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

Factual and Procedural Background

Between the 2001/02 and 2008/09 tax years, several companies within a corporate group, the principal one being Company A (the Appellant), implemented a remuneration scheme designed to avoid income tax and Class 1 National Insurance Contributions. Under the scheme, the employer paid part of an employee’s agreed remuneration into an “Employees’ Remuneration Trust” (“the Principal Trust”). The trustee of that trust invariably created a sub-trust for the named employee and, at the employee’s request, advanced the entire sub-trust fund to the employee by way of an interest-bearing ten-year loan that was expected never to be repaid in the employee’s lifetime.

Agency A (the Respondent) assessed the employing companies for income tax and NICs on the sums paid into the trust structure. The First-tier Tribunal (“FTT”) (majority) held the scheme effective and found no tax liability. The Upper Tribunal affirmed, detecting no error of law. On further appeal, the Inner House of the Court of Session accepted a fresh legal argument advanced by Agency A: that the trust payments represented a mere redirection of salary and therefore remained taxable. Company A alone appealed to the Supreme Court, which delivered the present judgment.

Legal Issues Presented

1. Whether remuneration paid by an employer to a trust, rather than directly to the employee, is nonetheless taxable as the employee’s “earnings” or “emoluments” when the employee had no prior legal entitlement to receive the sums personally.
2. Consequent on (1), whether the employer was obliged, under the PAYE regime, to deduct income tax at source when funding the trust.

Arguments of the Parties

Appellant's Arguments

• The statutory charge to tax on employment income applies only if the employee either receives, or is already legally entitled to receive, the sum in question. Because employees never held such a right—only a contingent right to request a loan—the trust payments fell outside the charge.
• Any liability should arise, if at all, only when (and if) a loan is forgiven, not when monies are paid to the trust.
• The Inner House wrongly relied on a “redirection principle” which, in prior authorities, applied only where an employee directed payment of sums already owed to him or her.

Respondent's Arguments

• Employment income is taxable when it is derived from employment, irrespective of the route or recipient of payment; the legislation contains no requirement that the employee first hold a vested right.
• The scheme merely diverted agreed remuneration through a third-party trust and therefore did not defeat the PAYE obligation.
• Earlier tribunal decisions mis-applied judicial glosses on the word “payment” and failed to adopt the purposive approach mandated by modern case-law.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Statutory construction: The court conducted a detailed textual analysis of ICTA and ITEPA. It found that, except for the specific perquisite provision in s.62(2)(b) ITEPA, the legislation does not condition taxability on the employee’s receipt of funds. The charge is triggered by remuneration from employment, irrespective of the person to whom payment is made.

2. Purposive approach: Following Ramsay and Barclays Mercantile, the court examined the overall design of the trust scheme. Its sole purpose was to deliver agreed net pay while avoiding PAYE and NICs. Looking at the composite effect, the payments were economically indistinguishable from salary.

3. Redirection principle: Drawing on Hadlee, the court held that diverting remuneration to a third-party trust cannot remove it from the tax charge; the employee remains the “taxable person” under s.13 ITEPA because the earnings relate to his employment.

4. PAYE obligations: The trustee was “a person in receipt of the emoluments,” making the employer liable to deduct tax under regulation 21 of the PAYE Regulations. References in subordinate legislation to payment “to an employee” were interpreted to include payment made on account of the employee.

5. Rejection of contrary authorities: Earlier tribunal decisions (e.g., Sempra Metals) were found to have elevated the Garforth gloss into an unwarranted rule. The Supreme Court clarified that the gloss does not override clear statutory language.

6. No counter-vailing statutory provisions: Specific codes on loans or benefits (e.g., Part 3 Chapter 7 ITEPA) are residual; they do not displace the primary charge on earnings and would otherwise result in double taxation.

Holding and Implications

APPEAL DISMISSED.

Company A’s payments to the trust constituted taxable earnings, and the employer was obliged to deduct income tax under PAYE. The decision confirms that employees cannot sidestep income-tax liability by arranging for remuneration to be routed through trusts or other intermediaries. While the judgment directly affects the parties by upholding Agency A’s assessments, its broader implication is to reaffirm the primacy of a purposive approach to employment-income taxation and to undermine similar trust-based avoidance schemes without creating new doctrine.