[2011] UKFTT 16 (TC)

TC00893

Appeal number: SC 3031/2004

Corporation tax – deductibility of payment to employee benefit trust (EBT) – whether payment made wholly and exclusively for the purpose of appellant’s trade – ICTA 1988 s 74(1)(a) - whether payment revenue or capital expenditure – ICTA, s 74(1)(f) – whether payment a “potential emolument” – FA 1989, s 43(11)

FIRST-TIER TRIBUNAL

TAX 

	J T DOVE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JUDGE ROGER BERNER
				JOHN WHITING OBE (Member)									

Sitting in public at 45 Bedford Square, London WC1 on 18 – 19 October 2010

Andrew Thornhill QC and Sadiya Choudhury, instructed by unw LLP, chartered accountants, for the Appellant

Sam Grodzinski, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by J T Dove Limited (“the Appellant”) against an assessment to corporation tax made by HMRC on 17 December 2003 for the accounting period of the Appellant ended 31 December 1997.  The assessment relates to a payment of £3 million made by the Appellant to an employee benefit trust known as the Herbert Dove Trust (“the Trust” or “EBT”).
2.	The issue in the appeal is whether the £3m payment, which was made by the Appellant to the company trustee of the EBT, Herbert Dove Trustees Limited (“the Trustee Company”), can be claimed as a deduction against the Appellant’s taxable profits for the relevant accounting period.  HMRC contend that it cannot.  In determining this question, it is common ground that we must consider three separate issues, on each of which the Appellant must succeed if we are to allow this appeal:
(1)	Whether the payment was made wholly and exclusively for the purposes of the Appellant’s trade as required by s 74(1)(a) of the Income and Corporation Taxes Act 1988 (“TA”).  The Appellant contends that it was, and HMRC contend that it was not.
(2)	Whether the payment constituted capital or revenue expenditure.  The Appellant contends that it was revenue expenditure, and HMRC contend that it was a capital payment, so that its deduction was prohibited under s 74(1)(f) TA.
(3)	Whether the payment was a “potential emolument” within the meaning of s 43(11) of the Finance Act 1989.  If so, that provision operated to prevent the Appellant from claiming the relevant deduction.  The Appellant contends that the payment was not a potential emolument and HMRC contend that it was.
3.	Andrew Thornhill QC and Sadiya Choudhury appeared for the Appellant.  HMRC were represented by Sam Grodzinski.
The facts
4.	 We had the benefit of a statement of agreed facts, which we reproduce below.  We had witness statements of, and heard oral evidence from, a number of witnesses of fact: Ashley Wilton, former head of the law school at the University of Newcastle, and Chairman of the board of directors of the Trustee Company, having previously been appointed by the University as Chairman of the Trustee Council of the Pensions Trust Company in 1994; Nigel Sherlock, who was Chairman of the University Council of Newcastle University from 1993 to 2002, a director of the Pensions Trust Company and a member of the Trustee Council from 1970, and a director of the Trustee Company; Richard Painter, finance director of the Appellant since May 1999; and Ian Stevenson, operations manager of the Appellant.  We also had an expert accounting report from Peter Holgate, senior accounting technical partner in the London office of PricewaterhouseCoopers LLP, and we heard oral evidence from Mr Holgate.  Finally, we had a bundle of documents.  From all this material we make the following findings of fact.
Statement of agreed facts
1.  J T Dove Limited (“the Appellant”) is a builder’s merchant in the North East founded in 1869 by the Dove family.  Herbert Dove represented the third generation of the family to run this company.  He wished to enter into arrangements to ensure that the Appellant’s shares would be held for the enduring benefit of its employees.  
2.  In 1954, he set up a company called the J T Dove Pensions Trust Limited (“the Pensions Trust Company”).  He transferred his shares in the Appellant to the Pensions Trust Company, as did the two minority shareholders.  The Pensions Trust Company was run by the Trustee Council.  The members of the Trustee Council, including the Chairman, were appointed by Kings College, University of Durham, which became the University of Newcastle in 1963.  
3.  The Pensions Trust Company provided an additional pension to employees of the Appellant who were members of its occupational pension scheme.  Furthermore, the Pensions Trust Company held the ordinary voting shares of the Appellant and supervised the Appellant’s board in order to ensure that the business was run in accordance with the principles set out in its Statement of Principles and Directions known as “the Blue Book”.   The Trustee Council also supervised a profit share system for all the Appellant’s employees, as stipulated in the Blue Book.  These arrangements remained in place until early 1997.  
4.  Under the Pensions Act 1995, self-investment by a company’s pension scheme in the company of more than 5% became unlawful from 6 April 1997.  The Trustee Council therefore had to divest itself of its shares in the Appellant prior to this date.  However, if the shares were sold to a third party, that third party would not be bound to follow the principles in the Blue Book of holding the shares for the benefit of the Appellant’s employees.  
5.  The Trustee Council eventually came up with a solution that it believed would allow the principles in the Blue Book to continue to be followed.  The steps described in paragraphs 6 to 10 below were taken in order to implement this solution.
6.  The pension fund was merged with the Appellant’s main scheme and the combined scheme was administered by the Pensions Trust Company.
7.  A company, which had been incorporated on 25 November 1996 as Intercede 1209 Limited, had its name changed by special resolution to Herbert Dove Trustees Limited (“the Trustee Company”) on 27 January 1997.  The directors of this company were appointed by the University of Newcastle.  
8.  On 28 January 1997, the Appellant contributed the sum of £3 million to the Trustee Company out of its reserves so that the Trustee Company could purchase the Appellant’s shares from the Pensions Trust Company.  The Trustee Council had received valuation advice to the effect that £3 million would be a fair value for the purchase of the shares.  The shares had to be transferred at a fair value by the Pensions Trust Company to prevent a breach of trust.
9.  On 29 January 1997, an employee benefit trust known as the Herbert Dove Trust (“the EBT”) was set up.  The EBT’s trust deed stated that the trust would only benefit former and present employees and defined family members.  It provided that the trustees may pay or transfer to or apply for the benefit of any one or more of Beneficiaries the whole or part of the capital or allocate income from the trust fund to one or more of the Beneficiaries.  It contained some provisions similar to those found in the Blue Book, such as a provision allowing a profit-sharing scheme for the employees/beneficiaries.  The Trustee Company was the trustee of the EBT.  
10.  On the same day, the Appellant’s shares were purchased by the Trustee Company pursuant to a share sale agreement and settled by it on the terms of the EBT.  The EBT thus held the Appellant’s shares for the benefit of all the Appellant’s employees while the pension scheme was now held separately.  
