03 March 2016

A couple of recent tax cases raise the question again of the application of the old principle that earnings are taxed when they are received.

A recent article from Burges Salmon’s Incentives team in Employee Benefits Magazine considers the Court of Session decision in Advocate General for Scotland v Murray Group Holdings and others, perhaps better known as the ‘Rangers case’ in which it was held that contributions to an EBT were “redirected payments of earnings” taxable as employment income.

While this was specific to the facts of the case, it makes the decision in the recent case of Glory Wealth Shipping Pte Ltd v Flame SA rather relevant. This is not a tax case, it is actually a Commercial Court decision considering the 'compensatory principle' in contractual damages where there has been a failure to perform, in this case in freight distribution. What is interesting, however, is the finding that the right to redirect the payment of money (or to give it away) is as valuable as the right to have the money paid into one's own bank account.

This does accord with what is already know about redirection of earnings - for example if Mr A directs that an award of shares from his employer should be made instead to his girlfriend Miss B (who is not an employee) the value of the shares is taxable in Mr A's hands.

What does this mean in the context of employment income? If you deliberately redirect your earnings, or other income, the value will be attributable to you. That value will be the same as if you had received the redirected item yourself. However, the Rangers case decision, whilst it was based on its own facts, taken hand-in-hand with the law dealing with the taxation of payments from third parties (the "disguised remuneration" legislation) should highlight the need to be careful about what might be considered a redirection and therefore result in taxable earnings at a time they were not expected, and perhaps not even intended.

If a third party is involved in any remuneration structure, it is important to obtain professional advice at the outset to avoid the risk of unwelcome surprises.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions Practice
  • Pensions Services
  • Pensions Legal Advice

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