The Case: Q & A

With just a single day left of Rangers’ First Tier Tribunal (Tax) dealing with the Employee Benefits Trust scheme that has brought Rangers to the edge of insolvency, I notice a surge of posts from people asking basic questions about what is going on. My first advice for anyone trying to understand what Rangers have done would be to read the following blog posts:

• What Rangers Tax Case Is All About
• Lies, Damned Lies, and Scottish Football Journalism

With apologies to our old lags who will know most of what follows already, I will attempt to address some other commonly asked questions below:

How many tax cases are there?

Rangers have several outstanding tax issues currently. Most of the publicity has been focused on the “Big Case” dealing with Rangers’ use of a trust to pay employees’ salaries and bonuses without paying income tax or National Insurance. There is also the “Wee Case” which covers an innocent sounding Discounted Options scheme. This involved stuffing cash into the bank accounts of offshore companies and granting Rangers players options to buy shares in the firm. The players would end up with shares (for which they effectively paid very little) in a company whose only asset was the cash in the bank. The players could then could then help themselves to the money without paying UK taxes.

There are more tax issues?

Currently, the biggest other issue Rangers face in their tax affairs is simply failing to keep up with remittances on time. Every employer is required to submit the taxes deducted from employees’ salaries (and VAT receipts) promptly and on a set schedule. Rangers made the late payment of creditors, including HMRC, into an official policy before the takeover even occurred according to documents in my possession. Whyte seems to have embraced this policy of late payment as his own. We will later see how this policy will likely have artificially boosted Rangers’ cash and reported Net Debt in their 2011 Annual Report.

What are Rangers chances of winning the Big Tax Case?

Low, but not zero. Their chances are not zero simply because no legal procedure involves a certain outcome. However, the case against Rangers is overwhelming. A newspaper journalist, whose career has been built entirely upon relaying information that Rangers employees (past and present) want to see in the media, claims to have seen side-contracts effectively telling Rangers players that loans from the EBT do not have to be repaid. That would make a conclusive case against Rangers in its own right. However, it could be worse for Rangers. If documentation exists that would prove that Rangers’ executives knew that what the club was doing was illegal, that would be bad news. If any Rangers executives took “extraordinary steps” to try to disguise the true nature of the EBT scam, that would be bad news too.

How much could the Big Case cost Rangers?

The Martin Bain papers stated a figure of £49m. However, Bain’s legal representative may have mangled this issue. It looks to me that the Bain Papers only referenced the assessments for underpayment and not the penalty. The bills are for: underpaid PAYE; underpaid National Insurance; interest (compounding and going back 10 years); and a penalty. ( At Rangers’ request, the penalty is not part of the current tribunal. If Rangers lose the underlying case, the penalty assessment would be confirmed in a separate tribunal). The original assessments sent by HMRC were for amounts that assumed that contributions to the EBT were made post-tax. This argument stands virtually no chance of succeeding and the amounts paid to the trust will be viewed a pre-tax (i.e. gross salary) amounts. I introduced this issue in one of the responses to an early blog and it resulted in much confusion! Therefore, it is likely that the final tax bills due will be very close to £24m in underpayment and £12m in interest. The penalty amount, given the documentation trail demonstrating executive knowledge that their actions were illegal and steps taken to disguise the illegal nature of the payments, will likely be confirmed at about £12-18m.

When will we know the result?

There is no set schedule for the judges to post their findings. (It will be posted as an anonymised entry on the tribunals service website. Rangers will not be named. However, you can be sure that I will help decode anything that is not clear). It is probable that we will learn the outcome sometime in March 2012. A little earlier is possible, as is the answer coming much later. All of this assumes that the FTT does indeed conclude on schedule next week.

Is it just Rangers who have been doing this?

