What is Rangers’ tax case all about?
28/03/2011 17 Comments
Unfortunately, any discussion of tax law is unlikely to become a best-seller, and this will be no different. In the interests of making this article readable, I will brush over a few technicalities. If anyone wishes to discuss these, please post a comment and we can explore these issues in more detail outside of the article. There are also a few more details which are critical to the case. I will not be discussing or disclosing these until after the First Tier Tribunal returns a result.
Rangers’ tax problem goes back to the 2000-2001 financial year. A tax plan was purchased from the Baxendale-Walker law firm and Rangers dipped their toes in the waters of a tax scheme which would, a decade later, place a cloud over the solvency of the club.
The scheme, an Employee Benefits Trust (EBT), can be operated legally. So let us look at how an EBT is supposed to be operated. Then we shall look at what Rangers FC have done.
When money is transferred to an EBT, it is no longer the property of the employer. It is the legal property of the trustee. A business owner can legally deposit large amounts of his company’s profits in the trust and then apply to the trustee for a loan. In practice, the loan never gets repaid, and the business owner or senior employee pays only a nominal interest rate on the loan (or tax on the benefit in kind). This is a fraction of the amount of money the loan recipient would have paid had he received the money as salary or a bonus which would be subject to PAYE and National Insurance Contributions. It may seem like a transparent scam to you and me- and it was- but HMRC failed to prove that the loans were not loans and that these schemes were just sham transactions. (See “Dextra” case).
So far, so good for Rangers FC. However, there were conditions behind the decisions that established case-law. Most importantly, such payments cannot be tied to contractual obligations e.g. salaries, appearance money, win bonuses, etc. EBTs worked for entrepreneurs who did not need to write down how much they wanted to withdraw from their businesses. A few senior directors who trusted the company could also join in with this legal loophole, so long as they did not insist that there was a documented promise of what they would receive.
The administrators (usually specialist law firms) are also required to exhibit independence from the company which is depositing money with the trust. So a few requests for loans need to be rejected and some amounts modified. Again, all fine if you are an entrepreneur who understands how the game is played and that everything will work out in the end.
The problems for Rangers started with the fact that footballers and their agents would never be so daft as to trust a ‘nod and a wink’ from a football club executive. Amounts for salaries, bonuses, appearance fees- are all the subject of written contracts. These contracts (which are routinely available during tax investigations) provide the Rosetta Stone for tax investigators. I cannot discuss some of the other evidence against Rangers FC, but I understand that at least some of Rangers FC executives were aware that what they were doing was illegal. These executives appear to have been overly diligent in their record keeping! (You will hear a lot more about this after the case is complete).
So facing a documentation trail that proves that the payments to the EBT were for contractual payments which would normally be subject to PAYE and NIC and that Rangers FC was aware that what they were doing was illegal (and far from the scheme which they purchased from Baxendale-Walker), Rangers’ lawyer, Andrew Thornhill QC, faces a monumental task. I can only hope for Rangers’ sake that they were not so stupid as to provide written guarantees for players saying that they did not need to repay these loans!
So how much could Rangers owe? The listing below shows Rangers’ annual contributions to the EBT (data from Rangers’ Annual Reports):
So a total of about £48m has been paid into the trusts. The amount of tax due is actually open to debate. Some argue that this money should be treated as “post-tax” earnings. In such a case, Rangers would owe approx £32m in tax + £10m in NIC (Total of £42m). If this amount is treated as pre-tax earnings, the amount owed would be about £19m in PAYE and approx £5m in NIC (Total of £24m). My personal view is that this will be ruled as being “pre-tax” earnings and that the core bill payable will be about £24m.
In a case which goes back to 2001, the power of compound interest will work against Rangers. Interest charges are likely to be £10-12m on top of the £24m.
If Rangers lose this case, a separate process will begin to determine the amount of penalty to be applied. As discussed above, the extent of documentation on Rangers’ awareness of what they were doing is unlikely to bode well for any penalty payment. This would likely be 75-100% of the core underpayment amount. That could add another £18-24m to the bill.
In the next posting, we will review some of the myths and rubbish published on this subject.