An own goal
By Jerome Veldsman
Scottish Pay As You Earn tax (PAYE) is similar to PAYE in South Africa. An employer must deduct from an employee’s remuneration (widely defined) a determinable percentage, and pay the amount to the receiver of revenue.
The top league professional soccer players (and executives) employed by the Club earned substantial remuneration. In an endeavour to ‘shield’ this remuneration from PAYE, there was a side letter to a relevant employee’s employment contract, relating to a trust arrangement. Under the side letter, the employee’s remuneration would be paid to a principal trust, which would then allocate the payment to a sub-trust dedicated to the employee. If the employee wished to access the money, he or she would request a ‘loan’ from the sub-trust (with the expectation that the ‘loan’ would not be repaid).
The perceived ‘magic’ in the scheme was that, as the employee did not personally receive the remuneration, it was not subject to PAYE.
At the lower tiers, the Courts regarded the scheme as ‘robust’, but effective. However, the Supreme Civil Court in Scotland did not see the ‘magic’ in the scheme, and the Club appealed to the UK Supreme Court (the apex Court), which gave judgment in RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland on 5 July 2017.
In essence, the Supreme Court held that the scheme was an ineffective ‘solution’ to the wrong problem. There is no requirement under the PAYE legislation that the employee must personally receive the remuneration, for it to be subject to PAYE:
“Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect.”
PAYE is a tax on the remuneration of the employee, but the employer is obliged to deduct the tax percentage, and pay the amount to the receiver of revenue (in this instance, HM Revenue and Customs Commissioners). If an employer fails to deduct the money, HMRC is entitled to require of the employer nevertheless to pay the money (with interest and penalties). And, of course, HMRC can presumably also go after the employees for the unpaid tax.
In South Africa, this scheme would not have stood a chance.