11.  The contribution made by the Appellant to the Trustee Company for the purchase of the shares was claimed as a deduction against the Appellant’s taxable profits for the year ended 31 December 1997.  Following an enquiry by the Respondents, this deduction was disallowed and an assessment for additional corporation tax was made by the Respondents on 17 December 2003 received by the Appellant on 8 January 2004.   The Appellant appealed against this assessment on 15 January 2004. 
 
Further findings of fact
5.	We were taken to a copy of the Fifth Revision of the Blue Book, dated September 1971.  We accept on the evidence that, subject to certain amendments in relation to remuneration that were made in 1973, the Blue Book remained materially unaltered from this version up to the material time in 1997.  The front cover is headed “Principles and Directions for the Management and Conduct of the Businesses of J T Dove Limited and Subsidiary Companies” and states “For circulation only to members of the Trustee Council”.  In its Introduction the following are recorded:
“As a result of gifts thereof to the Additional Fund [that is, the fund established to provide additional pensions] the Trustees of the Fund own and control all of the 5,000 issued and fully paid Ordinary Shares of £1 each in JTD …
The donors of the £5,000 Ordinary Shares in JTD Ltd to the Trust have formulated this statement of the principles and directions for the management and conduct of the businesses on the lines which have proved so effective in the past in order that all succeeding Members of Council of the Trustee Company and all succeeding Directors of the Trading Companies will be enabled consistently to follow and implement this policy.  To this end it will be a condition of appointment and re-election as a Member of Council of the Trustee Company that each undertakes to observe the principles and directions here laid down.”
6.	Under the Blue Book the business of the Appellant was managed by the Trustee Council.  The Council included members appointed as University Members.  Those University Members were required to give unanimous agreement to certain changes to the board of the Appellant.  This included the appointment of directors, for which the expressed policy was that these should be promoted from within the business, unless in exceptional circumstances the effective management of a company required an external appointment.  We heard from Mr Painter that he was an exceptional case on his appointment in May 1999, albeit after the transfer of the Appellant’s shares to the Trustee Company, as there was no internal candidate for the post of finance director with the appropriate professional qualifications, the previous finance director having been appointed to the post of managing director.
7.	The Trustee Council was directed by the Blue Book to maintain financial control of the activities of the trading companies.  As part of this it had responsibility for deciding the dividend to be declared by the trading companies, subject to payments under the profit-sharing scheme and other express limitations.  The Blue Book established the principle that the financial needs of the trading companies were to be met, so far as possible, from their own resources, individually or combined, and by reserves created out of trading profits.
8.	Provision was, however, made for the raising of further capital, but with particular restrictions on the transfer or issue of ordinary shares in the Appellant.  Clause 19 provided as follows:
“Loans
 In case of further capital needs, loans from Banks or the issue of Debentures or Preference Shares which do not carry any voting powers are to be at the discretion of the Trustee Council, but any transfer of Ordinary Shares or the issue of new Ordinary Shares to any outside company, person or institution, other than to the Trustee Company itself, is expressly forbidden, except as provided in the section entitled ‘Amalgamation’, Clause 34.”
9.	Clause 34 of the Blue Book made special provision in the case of any proposed amalgamation of any of the trading companies with another company or companies.  It provided for a series of successive resolutions of the Trustee Council, including unanimity of the University Members, of the Trustee Council and the directors of the trading companies combined and of a meeting of the Trustee Council and directors plus representative members of staff.  It stated:
“If ever circumstances should arise wherein amalgamation of the Trading Companies or any of them separately, with another firm or firms is considered desirable or advantageous, such amalgamation may only be carried out if it is sanctioned by resolutions duly passed, as follows:-
(a) At a meeting of the Trustee Council by a simple majority and subject to the specific agreement of the University Members of the Trustee Council, the Chairman of the Trustee Council to have a casting vote.
(b) At a joint meeting of the Trustee Council and the Directors of the Trading Companies by a simple majority of such Trustee Council and Directors, the Chairman of the Trustee Council to have a casting vote.
(c) At a joint meeting of the Trustee Council and the Directors of the Trading Companies and two representative senior members of the staff of J.T.D. and one representative senior member of each Subsidiary Company, such representative members to be appointed by resolutions duly passed by simple majority at separate meetings of the staffs of the Trading Companies convened by not less than 14 days previous notice in writing to all members of the respective staffs (not manual workers) over the age of 21, and who are also members of the Companies’ Staff Pension Schemes.
(d) The meeting under para. (b) is not to be convened unless the resolution is duly passed at the meeting under para. (a), and the meeting under para. (c) is not to be convened unless the resolution is duly passed at the meetings under para. (a) and under para. (b).  At all three meetings held under this clause the University Member when Chairman of the Trustee Council to have a casting vote.”
10.	We had evidence, which we accept, that the control exercised by the Trustee Council over the businesses and the appointments of directors had, under the old structure, prevented a takeover of the Appellant even though numerous approaches had been made by third parties.  This was driven by adherence to the Blue Book and through that to the principles laid down by Herbert Dove.
11.	Expressed in the Blue Book as a fundamental principle was that all employees should receive a fair rate of pay, and that there should be fairness in the relation between the remuneration of directors and managers on the one hand and ordinary staff and manual workers on the other.  A major element of the remuneration policy, and one which followed from the control exercised over the making of reserves in the trading companies and the distribution of dividends, was the profit sharing scheme.  The Blue Book provided that the amount available for distribution by the companies under the profit sharing scheme was to be decided by the Trustee Council.  We heard from Mr Wilton, and we accept, that a convention had been established that the proportion of profits to be shared under the profit sharing scheme was 20%, and that this had continued for many years, both under the old and new structures.  Mr Painter also explained, and again we accept, that all employees receive the same percentage of salary by way of profit share.
12.	Although the Blue Book itself was confined in its circulation to members of the Trustee Council, the structure that had been created and the principles, directions and policy emanating from the Blue Book on which the Trustee Council intended to act and which they would require any successors to adopt were summarised in a document known as “the Green Book” that was, at least in the early years, circulated to all members of the Appellant’s pension scheme.  We were shown a copy of the Green Book, headed “Revised Version 1959”.  Mr Sherlock gave evidence that the Introductory Note, which described the structure and concluded with the hope that, with the loyal, enthusiastic and sustained support of all employees, the efficient and successful conduct and continuity of the businesses would be sustained, along with the employees’ profit participations, accorded with his understanding of the underlying principles.  But Mr Sherlock had not seen the Green Book before it was shown to him at the hearing, and was unable to say whether it had been provided to employees after 1959.  He confirmed that it was no longer given to employees.  We find that the Green Book had ceased to be provided to employees well before any consideration was given to the creation of the EBT.
