The Decision of the Court of Session in Murray Holdings: Selling an Invention

“I had a dream about you. I invented and sold shoes that left no footprints, and you were thinking about committing a murder in a muddy area. I said that committing a murder was a bad idea, and that you should commit several murders, but I was just trying to sell more shoes.
”

― Jarod Kintz, We Had A #Dream About You

The ratio of the decision of the Second Division of the Court of Session may be summarised as follows:

Emoluments are payments in respect to services and they are regarded as paid when they are paid to the employee or to any third person with either his agreement or acquiescence.

The court takes the view that, when determining tax liability, one is, in such cases, entitled to go beyond the position in law and, in particular, the legal entitlement of the taxpayer. In the case before it, the court then held that the payments to the Employee Remuneration Trust were in themselves payments of emoluments to employees, At paragraph [52], the court holds:

The first submission made by HMRC was that the scheme involving payments to the various trusts and the application of the monies so paid amounted to a mere redirection of earnings which did not remove the liability of employees to income tax.  In our opinion this submission is correct, and accordingly the appeal must be allowed on this ground.

It followed that a liability to income tax arose to employees concerned at the point of contribution to the trust and that the terms of the trusts or loans were not in themselves material.

[56]   The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party.  That accords with common sense.  If the law were otherwise, an employee could readily avoid tax by redirecting income to members of his family to meet outgoings that he would normally pay: for example to a trust for his wife, as in Hadlee, or to trustees to pay for his children’s education or the outgoings on the family home.  It follows that, if the principle applies, it is irrelevant that the redirection is through the medium of trust arrangements.  It is equally irrelevant that the trustees who receive the payment, at whatever remove, exercise a genuine discretion as to what happens to the funds.  The funds are ultimately derived as consideration for the employee’s services, and on that basis they are properly to be considered emoluments or earnings.

The three cases relied upon by the court in arriving at its ratio do not go towards the point in contention in this case. Brumby v Milner is a case which relates to what emoluments are for (i.e. whether they arise from the employment) and not so much about what emoluments are in the first place or when they can be said to have been received. Admittedly, Brumby is only relied upon on the basis that the House of Lords and the Court of Appeal in that case adopted a realistic approach to the facts – and this is then put forward by the court as encouragement for the broad-brush approach it then seeks to develop here. The irony is that in doing so they have perturbed the clear matrix which the House of Lords in Brumby espoused – which is that emoluments are received when they are placed at the unreserved disposal of the employee (in Brumby, the tax arose on distributions from the trust). A second irony is that in refusing to give weight to the terms of the sub-trust or the legal entitlement of the employee (in respect to the amounts which were contributed to the trust), the court has focused on a very narrow aspect of the realities of the arrangements in place there.

Setting aside the strict legal position, it is clear that the court was driven primarily by policy considerations. The court is right in idetifying the potential mischief here:

 [56]   The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party.  That accords with common sense.  If the law were otherwise, an employee could readily avoid tax by redirecting income to members of his family to meet outgoings that he would normally pay: for example to a trust for his wife, as in Hadlee, or to trustees to pay for his children’s education or the outgoings on the family home.

The objective of countering this mischief is one with which all would naturally have great sympathy with. However, the court appears to proceed on the assumption that this would be the first time such a notion would ever have occurred to any person. And that the tax field is somehow a barren landscape where the legislator or the courts have never given thought to the problem. There is no regard made in the decision of the host of anti-tax avoidance rules which already cater for this problem. The settlements code is not considered – in which context the courts have previously had to adopt a restrictive approach in light of the anomalies which would otherwise arise. This line of cases proceeds on the assumption that there is no problem with income arising to another person provided that this is done on a commercial footing. The agencies or PSC legislation is also not considered, a set of rules under which the legislator fully assumes that the fruits of one’s personal exertions may accrue to another person (such as the company of the person concerned). Most problematically, Part 7A of ITEPA is not considered. So, we now face the prospect of a charge on a contribution in to a trust and then one out of the trust too. Taking into account Part 7A, we have gone to having two sets of Draconian avoidance inventions to the same (non)problem, which together create a new (real) one.

The courts should not take on the role of legislator. In particular, when it comes to the attribution of A to B – among other things, it is only the legislator who, once he has made the re-attribution, can award B the right under general law to have recourse to A.

There are a great deal many other objections to be made here and these I expound on in my opinions. For the time being and setting aside the legal and policy-based problems with the decision, it would be in the interests of caution to meet it on its own terms. Though depending on the facts, this ought to be capable of being done with relative ease.

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