RFC 2012 Plc ((in Liquidation)) (formerly The Rangers Football Club Plc) v Advocate General for Scotland

Court:Supreme Court
Docket Number:No 2
Judge:Lord Hodge, Lord Neuberger, Lady Hale, Lord Reed, Lord Carnwath
Judgment Date:05 Jul 2017
Neutral Citation:[2017] UKSC 45

[2017] UKSC 45


Trinity Term

On appeal from: [2015] CSIH 77


Lord Neuberger, President

Lady Hale, Deputy President

Lord Reed

Lord Carnwath

Lord Hodge

RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc)
Advocate General for Scotland
(Respondent) (Scotland)


Andrew Thornhill QC

Roddy Dunlop QC

Mark Studer

Jonathan Bremner

(Instructed by Brodies LLP)


Julian Ghosh QC

Mark Herbert QC

Joseph Goldsmith

Barbara Belgrano

(Instructed by Office of the Solicitor to the Advocate General for Scotland)

Heard on 15 and 16 March 2017

Lord Hodge

( with whom Lord Neuberger, Lady Hale, Lord Reed and Lord Carnwath agree)


This appeal concerns a tax avoidance scheme by which employers paid remuneration to their employees through an employees' remuneration trust in the hope that the scheme would avoid liability to income tax and Class 1 national insurance contributions ("NICs"). The appeal raises a fundamental question about the nature of the income tax charge on employment income. That question is whether an employee's remuneration is taxable as his or her emoluments or earnings when it is paid to a third party in circumstances in which the employee had no prior entitlement to receive it himself or herself.


HM Revenue and Customs Commissioners ("HMRC") assessed the employing companies to income tax and NICs on the sums so paid as remuneration. The employing companies appealed those assessments to the First-tier Tribunal (Tax Chamber) ("the FTT"), whose members were Kenneth Mure QC, Dr Heidi Poon and Scott Rae WS. The FTT, while recognising that the scheme was an aggressive tax avoidance scheme (para 193), held in a decision dated 29 October 2012 (by a majority, being Mr Mure and Mr Rae) that the scheme was effective in avoiding liability to income tax and NICs. This was because the FTT considered the steps in the scheme were not shams and that the employees had received only a loan of the moneys which the employing companies paid to the trusts. The Upper Tribunal (Tax and Chancery Chamber) (Lord Doherty), in a decision dated 8 July 2014, upheld the FTT's decision, because it detected no error of law in the majority's reasoning.


The Advocate General for Scotland on behalf of HMRC appealed to the Inner House of the Court of Session and advanced a legal argument which had not been presented to, or at least had not been developed before, the tribunals, namely that the payment of the sums to the remuneration trust involved a redirection of the employee's earnings and accordingly did not exclude those earnings from the charge to income tax. The Inner House (the Lord Justice Clerk (Lord Carloway), Lord Menzies and Lord Drummond Young) upheld that argument and allowed the appeal on 4 November 2015: Advocate General for Scotland v Murray Group Holdings Ltd 2016 SC 201. Of the employing companies only RFC 2012 plc appeals to this court. I will refer to it, along with its previous incorporation which was the Rangers Football Club plc, as "RFC". In this judgment I set out my reasons for concluding that this appeal should be dismissed.

The tax legislation

The employing companies, including RFC, operated the tax avoidance scheme in the tax years between 2001/02 and 2008/09. During that time the legislation for the taxation of emoluments from earnings was replaced by a new enactment. It is therefore necessary to describe the relevant provisions, which are essentially to the same effect, under each of the relevant Acts.


In the tax years 2001/02 and 2002/03 the relevant legislation was contained in the Income and Corporation Taxes Act 1988 (as amended) (" ICTA"). Section 19 of that Act charged income tax under Schedule E on emoluments derived from any office or employment. So far as relevant section 19 provided:

"Schedule E

Tax under this Schedule shall be charged in respect of any office or employment on emoluments therefrom which fall under one or more than one of the following Cases —

Case1: any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom …"

"Emoluments" were defined in very wide terms in section 131 of ICTA as including "all salaries, fees, wages, perquisites and profits whatsoever". Since 1989, emoluments have been taxed on a receipts basis: section 202A of ICTA provided that income tax shall be charged under Schedule E on "the full amount of the emoluments received in the year in respect of the office or employment concerned". Section 202B defined when emoluments were to be treated as received for the purposes of section 202A: so far as relevant it was the earlier of (a) "the time when payment is made of or on account of the emoluments" or (b) "the time when a person becomes entitled to payment of or on account of the emoluments".