13.	Having regard to the restrictions on self-investment introduced by the Pensions Act 1995, a meeting of the Trustee Council took place on 11 September 1995.  Options discussed at that meeting were a sale of the shares in the Appellant on the open market, and the raising by the Appellant of the necessary funds to buy the shares.  It is recorded in the minutes that one of the Council members, Mr Kilner, expressed concern that the Council would be disregarding the principles of the Blue Book if the shares were sold.  At the meeting the chairman, Mr Wilton, explained the proposal to establish a new trust to purchase the shares from the Pensions Trust Company and to hold them for the benefit of the employees of the Appellant.  We were shown a copy of Mr Wilton’s paper to the meeting in which he referred to the “present protective role (in holding onto the shares) and that of the Trustee Council in the profit sharing scheme [being] conferred on a new trust.  The composition would include trustees appointed by the University in order to continue the effective device developed by Herbert Dove to protect the independence of the trading company.”
14.	In a letter to Mr Wilton dated 15 December 1995, McKenna & Co set out the suggested structure and content of the EBT.  The letter acknowledges that the trustees wished to keep as closely as possible to the Blue Book.  In a section headed Prohibition of subsequent sale of Dove shares, the author of the letter, Mr John Cunliffe, wrote:
“As this trust is being established it would be possible to entrench a prohibition on the sale of the Dove shares.  While this is a central feature, I would suggest not wording the prohibition in absolute terms as we are not able to foresee all circumstances over the life of the trust.  A provision allowing a sale only if proposed by the trustees and supported by the company and employees in the voting procedure set out in clause 34 of the Blue Book would seem appropriate.  This allows the flexibility to react to changes in circumstances but puts the threshold for such a fundamental action very high.”
15.	Mr Cunliffe’s letter also contained the following under the heading Employee share option scheme:
“A small block of the shares (for control purposes not more than 24%) could be used to provide a further incentive for employees the company wishes particularly to encourage.  If the trustees agree to a share option scheme, the restriction on sale could be disapplied in the original deed for such a block of shares.  This would enable the EBT trustees to set up such a scheme without compelling them to do so.  Any shares given to employees could be subject to rights of pre-emption requiring them to be sold back to the EBT trustees when the employee leaves the company or retires.”
16.	The EBT was established by the trust deed dated 29 January 1997.  It is a discretionary trust, the potential beneficiaries of which are employees and former employees of the Appellant and relevant subsidiaries, and their spouses, widows and widowers and children and stepchildren under the age of 18.  Clause 3 of the trust deed provides for a trust for sale, expressed as subject to clause 9.  Clause 5 sets out the dispositive powers of appointment over the trust fund.  Clauses 5.1 and 5.2 provide as follows:
“5.1 The Trustees shall have power during the Trust Period to pay or transfer to or apply for the benefit of any one or more of the Beneficiaries the whole or such parts of the Trust Fund at such time or times as in their absolute discretion they think fit.
5.2 The Trustees shall have power to appoint or apply capital monies to grant options upon such terms as the Trustees shall think fit over Shares at the expense of the Trust Fund to any one or more of the Beneficiaries Provided Always that no such option shall be exercisable after the end of the Trust Period.”
17.	Clause 5.3 contains power for the trustees to enter into any agreement with the Appellant or a relevant subsidiary to enable Beneficiaries to acquire ordinary shares in the Appellant or options over such shares.  We find as a fact that no such agreement has been entered into.  The terms of clause 5.3 are as follows:
“5.3 The Trustees shall have power to enter into any agreement or contract with the Company or any Relevant Subsidiary on such terms and subject to such conditions as the Trustees shall in their absolute discretion think fit to enable the Beneficiaries or any of them to acquire and take up Shares or options over Shares and (without prejudice to the generality of the above) pursuant to or in furtherance of such agreement:-
5.3.1 to purchase Shares to be acquired by the Beneficiaries whether pursuant to the terms of any such option or options or otherwise;
5.3.2 to borrow money from the Company any Relevant Subsidiary or any other person on such terms as the Trustees shall in their absolute discretion think fit Provided Always that in relation to any borrowing from the Company or any Relevant Subsidiary such borrowing shall be on such terms as would be no less favourable to the Trustees than between the parties dealing at arm’s length;
5.3.3 to transfer Shares pursuant to the exercise of options granted to Beneficiaries by the Company.”
18.	For these purposes, “Shares” is defined to mean the fully paid ordinary shares of the Appellant, or such other shares as may be appropriate for the share schemes from time to time as the result of any takeover, reconstruction, amalgamation or other event affecting the Company and its shares.
19.	Under clause 8, which is expressed as subject to clause 9, the trustees are given the widest possible powers of managing and dealing with the trust fund as if the trustees were the absolute beneficial owners of the trust fund.
20.	Clause 9 of the trust deed is headed Inalienability of Shares, and provides as follows:
“The Trustees shall only transfer Shares in the following circumstances:
9.1.1  in accordance with the Agreement [This is an agreement under clause 5.3; there has been no such agreement.]; or
9.1.2  where transfer has been sanctioned by a simple majority of those present at each of the following;
9.1.2.1  a meeting of the Trustees;
9.1.2.2  a meeting of the directors of the Company;
9.1.2.3  at a meeting of the employees of the Company convened at not less than 14 days written notice to all employees.”
21.	Clause 7 sets out the ultimate trusts.  At the end of the trust period (80 years unless earlier determined by the trustees) the trust fund is to be held on trust for the J T Dove Ltd Pension Fund or any pension fund of the Appellant which has assumed the greatest part of the assets and liabilities of that fund or, failing that, on trust absolutely for living beneficiaries.  Finally, if there are no living beneficiaries the fund is to pass to charity.
22.	The new arrangements entered into in 1997 also involved the adoption of new articles of association of the Appellant.  Under those articles the only shares that have votes are the ordinary shares, although preference shares (of which there are two classes not material to this appeal) also have votes if preference dividends are in arrears and on a winding up of the Appellant, or on an alteration of the articles.  Articles 37 and 38 of the articles contain certain restrictions on share transfers, mirroring to an extent the provisions of clause 9 of the trust deed.  Those articles provide:
“37.  No transfer of any share or interest in any share shall be made by any member, and … the directors may refuse to register any transfer, unless it is made:-
37.1  pursuant to the terms of an Employee Share Scheme [defined so as to include the EBT]; or
37.2  to any other person in accordance with Article 38 (a ‘Permitted Transfer’) provided that it must be proved to the reasonable satisfaction of the directors that the transfer falls bona fide within one of these exceptions.
