RFC 2012 Plc (in liquidation) v Advocate General for Scotland

Money paid as a reward for an employee’s work is taxable employment income even when, with the employee’s agreement, arrangement or acquiescence, it is paid to a third party. The employee need not receive the money or have a prior right to receive it personally. PAYE applies to the third-party payment.

Taxing provisions must be construed purposively and applied to the transaction’s intended composite effect. Genuine trust discretions and the possibility that a scheme might not operate as planned do not alter the character of remuneration paid into it. Different rules apply to perquisites obtained by the employee, non-convertible benefits in kind and genuinely contingent interests. A specific benefits code does not displace a prior general charge on earnings.

RFC and associated employers operated an employee remuneration trust intended to avoid income tax and Class 1 national insurance contributions. Amounts representing salaries, bonuses and other employment rewards were paid to a principal trust, transferred to employee-specific sub-trusts and ordinarily made available to employees as unsecured loans.

The First-tier Tribunal, by a majority, held that the valid trusts and loans prevented the payments from being taxable earnings. The Upper Tribunal upheld that decision. The Inner House allowed HMRC’s appeal in Advocate General for Scotland v Murray Group Holdings Ltd [2015] CSIH 77, reported at 2016 SC 201, holding that the arrangements redirected employees’ earnings without removing the tax charge.

RFC alone appealed. The central issue was whether remuneration paid to a third party is taxable as employment income where the employee had no prior entitlement to receive the money personally.

1. Appeal dismissed unanimously. Lord Hodge delivered the judgment, with which Lord Neuberger, Lady Hale, Lord Reed and Lord Carnwath agreed. The payments to the principal remuneration trust were employees’ emoluments or earnings and should have been subjected to PAYE deductions.

2. The court must begin with the statutory language. Judicial glosses may assist in their original factual context, but they do not replace the words enacted by Parliament. Taxing provisions are construed purposively. The court first identifies the transaction to which the provision is directed and then determines whether the actual transaction, considered in its intended composite operation, answers that description. The approach in Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684 and W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300 applied.

3. The employment-income provisions of the Income and Corporation Taxes Act 1988 and the Income Tax (Earnings and Pensions) Act 2003 tax remuneration or reward for services. Their general provisions do not require the employee personally to receive the money. The taxable person is the person to whose employment the earnings relate. A payment to a trustee or another third party is therefore taxable where it is made as remuneration with the employee’s agreement, arrangement or acquiescence.

4. That general rule has defined limits. Under section 62(2)(b) of the Income Tax (Earnings and Pensions) Act 2003, a gratuity, profit or incidental benefit must be obtained by the employee and be money or money’s worth. Non-convertible benefits in kind depend on special statutory charges. Where an employee has only a genuinely contingent interest, earnings are received when the contingency is fulfilled, rather than when the employer initially funds the arrangement. Forde and McHugh Ltd v Revenue and Customs Comrs [2014] 1 WLR 810 concerned such contingent benefits and did not establish a general requirement of personal receipt.

5. The propositions that PAYE payment occurs only when funds are placed unreservedly at the employee’s disposal resulted from treating a context-specific judicial gloss as a general principle. Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062 was wrongly decided on that basis. The corresponding conclusion in Dextra Accessories Ltd v Macdonald (Inspector of Taxes) [2002] STC (SCD) 413 was also rejected.

6. The trust payments formed part of the employees’ negotiated or awarded remuneration. The arrangements were intended to give employees prompt access to the money through unsecured loans and ultimately to benefit their nominated families. The trustees’ discretions and the possibility that the arrangements might not work as expected did not change the character of the payments. Voluntary bonuses were likewise earnings because they rewarded work performed as employees.

7. The specific statutory charges for employment-related loans and other benefits did not exclude the general earnings charge. Once the original payment was taxable as earnings, applying the benefits code to the same amount would produce an impermissible double charge. Later anti-avoidance legislation could not determine the meaning of the earlier provisions.

1. United Kingdom Supreme Court: The court unanimously dismissed RFC’s appeal and affirmed the Inner House’s conclusion: RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45.
2. Inner House of the Court of Session: The court allowed HMRC’s appeal and held that payments to the remuneration trust were redirected employment earnings subject to PAYE: Advocate General for Scotland v Murray Group Holdings Ltd [2015] CSIH 77, reported at 2016 SC 201.
3. Upper Tribunal (Tax and Chancery Chamber): On 8 July 2014 Lord Doherty upheld the First-tier Tribunal’s decision, finding no error of law in the majority’s reasoning.
4. First-tier Tribunal (Tax Chamber): On 29 October 2012 the tribunal, by a majority, held that the valid trusts and loans made the scheme effective in avoiding income tax and national insurance contributions.