A day or so ago, I gave an interview to BBC Radio Scotland.
For a while, at least, you can listen to that interview here (at about one hour and 36 minutes in). It’s not a particularly fluent interview – but it does have one merit. I express a clear view about the decision the Court of Session gave earlier this week in the Rangers case. I say that it was wrong. That’s my view at least and I’m a Queen’s Counsel specialising in the field of tax. Although that fact doesn’t make me right, it does make my view worth listening to.
After I gave that interview, I was asked whether I wanted to write about the Decision. My immediate reaction was that I didn’t. Analysing what cases mean – and whether they are rightly decided – is part of what I do for a living. What I do on this blog I do for other reasons.
But I hadn’t anticipated the level of interest in my views. And the need many Rangers fans have to understand what happened to their club. And the sense of loss that – or so from many hundreds of miles south it seems to me – many feel at having had part of their identity somehow taken away or diminished. And then I remembered that I had started writing this blog because I wanted to improve understanding of the field in which I work. And that the Rangers case was one where there was a huge demand for better understanding.
And so I changed my mind.
In a second I’ll tell you what I’ve decided to do. But before I say anything more, I need to tell you two things.
The first is that I don’t have any connection to Rangers or its equally proud rival, Celtic. I am not Scottish. I am not religious. And although I continue to follow Sunderland AFC – that being the team local to the pit village where my grandfather, Dennis, grew up – I can’t even decently pretend to be a serious football fan.
The second is that, as I point out here, I do work in many of the areas I cover in my blog. And I do work in the field of Employee Benefits Trusts. I think that the only difference this makes is that it gives me a good understanding of the area. I know I’m not the sort of person who would feed you a line because it was convenient to my clients for me to do so. I know that, as I’ve explained here, my record demonstrates that that’s not what I do. But none of that changes the fact that you’re entitled to know when you read what follows that I am doing some – not much but some – work in the field of Employee Benefit Trusts.
What I decided I would do is this.
I would write three pieces.
The first on why people use Employee Benefits Trusts; the second on why I think the Decision of the Court of Session is wrong and what happens next; and the third on what we can learn about the effects of tax avoidance from this sad tale.
And I would write them for those who most need them: the fans of Rangers. And because tax is difficult, I’d try and go slowly. I’d like the third piece to get more readers than the first – I think it will be the most interesting – and to do that I’d need not to lose readers along the way.
I haven’t followed the Rangers story especially closely – as I say, I don’t have any connection to the club – so please make allowances for that fact. I don’t think that will affect my ability to carry out the task I’ve set myself – but please bear it in mind if you think I’m getting something wrong.
If you’re a tax specialist you’ll also need to make allowances for the fact that this piece isn’t written for you. I make no apologies for not capturing in these posts the full technical detail around Employee Benefits Trusts.
To understand Employee Benefits Trusts you need to start by understanding income tax.
To acquire a liability to pay income tax two things need to happen: the first is that you need to “get” a sum of money and the second is that that sum of money needs to be “income”.
If you do “get” “income” you’ll have to pay income tax on it. And that income tax will reduce the amount of money you have available in your hand to spend.
I’m not going to write a long essay on what “income” is here. It’s enough for me to point out that the money that you get from the work you do as an employee is your income.
The interesting bit – for my purposes here at least – is around the “getting”.
Dennis’ wife, my grandmother Joan, had eight grandchildren. As each of us was born, she opened a new savings account and every week she paid money in. Not much: she didn’t work and although Dennis had not followed his brothers down the pit he wasn’t earning a fortune working as an electrician. But something: and as we turned 18 she handed the savings book over to us.
Before I turned 18, the money wasn’t mine. Even though she absolutely knew that she was going to give it to me – and I knew she was too because she’d told me she was saving money for me – it was still hers. But when I turned 18 and she gave me the savings book with the entries all written in in hand (I remember this because the adding up on the final entry was wrong and the handwritten notes showed a new balance rather higher than the amount Joan had paid in and I spent many happy hours wondering whether the bank might hand over that extra. Reader, I was disappointed) and I could take the money out and spend it or give it away… Then it was mine: I’d got it.
Employee Benefits Trusts are a bit like that savings account. They are a way that employers earmark money to pay to their employees in the future.
A lawyer will tell you that once the employer has paid the money into the Employee Benefits Trust it doesn’t belong to the employer anymore. But it doesn’t belong to the employee either. It belongs to the trustees who hold on to it until they decide who – which of the beneficiaries of the trust – they are going to give it to.
Accountants take a different view. When they draw up the employer’s accounts they ask who really owns the money. If the employer can use that money to meet its future obligation to pay its employees then they treat it just like Joan’s bank accounts. It’s one of the employer’s assets.
But if control over the money has already been passed over to the employee – if Joan has given me the savings book – then it’s treated just like a payment by the employer of wages. The employer can deduct that money from its income in calculating its profit.
And that’s rather good news for the employer. Because by making that deduction the employer gets to reduce the amount he or she has to pay to the tax man.
So the employer wants to hand control of the money over to the employee to reduce the employer’s tax bill.
But what about the employee?
He’d like to – she’d like to – have control of that money too. To spend it. But ideally without having to pay income tax on it. Ideally getting in his or her hand all of the money in the trust.
And because the employer benefits from keeping the employee happy – because a footballer employee who had less in his hand than he wants might otherwise decide he’s going to go play for another club – the employer has a good reason to help the employee get control of that money without having to pay tax on it.
So the magic of Employee Benefits Trusts from an employer’s point of view is that they enable the employer to reduce the amount of tax it has to pay to the taxman. And they enable the employer to keep his employees happy.
But only if they work.
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All three blogs have made for very interesting reading, as an aside, do you think the ruling has any impact on Remuneration Trusts?