RFC 2012 – UK Supreme Court finds that payments derived from employment services are assessable even where they are agreed to be redirected to a trust with a 3rd-party trustee

A group of companies, which ran a Glasgow football club, implemented a scheme for their key employees to avoid income tax on their annual bonuses or other compensation. Most of the compensation package for an employee might be paid by the employer to a master trust whose trustees in their discretion would use the amount to settle a sub-trust with the class of beneficiaries (usually the employee's family members) determined by them after reading a letter of suggestion from the employee. The trustee of the sub-trust would lend all the funds to the employee under a long-term loan at LIBOR+1.5%, and the employee as sub-trust protector could change beneficiaries or the trustees of the sub-trust.

In finding that this scheme did not work, i.e., the payments to the master trust were taxable employment income subject to source deductions, Lord Hodge stated:

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.

Neal Armstrong. Summary of RFC 2012 Plc v. Advocate General for Scotland, [2017] UKSC 45 under s. 6(1)(a).