Principal Trust chose not to follow the recommendation of the employer. Nevertheless, the employer arranged for a letter of wishes from the relevant employee to be passed to the trustee of the Principal Trust, and also an application for a loan by the trustee of the sub-trust to the employee. HMRC’s fundamental argument is that the cash payment to the Principal Trust was part of the remuneration package of the employee, comprising salary and bonuses; it had been earned for work done. The only reason that it was said not to be taxable was that it had been paid to someone other than the employee, namely the trustee of the Principal Trust, with a recommendation that the funds be passed to the trustee of the sub-trust. That, it is said, brings into operation the principle that if an employee or self-employed person instructs that payment of money that he has earned through his work should be made not to him but to another person he is still obliged to pay income tax and NICs on that sum. Monies due to him have merely been redirected to another person. The first question for the court is whether that argument is correct. If it is not, HMRC advance a second argument, based on the proposition that the employee as protector can exercise his powers in such a way that the whole of the funds in his sub-trust are paid to him. That is said to bring the Ramsay principle (Ramsay (WT) Ltd v IRC, [1982] AC 300) into operation, with the result that the amount paid into the sub-trust is treated as at the absolute disposal of the employee and hence part of his emoluments or earnings. Finally, there is a possible third issue about the application of the PAYE legislation.

[4] We will first set out the facts of the case in greater detail. We will then consider three incidental questions. The first relates to the basis on which an appellant from the First-tier and Upper Tribunals may raise a new argument before the court; that is relevant to HMRC’s first argument, which was not presented before the Tribunals. The second relates to the scope of the present appeal, which is an appeal on a point of law only: in particular the extent to which the court can interfere with the decisions of the First-tier Tribunal and the Upper Tribunal. The third relates to the manner in which the Court of Session should deal with questions of English law that arise in an appeal from the Tax and Chancery Chamber: can the Court, like the First-tier and Upper Tribunals, treat English law as a question of law, or must it treat it as a question of fact? If the latter is correct, the result will be that any findings on English law by the two Tribunals are binding on the Court. Thereafter we will consider HMRC’s two principal arguments, and finally the PAYE issue.

Facts
General
[5] The facts as found by the majority of the First-tier Tribunal are as follows. These are taken from the majority opinion of the First-tier Tribunal (paragraphs 2, 103, 204-208 and 224-233). Representative documentation was also available, and we have had regard to that. At this stage we comment that the facts found by the First-tier Tribunal focused in large measure on the trust arrangements that were set up rather than the source of the funds involved and, most importantly, the reason that they were provided in the first place. It is, however, the findings relating to the latter that are important for our decision. We further note that in her dissenting opinion Dr Poon made a number of additional findings, largely based on the documents before the Tribunal. For present purposes, however, we must proceed on the facts as found by the majority; the appeal to the Court is on questions of law only.

[6] Murray International Holdings Ltd is the ultimate holding company of the Murray Group, and Murray Group Holdings Ltd, the first respondent, functions as a subsidiary holding company within the Group. MGML, the second respondent, provides management services to the companies in the Group. The group consists of approximately 100 subsidiary companies involved in trading and other commercial operations; one of the members of the group, the fifth respondent, was the owner of Rangers Football Club. By a deed dated 20 April 2001, referred to as “the Definitive Deed”, MGML set up a trust known as the Employees’ Remuneration Trust (referred to as “the Principal Trust”). This was subsequently amended by a Deed of Variation dated 28 January 2002, a Deed of Amendment dated 29 November 2002, and a Deed of Amendment and Rectification dated 12 October 2005.

[7] The Principal Trust was used as the basis of a scheme involving a large number of sub-trusts for the benefit of the families of employees of certain companies in the Group. After the Principal Trust was established, companies in the Group other than MGML were allowed to participate in the scheme. In summary, their participation took the following form. The company in question paid monies into the Principal Trust with a direction to the trustees of that trust that a sub-trust should be established and funded for the benefit of the family of one of the company’s employees. In addition, the trustees of the sub-trust made a loan facility available to the employee, at commercial rates of interest but on a discounted basis. That would constitute a debt on the employee’s estate, which was perceived as offering inheritance tax advantages on his death. The fundamental purpose of the sub-trust was to benefit the employee’s family, but almost invariably the whole of the trust estate was used to make the loan available to the employee. The employee was appointed protector of the...