This legislation was replaced by the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"), which governs RFC's liability to income tax on employment income during the relevant tax years from 2003/04 to 2008/09. Section 6 of that Act imposes a tax on employment income, which so far as relevant is on "general earnings". Section 7 defines "general earnings" by reference to section 62 which, so far as relevant, provides:

"(2) … '[E]arnings', in relation to an employment, means —

(a) any salary, wages or fee,

(b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, or

(c) anything else that constitutes an emolument of the employment.

(3) For the purposes of subsection (2) 'money's worth' means something that is —

(a) of direct monetary value to the employee, or

(b) capable of being converted into money or something of direct monetary value to the employee."

Section 9 of ITEPA, which defines the amount of employment income charged to tax, provides in subsection (2) that, in the case of general earnings, "the amount charged is the net taxable earnings from an employment in the year".


Employers, who pay emoluments (or earnings after 2003) which are assessable to tax, are required to deduct income tax from their payments to their employees under the "pay as you earn" ("PAYE") regime. Before 2003, section 203 of ICTA provided for the deduction to be made in accordance with regulations, which were the Income Tax (Employments) Regulations 1993 (SI 1993/744) ("the 1993 Regulations"). Regulation 6 provided that an employer, on making any payment of emoluments to an employee, should deduct tax and regulations 40 to 42 provided that the employer should pay to HMRC the amount of tax which it was liable to deduct. Section 203A of ICTA provided, so far as relevant, that for the purposes of section 203 and the 1993 Regulations payment was treated as made at the earlier of (a) "the time when the payment is actually made" and (b) "the time when a person becomes entitled to the payment". For the tax year 2003/04 and following tax years, section 683 of ITEPA defined "PAYE income" as "any PAYE employment income for the year" and section 684 provided for the making of regulations, which became the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) ("the PAYE Regulations"). Regulation 21 of the PAYE Regulations requires the employer to deduct income tax on making a relevant payment to an employee. I discuss the meaning of "employee" in both of these regulations in para 40 below. Regulation 80 of the PAYE Regulations provides that, if it appears to HMRC that there may be tax payable by an employer which has not been paid, HMRC may determine the amount of that tax and serve notice of their determination on the employer. HMRC made its determinations in relation to the employing companies under this regulation.


Thus, as Lord Drummond Young stated in delivering the impressive judgment of the court, the central concept in the tax regime governing employment income is the payment of emoluments or earnings derived from employment; and an employer who pays emoluments or earnings to or on account of an employee is obliged to deduct tax in accordance with the PAYE Regulations.


Liability to pay Class 1 NICs on earnings in respect of employment was and is governed by section 6 of the Social Security Contributions and Benefits Act 1992 ("the 1992 Act"). Schedule 1 to the 1992 Act required the employer, who paid earnings to an employed earner, to pay both the employer's and the earner's Class 1 contributions to HMRC. The parties to the appeal have agreed that the determination of the appeal in relation to income tax will govern liability to NICs. I therefore do not need to consider the legislation relating to NICs any further.

The interpretation of tax legislation

The legislative code for the taxation of income has developed over time to reflect changing governmental policies in relation to taxation, to remove loopholes in the tax regime and to respond to the behaviour of taxpayers. Such responses include the enactment of provisions to nullify the effects of otherwise successful tax avoidance schemes (or schemes which were apparently successful pending a definitive judicial determination). As a result, the legislative code is not a seamless garment but is in certain respects a patchwork of provisions. Over time, judicial decisions on the interpretation of sections of the tax legislation have assisted in clarifying the boundaries of those provisions. Such decisions have influenced Parliament in the re-enactment of legislation. Some judicial decisions, for example, as I discuss in paras 42–44 below, the requirement that a "perquisite" in section 131 of ICTA be convertible into money, have been definitional.


But the courts at the highest level have repeatedly warned of the need to focus on the words of the statute and not on judicial glosses, which may...

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