Following a lengthy battle to recover what it maintains are unpaid taxes on a tax avoidance scheme used by Rangers Football Club, HMRC has won a dramatic victory in the Supreme Court this week.

The ruling in the Revenue’s favour is likely to be seen as a powerful precedent, emboldening HMRC to pursue all financial arrangements that it construes as tax avoidance vehicles. It effectively cements the Government’s ongoing crackdown on tax avoidance as a more or less permanent feature of Government policy.

The ruling has ominous implications for independent professionals contracting via their own personal service companies (PSCs), although not for those contracting via Umbrella Companies, which automatically deduct all due tax and NICs on income on a PAYE basis. Many PSC contractors working in the public sector have already been hit by controversial new IR35 tax avoidance rules, and the Supreme Court decision is almost sure to strengthen HMRC’s case for extending these rules to the private sector.

Rangers FC had made “loans” to a number of its star players as well as managers and directors via an Employee Benefit Trust (EBT). EBTs are trusts that, in the past, have been set up by large companies to make tax free “loans” to employees or beneficiaries. HMRC declared them tax avoidance schemes after it became clear than many of these loans have never been paid back, strongly suggesting that they ought to be seen more properly as income and therefore tax deductible.

Rangers FC made numerous EBT “loans” between 2001 and 2010 when the club was under different ownership. HMRC has consistently argued that these payments are actually income and should have been subject to income tax and NICs. It provided evidence to this effect to the Supreme Court judges in the form of letters and emails between players’ agents and Rangers’ directors. Revenue officials were also able to demonstrate that none of the loans had ever been repaid.

Two earlier tribunals, in 2012 and 2014, ruled in favour of Rangers, but in 2015, the Court of Session found in favour of HMRC. The Supreme Court hearing arose in response to the club’s liquidators, BDO, who were appealing the 2015 decision. As the Supreme Court is the highest court in the land, the matter is now irrevocably settled in favour of HMRC.

The Supreme Court decision will assist HMRC in pursuing thousands of other companies that it maintains have used EBTs to avoid tax.

EBTs were legally abolished in 2010, but a five-year period of grace was permitted to allow time for settlement. That expired in July 2015. Many companies are now set to face large liabilities.

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