38.  A Permitted Transfer shall be registered by the directors of the Company only if the transfer has been sanctioned by a simple majority of those present at each of the following:-
38.1  a meeting of the trustees of Herbert Dove Trustees Limited (the ‘Trustees’); and
38.2  a meeting of the directors of the Company; and
38.3  a meeting of the employees of the Company …”
[Provision for written agreement to be sufficient is also included.]
23.	The accounts of the Appellant for the year ended 31 December 1997 show, in the profit and loss account, a non-operating exceptional item of £3,036,658 included as a deduction after ascertaining operating profit of £203,269, subject to the profit sharing scheme.  This includes the £3m payment to the Trustee Company, and associated legal and professional fees.  The resultant loss on ordinary activities before taxation is £2,962,217.
24.	From the evidence of Mr Wilton and Mr Sherlock we are satisfied, as a matter of fact, that the reason for the establishment of the EBT was to perpetuate the vision of Herbert Dove of the Appellant company prospering through being held independently for the benefit of its employees.  We accept that they share the late Mr Dove’s vision that the company’s success is bound up with the independent control that was formerly exercised through the holding of the ordinary voting shares by the Pensions Trust Company, and that the new arrangements were designed to continue this through the holding of the shares in the EBT.  Mr Sherlock in particular described the principle of ploughing profits back into the company, rather than paying dividends, as a powerful engine to drive the company forward and the effect on growth of the compounding of re-invested profit.
25.	Both Mr Wilton and Mr Sherlock regarded the principles of the Blue Book as paramount.  Mr Sherlock described the University as the “keeper of the conscience”, and Mr Wilton said that he considered himself bound in conscience to observe the Blue Book.  In common with the other directors he had signed the Blue Book on his appointment as a director.  This meant, in his view, that he should as far as possible observe the Blue Book to the letter.  The primary principle guiding each of Mr Wilton and Mr Sherlock, we accept, was that the shares should be owned independently, originally by the Pensions Trustee Company, and currently by the EBT.  This entailed the shares in the Appellant being retained by the EBT and not distributed to the employees (or other beneficiaries) whether directly or as a result of the exercise of share options.  Mr Wilton referred to the letter from McKenna & Co of 15 December 1995, and said that he had been concerned at the inclusion in the EBT trust deed of a power to sell shares.  He had been reassured by the advice he had received that such a power was in case of unforeseen circumstances and that the threshold for the exercise of the power was very high.  He had taken this to be a reference to clause 9 of the trust deed, which he had very much taken to heart.  There had never been a discussion of any transfer of any part of the EBT’s holding of shares in the Appellant; such a matter had never been an item for discussion.  The facility for a small block of shares to be used to incentivise employees, as referred to in McKenna & Co’s letter, had never been used.
26.	Mr Wilton was asked about the attitude of employees, in the light of the requirement in clause 9 of the trust deed for employee approval for transfers of shares, to the possible grant of share options.  Mr Wilton said that in his view such a scheme would contradict or undermine the quality of the profit share arrangements, be divisive (as it would not apply universally) and offend one of the late Mr Dove’s basic principles.  Mr Wilton was quite clear that the late Mr Dove did not want shares held by the employees: the profit-sharing arrangements were the route for employees to share in the results of the business.  Mr Dove had wanted employees to benefit but not to be in a position to control the company; management could control day-to-day but that was separate from ownership.  The Green Book contained no reference to employees owning shares in the Appellant.  In Mr Wilton’s view, the issue of share options would carry with it the need to provide shares to meet the exercise of those options, and ultimately to buy the shares back, which would deplete the capital of both the Trust and the business.
27.	In this context Mr Wilton also told us that there had been some informal discussions on the possibility of introducing a share incentive scheme for the directors of the Appellant.  The scheme would not have involved the shares held by the EBT, but rather “shadow” (not actual) shares with a notional value that would be tracked against an index.  This did not proceed as it was regarded as too complex, and there were doubts as to its effectiveness.
28.	In cross-examination, Mr Wilton was asked about the principle which in evidence he had espoused that the Appellant’s shares should not be owned by the employees.  He said that in his view the Blue Book provided a context, and that it was for the Trustee Company to maintain control.  Otherwise he considered that the benefits to employees would not be capable of being delivered.  He took the view that clause 34 of the Blue Book entrenched the ownership and control of the Appellant’s shares in independent hands.  So long as the University had control, the question would not be put to directors and employees.  He did not accept that the late Mr Dove’s vision might not have regarded employee ownership of shares as anathema.  Mr Wilton regarded himself as bound by the principles of the Blue Book.
29.	Mr Wilton was asked to consider the hypothetical situation where morale in the workforce was low, and the only way to secure the cooperation of the employees was to grant them options over shares in the Appellant.  It was put to him that there was nothing in the Blue Book or in the trust deed to prevent that.  Mr Wilton said, and we accept that this is his view (and also the view of Mr Sherlock, who agreed with Mr Wilton), that this would not be consistent with the principles established by the late Mr Dove.  Profit sharing amongst the workforce as a whole was a fundamental element of Mr Dove’s vision.  The trustees were duty bound to promote the profit sharing ethos and that did not include share options.  He explained that at the time the trust deed was being drawn up the question had arisen whether to have a small block of shares that could be used in a share option scheme and give some flexibility to the profit share scheme because the model in the Blue Book was restricted to cash.  This was the purpose behind the inclusion of clauses 5.2 and 5.3 of the trust deed.  However, no shares or share options have been granted to any of the employees or beneficiaries since the EBT was created.  
30.	In his evidence Mr Wilton explained that, although the workforce of the Appellant had been informed about the new arrangements involving the EBT, they had not been consulted as such.  He was cross-examined on this in the light of the constraints he regarded himself as bound by in respect of transfers of the shares.  His explanation, which we accept, was that there were confidentiality concerns; the commercial information, including as to valuation, was considered to be too sensitive to be published.  Mr Wilton later wrote to all employees on 29 January 1997 informing them of the new arrangement and received no objections.
