Advocate Gen. for Scotland v. Murray Group Holdings Ltd., [2015] CSIH 77, [2015] BTC 36 (Ct. of Ses. (Inner House, 2nd)), aff'd sub nomine RFC 2012 Plc (formerly The Rangers Football Club Plc) v Advocate General for Scotland (Scotland) [2017] UKSC 45

A company in the Murray Group of companies which wished to benefit one of its employees (generally, a footballer or executive) made a cash payment (often corresponding to a discretionary “bonus”) respecting the employee to a trust which had been set up by one of the Murray companies (the “Principal Trust”). The paying company recommended that the trustees of the Principal Trust resettle the sum in question (in their discretion) on to a sub-trust and would ask that the income and capital of the sub-trust be applied in accordance with the wishes of the employee. The beneficiaries of the sub-trust (generally, family members) were chosen by the employee. In practice, the trustees of the sub-trusts invariably gave effect to the wishes of the employee. The employee would be appointed protector of the sub-trust (i.e., with a power of appointment, and the right to change trustees), and the trustee of the sub-trust would then lend the employee the money that had been advanced to the sub-trust at LIBOR +1.5% and with a 10–year term subject to extension.

Before finding that the payments made by the companies to the Principal Trust in respect of the employees were emoluments or earnings that were subject to the obligation to deduct tax under the PAYE system, Lord Drummond Young stated (at para. 56):

[I]f 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….[I]t 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.

Lord Drummond Young found that a scheme, which entailed employers paying employee bonus amounts to a master trust whose trustees in their discretion would use the amount to settle a sub-trust with the class of beneficiaries generally comprising the employee's family members, and with the trustee of the sub-trust lending such funds to the employee, resulted in taxable employment income to the employee when the amounts were first paid to the master trust. Before so finding, he first concluded that the Inner Court of the Court of Session had judicial knowledge of English law, noting (at para. 49) that The First-tier Tribunal and Upper Tribunal below had “United Kingdom-wide jurisdiction, and it is agreed between the parties that both of them have judicial knowledge of English law…[and i]n the event of an appeal from the Inner House to the United Kingdom Supreme Court, that court too has judicial knowledge of English law,” and stated (at para. 50):

The result otherwise would be highly artificial. The lower tribunals would have judicial knowledge of English law; the court to which a final appeal may be taken would have judicial knowledge of English law; but this court would be constrained by the findings on English law of the First-tier and Upper Tribunals.

…No doubt the theoretical nature of a trust is different, being based on the notion of legal estate and equitable interest in England, whereas in Scotland it is based on the notion of dual patrimonies of the trustee. Nevertheless the practical results are similar, and the institution of the trust fulfils similar functions in both jurisdictions. Consequently Scottish judges should not have any great difficulty in understanding English law, and are expected to do so in the Upper Tribunal and UK Supreme Court.

In the course of finding that the (Scottish) Inner Court was entitled to decide on questions of English trust law that were relevant to a tax scheme using trusts governed by English law, Lord Drummond Young, stated (at para. 50) that:

No doubt the theoretical nature of a trust is different, being based on the notion of legal estate and equitable interest in England, whereas in Scotland it is based on the notion of dual patrimonies of the trustee. Nevertheless the practical results are similar… .