A First-tier Tribunal (FTT) recently confirmed that payments made into a third-party trust as a reward for work are legally classifiable as immediate employment earnings. This landmark decision precludes employers from using loan-based structures to mask the true nature of remuneration.
Facts:
Mr. Jack was employed by Aston Management Ltd. (AML), an offshore company based in the Isle of Man, while he himself lived and worked in the UK. Under the arrangement, the fees paid by end clients for Mr. Jack’s services were split by AML, one portion being paid to him as a modest basic salary, while the substantial remainder was transferred to an Employee Benefit Trust (EBT). The EBT would then advance these funds to Mr. Jack in the form of interest-free loans. Because these payments were categorised as loans rather than salary, they were not initially reported as taxable employment income.
Following an enquiry into his self-assessment return, HMRC issued a closure notice concluding that the £48,034 transferred to the EBT actually constituted “redirected earnings” and was therefore taxable as employment income under Section 62 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003. Mr. Jack appealed this notice, arguing that a significant portion of the funds should be exempt from tax since he had indeed repaid approximately £23,479 of those loans in April 2011. As a consequence, he believed that a specific amount was no longer chargeable to tax and appealed the notice.
Decision:
The FTT dismissed the appeal in full, upholding HMRC’s closure notice. Applying the Supreme Court decision in RFC 2012 plc (Rangers), the Judge held that, when AML paid money into the EBT for work done by Mr. Jack, that money became taxable employment income at that exact juncture. The Court found that the funds were simply “redirected” earnings. The fact that they were later handed to Mr. Jack as a “loan” did not change their legal nature as a form of salary.
The most significant part of the outcome was the rejection of Mr. Jack’s argument that he had “fixed” the tax issue by repaying the loans. The Judge stated that because the tax charge arose on the transfer to the EBT, anything that happened to the money afterwards did not affect the tax already owed for the 2010/11 tax year.
Implications:
While this case is primarily a tax case, its implications for employment law are significant as it reinforces the “substance over form” approach. The ruling confirms that the legal characterisation of a relationship or a payment in a contract is secondary to the reality of the work performed.
Employers and employees need to be careful when creating structures to minimise tax burden and maximise profits, as they might end up facing a tax return. Indeed, the full amount transferred to the trust was deemed to be ‘earnings’. It remains to be seen whether an employee may or may not have a claim for unlawful deductions from wages if the employer promised a specific net take-home pay based on a loan scheme that is later taxed as salary.
The Tribunal’s reliance on the Rangers case cements the principle that if money is paid in return for services, it is remuneration. Thus, employers cannot use “loan” structures to bypass employment-related costs such as the national minimum wage or holiday pay. If the Court views a loan as salary, it may also come to view the recipient as a worker entitled to full statutory rights.