31.	Mr Grodzinski put to Mr Wilton a further hypothetical set of circumstances, this time looking some 20 years into the future.  The hypothesis was that the company had at that time been struggling to make profits for 5 years, and matters were not likely to improve.  Another company came on the scene, not one that wished to asset-strip the company but one with a genuine interest in the business, and the potential synergy between the two businesses.  An offer was made at significantly above fair market value.  There was a promise of no redundancies; the existing workforce would be invited to participate in a share option scheme.  In the light of this Mr Wilton was asked to consider what his fiduciary obligations to the beneficiaries of the EBT would be.  In his reply, which we accept as representing his view (and that of Mr Sherlock who again agreed), Mr Wilton said that he would have to analyse the terms of any offer very carefully, including in particular any terms regarding redundancies.  He referred to the likely structural deficit in the pension fund as rendering this scenario an unlikely one.
32.	As well as supporting the evidence given by Mr Wilton, Mr Sherlock gave us some further background into the philosophy of Herbert Dove.  Although Mr Sherlock had met the late Mr Dove, he had not known him well, but he was able to relate certain background from discussions he had had with Percy Cooper, the original secretary to the Pensions Trust Company.  His evidence, which we accept, was that Herbert Dove wished the trading activities of the Appellant to continue in perpetuity and the benefits of those activities to accrue to the employees.  The Blue Book encapsulated Herbert Dove’s intention that the shares in the Appellant company should be held by an independent third party for the benefit of the employees.
33.	Dividends have never been paid in respect of shares held by the Trustee Company.  Mr Sherlock’s view was that there was no realistic possibility of dividends being paid to benefit the employees; instead they benefit from their profit share allocation, pensions and, in the long term, the prospect of future rewards as a result of the policy of the Trustee Company of reinvesting remaining profits of the Appellant.  In his view, the only reason the Trustee Company would need to sell its shares in the Appellant would be if the Appellant went into administration or otherwise failed.  However, his view was that in those circumstances any sale would be to a third party and the proceeds of sale would as a first call be paid into the defined benefits pension scheme, having regard to the present prospective liabilities under that scheme.  Both Mr Wilton and Mr Sherlock referred to the pension scheme being in significant deficit (a fact confirmed by Mr Painter), and expressed the view that this would absorb all or most of any proceeds from a sale.
34.	Mr Painter gave evidence on the range of benefits available to the Appellant’s employees.  The profit sharing scheme has made payments in most years. Benefits also include group life insurance cover, additional holiday entitlements, beneficial sickness and absence arrangements and pensions, both defined benefits and, for employees joining since 2005, defined contributions.  As regards the defined benefits scheme, Mr Painter explained that this was in deficit in an amount of £13 million.  Mr Painter accepted in cross-examination that these benefits could be provided without the EBT.  He also accepted that any company could plough back profits, but made the point that this depended on dividend policy.
35.	The availability of employee benefits is communicated to employees in a number of ways.  There are regular branch meetings, management meetings with senior management and director roadshows.  Since the recent downturn, and consequent pay reductions, a quarterly statement is sent to every employee at his or her home.
36.	 Mr Painter’s evidence, which we accept, was that these benefits were appreciated by the employees.  He said that the EBT ethos is strong and employees appreciate its fairness.  It promotes within the company a sense of everybody being together.  Although unwelcome, recent responses by the Appellant to recessionary times, including two pay reductions (impacting proportionately greater on the higher earners than those on lower pay), had been assisted in their acceptance by the existence of the EBT.
37.	Mr Stevenson impressed us with his evident pride at being an employee of the Appellant.  He said that the company’s history and the independence of its share ownership are discussed among the workforce and are a source of some pride for the employees.  The employees are reassured in the knowledge that they are working for independent trustees who act in the employees’ best interests.  He said, and we accept, that the transfer of the shares from the pension fund to the EBT helped to maintain the goodwill of the employees.
38.	Mr Stevenson told us that, although of course there is some employee mobility (he referred to employees being poached by rival businesses, but also sometimes returning), the employees in general are very loyal to the company.  He said, and we accept, that many have a long-standing relationship with the company; out of a total workforce of around 140, about 40 have been with the company for more than 25 years.
39.	In answer to a further hypothetical example put by Mr Grodzinski, postulating a time when there was no profit share and the company was making salary reductions, and the prospect of a sale of the company so as to enable him to receive a significant capital sum, Mr Stevenson was adamant that he would want the company to remain the way it is.  He said, and we accept his evidence, that he did not know what he would say if he were consulted on such a sale, but that he would want the principles laid down by the late Mr Dove to be maintained.  In response to further questioning he said, and we also accept, that his family would support him in this stance.
Accounting evidence
40.	Mr Holgate’s report provided his expert opinion on the accounting treatment appropriate for the payment to the Trustee Company to enable the EBT to purchase the ordinary share capital of the Appellant from the Pensions Trust Company.  The report sets out the four broad possibilities for accounting for a payment made by a company.  They are: (1) record as the creation or enhancement of an asset; (2) record in equity; (3) record as the reduction or elimination of a liability; and (4) record as an expense.
41.	On the question whether to record the payment as the creation or enhancement of an asset, Mr Holgate’s evidence, which was not challenged by HMRC, was that, applying UITF 13, ‘Accounting for ESOP (Employee Share Ownership Plan) trusts, issued in June 1995, the determining factor is whether or not the company has de facto control over the shares in the EBT.  On the facts, it does not; rather the EBT controls the company.
42.	Mr Holgate’s report explained that in developing UITF 13, the Urgent Issues Task Force was thinking primarily of the type of ESOP that is set up to hold shares that are then given, sold or put under option for the benefit of specific employees.  Such trusts are set up by the company so that the company can use the trust as part of its overall arrangements for employee remuneration.  He contrasted this with the unusual situation where the company does not have de facto control of the shares held by the EBT.  He explained that this unusual case is dealt with only in example 7 of UITF 13, which deals with the case where shares in a cooperative company are held in trust for the employees collectively and the trust receives dividends from the company and distributes those dividends to the employees in accordance with the trust deed.  In these circumstances the company does not have de facto control of the shares held by the trust; the shares held by the trust are not assets of the company since it neither controls them nor bears their benefits or risks.  The company should not record the shares held by the trust on its balance sheet.
43.	Whilst dividends are not paid to employees by the EBT in this case, and instead the EBT approves, as shareholder, the profit-sharing payments to be made by the Appellant to its employees, Mr Holgate’s view, on which there is no dispute, is that the Appellant does not have de facto control of the shares held by the EBT.  Therefore, he concludes, the shares held by the EBT are not an asset of the company for accounting purposes and should not be recorded as such.