No, but Rangers have been especially egregious / stupid in their use of the EBT. I can kill two birds with one stone by explaining this in terms of how the rest of the Murray group are affected. The current case is an appeal by a number of subsidiaries of Murray International Holdings Ltd. All of these companies used a variation of a similar scheme to have their staff withdraw money tax-free from The Murray Group Management Limited Remuneration Trust. (Rangers also used another trust named for themselves, but abandoned it several years ago, presumably to reduce administration costs. It should be clear that the trusts are not owned by the companies who contribute cash to them. They could have been called the Mickey-Mouse Trust for all of the relevance of the name).

There were differences in how Murray group executives from other divisions used the trust and how money was dispersed to players and executives at Rangers. In the case of Sir David Murray, he would have had no need to have a contract with himself. So he could just send a fax to the trust administrators requesting a loan of, say £100,000, and they might say “No. Just the £90,000 this time, Sir David.” Murray would understand what was happening i.e. the trustees have to prove their independence from MIH and Murray himself. However, what footballer would agree to seemingly arbitrary payments? They would wonder if they were ever going to get paid in full and fear that someone will ask for these loans to be repaid. So, there would be a need for a side-contract explaining that this was really their real salary and to not worry about repayment. Interestingly, claims that they also received indemnification from Rangers about future tax bills could open another can of worms. A contract to engage in illegal behaviour is not enforceable. So depending upon the wording, players may find themselves engaged in a legal mess. However, all of that would be long after the dispute between HMRC and Rangers had been resolved. It is the employer who bears the responsibility for deducting and paying payroll taxes.

The point above is that MIH executives (especially Murray) may have been using the EBT within the limits established by the Dextra case i.e. HMRC failed to prove that the loans were disguised remuneration when there was no contract or promise of payment for any particular purpose. So Murray’s own very substantial withdrawals from the trust might be deemed legal while those of Rangers’ players and executives will likely be found to be illegal. This point opens an interesting question about the legal services for Rangers’ appeal.

The contract that sold Rangers to Craig Whyte explicitly states that Rangers do not have to contribute any money to the legal costs for the current tribunal. Rangers cannot communicate directly with HMRC on this case and Rangers have to accept the legal counsel appointed by the Murray group. A generous offering from Murray? Or more likely that Murray sees financial advantage in paying the legal costs for a business which he no longer owns? Most people have a hardwired tendency to want to find a middle-ground in any dispute, We all would like to be thought of as being reasonable. Tribunal judges are unlikely to be much different. Therefore, with the Rangers issue looking like a lost cause and the Murray group having a fighting chance of ducking a large part of their bills, there could be a tactical element in keeping Rangers as part of the wider Murray case. It provides the judges with a target for venting their righteous vengeance on behalf of the state and for them to demonstrate their fairness and balance by letting Murray off lighter than might otherwise have been the case had the Murray group gone into the latter stages alone. Whyte? Winning the tax case is unlikely to have ever been a central part of his plans.

So back to the question: Who else has been doing this? Is this just a test case?

EBTs became quite widespread in the 2000s. However, almost all of the usage was for executives operating without written contracts. The Rangers case provides little or no utility in collecting taxes from these firms. There are a number of other clubs in England who will have had similar arrangements, but none were into it for as long or for as much as Rangers. It will have been the scale of Rangers’ scam and their duplicity that has put the club in the cross-hairs. The claims that HMRC’s only interest in this case will be in setting a precedent and that they will just forget about enforcing any decision will be proven false in time. Likewise, the idea that after the decision, Hector and Whyte will gather for a sup on the Loving Cup and negotiate a sensible settlement like gentlemen. There is no post-FTT stage for negotiation. I am sure that Whyte will try. I would be absolutely certain that he has been trying to negotiate a deal in recent weeks. However, this case is too high profile for HMRC to make a humiliating climbdown now.

Whether insolvency results in HMRC collecting anything or whether Rangers bounce back stronger than ever will be irrelevant to the fact that should they lose the case, The Rangers Football Club plc will be in very serious trouble.