No matter how complex or multi-layered they may be, tax avoidance schemes do not always work. A football club found that out to its cost when the Supreme Court ruled that a structure of trusts, by which money was funnelled to its players’ families, did not overcome the requirement to deduct Income Tax and National Insurance Contributions at source under the PAYE system.
When the club wished to benefit a player, it made a payment to a principal trust and requested the trustee to pay the sum into a sub-trust for the benefit of the player’s chosen beneficiaries, usually members of his family. The trustee had discretion as to whether to comply with such requests but, in practice, always did so. The money paid into the principal trust was provided to the player by way of a loan that would be repayable with interest on his death, thus also yielding an Inheritance Tax benefit.
The First-tier and Upper Tribunals found that the sums paid into the trust were exempt from the PAYE regime because the players had only received a loan. HM Revenue and Customs’ challenge to that decision was, however, subsequently upheld by the Inner House of the Court of Sessions.
In unanimously dismissing the club’s appeal, the Supreme Court noted that, as a general rule, the requirement to pay Income Tax extends to all remuneration to which an employee is entitled, irrespective of whether it is paid to the employee or a third party. There was no rationale for excluding from the scope of Income Tax remuneration that the employee agreed should be paid to someone else.
The sums paid into the principal trust constituted the relevant player’s earnings and the deductions required by the PAYE system had to be made in the ordinary way. The same applied to discretionary bonuses paid to the club’s senior employees using the same trust mechanism.