44.	In considering whether the payment should be treated as an equity item, Mr Holgate referred to chapter 4 of the Accounting Standards Board’s Statement of Principles (“SoP”).  Paragraph 4.42 of the SoP notes that distributions to owners are decreases in ownership interest resulting from transfers to owners in their capacity as owners.  Paragraph 4.43 then goes on to define what is meant by “in their capacity as owners”:
“Contributions from, and distributions to, owners include only those transactions to which owners are a party in their capacity as owners.  Increases or decreases in ownership interests that result from transactions entered into with owners in other capacities (for example, as customers or suppliers) are gains or losses.”
45.	On the basis that the payment by the Appellant was made to the Trustee Company before the EBT became the owner of the company, Mr Holgate concludes that the payment cannot be a payment to the EBT in its capacity as owner and hence it should not be recorded in equity.
46.	We should record here that Mr Holgate was asked by Mr Grodzinski what the position as regards recording the payment as equity would have been if, instead of the payment being made by the Appellant to fund the purchase prior to the acquisition of the shares by the EBT, the EBT had purchased the shares from the Pensions Trust Company for a consideration left outstanding, and the Appellant had then made the payment to the EBT so that it could repay the debt.  Mr Holgate said that this was a question he would have to consider further, but ventured that this could be recorded in equity as a distribution.  We do not consider it material to have accounting evidence on facts different from the reality of the actual case, particularly where there is no dispute on the accounting evidence on the real facts.  It seems to us, in any event, that the accounting treatment would depend wholly on the nature of the payment, and whether it could properly fall within the description of transferred to an owner in that capacity.
47.	There was no question of the payment being a reduction of a liability, so there remained only consideration of the payment as an expense.  Mr Holgate referred to paragraph 4.39 of the SoP which defines a loss (which he said was used almost interchangeably with expense) as “a decrease in ownership interest not resulting from a distribution to owners” (which would, we surmise, be recorded in equity).  As there was no distribution, the payment to acquire the shares should be recorded as an expense.  Essentially, and Mr Holgate accepted this in answering questions from the Tribunal, in the absence of the payment being recorded in equity, or as a reduction of a liability, the result of the view being taken that the shares in the EBT should not be recorded as an asset in the Appellant’s balance sheet is that, by process of elimination, the payment must be recorded as an expense.
48.	In his report Mr Holgate fairly noted that his discussion as to whether the payment gives rise to the creation of an asset, a reduction of a liability, an equity item or an expense used accounting terminology.  This is different from the tax terminology of whether a payment is capital or revenue in nature.  Mr Holgate confirmed to the Tribunal that his conclusion that the payment should be accounted for as an expense was not any indication of the nature of that expense for tax purposes.  
Discussion
49.	We turn now to consider, in the light of the facts we have found, the three issues before us for determination.  As we have described, the Appellant must succeed on all three if this appeal is to be allowed.
Issue (1) Wholly and exclusively
50.	Mr Thornhill submitted that the £3m payment made by the Appellant to the Trustee Company was deductible in computing the profits of the Appellant for Case1, Schedule D purposes.  He argued that this was not prevented from being the case by s 74(1)(a) TA, which provided at the material time that no sum should be deducted in respect of “any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade ...”.  Mr Thornhill’s argument, in essence, was that the payment was made wholly and exclusively for the purpose of the Appellant’s trade.  It was made to preserve the existing independence of the Appellant, which was valued by its employees, and to maintain the existing pension scheme, which was also valued by the employees, and accordingly benefitted the trade.
51.	Mr Grodzinski argued, on the other hand, that the payment by the Appellant could not be said to have been wholly and exclusively for the purpose of the Appellant’s trade.  First, he said, a payment by a company intended, at least in part, to prevent outsiders becoming shareholders will not in general be made wholly and exclusively for the purposes of “trade”.  In support of this proposition he cited Lord Reid in Morgan v Tate & Lyle Limited [1955] AC 21 (at p 55):
“... the company is held in law to be a person entirely different from the shareholders, and the company is the trader, not the shareholders. By the first form of nationalization the company, the trader, is deprived of its assets. But by the latter form the company's position is unchanged; it retains its assets and continues to carry on its business. All that happens is that the new shareholders can alter its policy; but a change of shareholders does not interest the company as a trader, and expenditure to prevent a change of shareholders can hardly be expenditure for the purposes of the trade.”
52.	Mr Thornhill acknowledged in this respect that if it were found that a purpose of the company in expending money was to preserve independence, then that could be said to fall on the wrong side of the line.  However, in ascertaining the purpose of the payment in question in this case he submitted that it was necessary to ask why the independence of the Appellant was considered so important that the Appellant would make the £3m payment to enable the new structure to be put in place.  We agree with Mr Thornhill.  We do not regard the preservation of the independent ownership of the Appellant as an end, or purpose, in itself.  It was the means to an end, or purpose, which was to perpetuate the principles established by the late Mr Dove for efficient or harmonious management and working practices, with a contented and cohesive workforce.  We do not therefore regard the maintenance of the independence of the Appellant as a separate purpose such that, whether on its own, or as a consequence of duality of purpose, the payment should be regarded as not wholly and exclusively for the purpose of the Appellant’s trade.
53.	Mr Grodzinski argued that, even if it could be said that the preservation of the Appellant’s independence was in some way connected to the trade, that would not suffice.  He pointed us to Strong & Co of Romsey Ltd v Woodifield [1906] AC 448, and to the observation of Lord Davey (at p 453):
“It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits.”
54.	We do not base our conclusion on the mere connection of the new structure with the Appellant’s trade.  In our view that structure was put in place, and the Appellant expended money, for the purpose of securing the goodwill and cooperation of the Appellant’s workforce, and that expenditure was for the purpose of earning profits in the Appellant.  Mr Grodzinski argued that the payment of £3m created a trading loss for the relevant year.  There was no suggestion that there had been any kind of business analysis to consider whether the £3m paid out would ultimately be recouped in the form of trading profits.  There had been no hard-nosed business calculation.  We reject this argument.  What the tribunal is concerned with is the purpose of the payment; it is not for the tribunal to assess or second guess the business acumen of those who direct the payment.  We are satisfied that the purpose here was to motivate the workforce and that this was for the purpose of earning profits over an extended period, not limited to the accounting period in question.  The fact that the means of achieving this resulted in an accounting loss in the accounting period of payment does not preclude the payment from being generally for the purpose of earning potential profits in the trade.
55.	Mr Thornhill referred us to Heather v P-E Consulting Group Ltd 48 TC 293, which concerned a share incentive scheme for the senior professional staff of a business of management consultants.  At the material time, following the death of one of the principal shareholders, the senior staff became concerned at the prospect of control being exercised by outside shareholders with no professional qualifications.  The scheme gave staff an incentive to purchase a stake in the company, thereby providing an incentive to greater effort on their part, and it removed the possibility of outside interference with the business of the company.  The company made payments over a number of years into the trust, of 10% of its consolidated gross profits for each financial year (subject to a minimum of £50,000).
56.	In the Court of Appeal it was held, upholding both the special commissioners and the High Court, that the object of the scheme was to keep the goodwill of the professional staff and to secure that control would remain in their hands.  Lord Buckley said (at p 326G-H):
“Now, I for my part would say that in the present case the objects of this scheme were to enable this Company's business to be carried on more efficiently; they were directed to improving and maintaining the trading potential of the Company and facilitating its trading to advantage.” 
Having regard to the particular character of the company in that case and of its business and the relation to that business of the qualifications and experience of the company’s employees, the expenditure there was regarded as being expenditure incurred wholly and exclusively for the purpose of that company’s trade.
57.	Mr Grodzinski argued that, in respect of the wholly and exclusively issue, there were two crucial differences between this case and that of P-E Consulting.  First, the sums paid by P-E Consulting to the trust in that case were for the object of giving staff the opportunity to purchase shares themselves.  Secondly, the business of P-E Consulting was one of management consultancy and depended upon its highly qualified staff.  Here, argued Mr Grodzinski, the Appellant was arguing (in relation to s 43(11) FA 1989, which we consider later) that there was no realistic possibility that shares in the Appellant would become owned by its employees, and the business - of builders’ merchants – was not of the same nature as that of management consultancy.  In this case the loyalty of the staff was not to the company but to the ethos established by the late Mr Dove, and to the structure that had been created.  There was no particular purpose to incentivise the existing workforce as there had been for the professional staff in P-E Consulting.
58.	In determining whether expenditure is wholly and exclusively for the purpose of a trade each case must of course be considered on its own facts.  We do not regard the factual distinctions between this case and that of P-E Consulting point us in the direction of a different conclusion.  In our view, on the facts of this case, the purpose of the Appellant when it made the £3m payment was to secure a contented and loyal workforce, and the underlying reason for that was in order to earn profits in its trade.  It is not material that this was sought to be achieved by retaining the Appellant’s shares in an EBT, rather than by transferring shares to employees.  Nor does it matter that the relevant employees in P-E Consulting were uniformly highly qualified, and here the benefits were made available to a wide range of employees of varying degrees of qualification.  The views of the highly qualified staff in P-E Consulting were no doubt a catalyst for the company in that case seeking to incentivise them and to allay their concerns, but the purpose of the payments in P-E Consulting was in substance no different from the purpose of the payment made by the Appellant in this case; the only difference is that here the Appellant took the view that, for the purpose of its trade, it should make the payment to preserve the goodwill of the workforce as a whole, irrespective of rank or status.
59.	In his skeleton argument, Mr Grodzinski also drew attention to the definition of Beneficiaries in clauses 5 and 6 of the trust deed, and the fact that this expression was defined to include not only current employees but also former employees and connected persons such as spouses, widows and children under 18 years of age.  His proposition, as we understand it, was that payments into such a fund could not be wholly and exclusively for the purpose of trade, and he cited Rowntree & Co Ltd v Curtis [1925] 1 KB 328 in support.
60.	Mr Grodzinski did not pursue this argument in terms before us, but he did refer in argument to the composition of the class of beneficiaries, so we ought to consider this point.  In our view the fact that the class of beneficiaries of the EBT was of this particular nature does not prevent a payment to the Trust from being wholly and exclusively for the purpose of the Appellant’s trade.  What is important is the purpose of the expenditure.  Provision benefitting former employees and family members is not a separate purpose inimical to a finding that a payment is to encourage and incentivise employees from time to time, and is thereby wholly and exclusively for the purpose of the trade.  Rowntree is not in our view any authority to the contrary.  As we read the judgments in the Court of Appeal in that case, it was decided partly on the basis that the payment by the taxpayer was more akin to the acquisition of a capital asset (and was thus a capital payment), and partly on the basis that one of the purposes of the establishment of the fund was charitable.  We consider the capital/revenue question next; but on the question whether in this case the payment was wholly and exclusively for the purposes of the Appellant’s trade, we are satisfied that it was, and there is nothing in Rowntree that deflects us from that view.
61.	For these reasons we conclude that the payment by the Appellant to the Trustee Company was wholly and exclusively for the purposes of the Appellant’s trade.
Issue (2) Capital payment or revenue expenditure
62.	It was common ground that the question whether the payment by the Appellant to the Trustee Company was capital or revenue in nature is a question of tax law and not of accountancy.  However, in so far as the proper accounting treatment of an item is relevant to the consideration of the tax law analysis, accounting evidence of that treatment should be afforded due weight.  The position is as summarised by Lord Denning MR in P-E Consulting (at p322E-F) where he said:
“The Courts have always been assisted greatly by the evidence of accountants. Their practice should be given due weight; but the Courts have never regarded themselves as being bound by it. It would be wrong to do so. The question of what is capital and what is revenue is a question of law for the Courts. They are not to be deflected from their true course by the evidence of accountants, however eminent.”
63.	Lord Denning was there responding to a submission that Odeon Associated Theatres Ltd v Jones 48 TC 257 had elevated the status of accounting evidence such that both the Commissioners (now HMRC) and the courts were bound by such evidence to a greater extent than had earlier been the case.  That proposition was rejected by Lord Denning, and by Buckley LJ who, citing Salmon LJ in the Odeon case, emphasised (at p 323G) that what the court must do is consider on the basis of the accountancy evidence whether a sound accounting practice has been established and, if it has, then apply it to the circumstances of the case.
64.	In his evidence, as we have described, Mr Holgate postulated four possible alternative accounting treatments for the payment by the Appellant.  Essentially by process of elimination, he concluded that the payment should be accounted for as an expense or loss.  We consider that in the circumstances of this case the possible treatment as equity or by way of reduction or elimination of a liability can be disregarded.  Mr Holgate himself agreed, in responding to questions from the Tribunal, that his conclusion that the proper accounting treatment was as an expense followed from the fact that the shares in the Appellant held by the EBT were not properly to be recognised as an asset in the Appellant’s accounts.  However, he also agreed that the fact that a payment is to be accounted for as an expense or loss is no indication of the nature of that expense, namely whether it is capital or revenue.  That conclusion is not therefore material to the question we have to consider as a matter of law.  What is material is the conclusion, which we accept is the proper commercial accounting treatment in this case (and which HMRC did not challenge), that the arrangements in question did not give rise to any asset capable of being recognised in the Appellant’s accounts.
65.	Of course it is not the case –and it was not suggested to be the case – that the fact that for accounting purposes no asset is recognised is in any way decisive.  It is clear from the authorities (see, for example, IRC v Carron Company 45 TC 18, per Lord Wilberforce at p 75E) that an item of expenditure by a company can be capital notwithstanding that it does not produce a capital asset such as would appear in a balance sheet.  But, as cases that have been concerned with the identification of an asset, or the getting rid of a disadvantageous asset, show, where an asset is acquired or money is spent on eliminating a disadvantageous asset, the logical starting point is to assume that it is capital expenditure (see Tucker v Granada Motorway Services Ltd [1979] STC 393, per Lord Wilberforce at p 396d).  So, although not in any way decisive, it is a material factor that on the accepted accounting treatment there is no recognisable asset for accounting purposes.  If there had been, the starting point would have been different.
66.	The fact that nothing is recognised in the accounts as an asset does not mean that there is no asset as a matter of fact.  However, in this case there was no suggestion that the shares in the Appellant comprised in the EBT could be an asset of the Appellant.  They clearly were not, either as a matter of fact or, as we have seen, as a matter of accounting.
67.	In approaching the question whether, as a matter of law, the payment by the Appellant to the Trustee Company was a capital or revenue payment, we must consider all the circumstances.  As stated by Millett LJ in Vodafone Cellular Ltd v Shaw [1997] STC 734, at p 739b), that there is no single test or infallible criterion for distinguishing between capital and revenue payments.  It is common for indicia to point in different directions; in the end the courts can do little better than form an opinion which way the balance lies (Granada Motorway Services, per Lord Wilberforce at p 396c).  Above all it is a question of judicial common sense in all the circumstances of the case (per Lord Upjohn in Strick v Regent Oil Co Ltd 43 TC 1, at p 53).
68.	In Vodafone, a case concerning a payment made to get rid of an onerous agreement, Millett LJ identified two matters as being of particular importance: the nature of the payment and the nature of the advantage obtained by the payment (Vodafone, at p 739d).  In the Appellant’s case the payment was of a lump sum; that factor – which points in the direction of capital – is relevant but not determinative.  Where, as here, an advantage has been obtained by the payment, the nature of that advantage has to be determined to see if it supports the capital analysis, or, if it points in the direction of revenue, how the balance between the competing indicia is to be struck.
69.	Not unnaturally both Mr Thornhill and Mr Grodzinski took us to British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205, and to the well-known dictum of Viscount Cave LC (at pp 213-4):
“... when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.”
70.	In Atherton the company established a pension fund for the benefit of its salaried staff and contributed to that fund, firstly a payment of some £31,000 calculated actuarially as the amount required in order that past years of service should rank for pension, and afterwards made successive yearly payments to the fund.  There was no dispute but that the yearly payments were deductible as revenue expenses.  The issue was whether the £31,000 payment, described in the trust deed establishing the pension fund as forming the nucleus of the pension fund, was capital expenditure.  By a majority of 3:2 the House of Lords held that it was.
71.	In this case, as we have described, no asset of the Appellant has been brought into existence by the payment that was made.  What we have to consider, therefore, is whether what has been brought into existence is an advantage for the enduring benefit of the trade, according to the legal meaning of that phrase.
72.	Mr Grodzinski argued that the Appellant’s case fell squarely within the guidance given by Viscount Cave.  In the same way that the £31,000 payment in Atherton had established the nucleus of the pension fund, so too the payment by the Appellant to the trust company had established the EBT.  The EBT was of a long-term nature; according to its perpetuity period it could go on for 80 years.  If, as we have now found, this was for the benefit of the trade, it was, submitted Mr Grodzinski, an advantage for the enduring benefit of the trade.
73.	Superficially attractive as this argument goes, we do not consider that the question of whether expenditure falls within Viscount Cave’s dictum can be answered by reference to the long-term nature of the advantage alone.  As Lord Cameron said in Carron (in the Court of Session), Viscount Cave’s test is not absolute (at p 64A):
“On that test these observations can be made: (1) it is qualified by the important parenthesis ‘(in the absence of special circumstances leading to an opposite conclusion)’; (2) the word ‘enduring’ has been glossed to mean enduring as a fixed asset endures, and (3) it is not enough that the expenditure has been incurred ‘once and for all’ to determine its capital character.”
The reference to “enduring” meaning enduring as a fixed asset endures is to the judgment of Rowlatt J in Anglo-Persian Oil Co Ltd v Dale 16 TC 253 (at p 262).  There the learned judge made the clear distinction between that analysis of what Viscount Cave had said in Atherton, and a construction of “enduring” as simply meaning something that extends over a number of years.
74.	In Carron a company had been incorporated by charter in 1773.  Its constitution had remained virtually unaltered until it was revised in 1963.  By that time many of its features had become archaic and unsuited to modern conditions, principally among those being a restriction on borrowing powers and certain features that made it difficult to appoint a suitable managing director.  The company incurred expenditure on a number of matters connected with the obtaining of a supplementary charter.  On appeal in relation to the specific cost of obtaining the new charter it was held that, since the engagement of a competent manager and the removal of the restrictions on borrowing facilitated the day to day trading operations of the company, the expenditure was revenue expenditure and accordingly deductible.
75.	From Carron it can be seen that the mere fact that an advantage will endure, in the sense of it being a long-term advantage, is not determinative.  What matters is the nature of the advantage for which the expenditure has been incurred.  That includes the purpose of the expenditure.  In dismissing the Crown’s appeal to the House of Lords in Carron, Lord Reid said (at p 68C-F):
“The main argument for the Crown was that by obtaining the new charter the Company obtained an enduring advantage in the shape of a better administrative structure. Of course they obtained an advantage: companies do not spend money either on capital or income account unless they expect to obtain an advantage. And money spent on income account, for example on durable repairs, may often yield an enduring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the Company. Its true purpose was to facilitate trading by enabling the Company to engage a more competent manager and to borrow money required to finance the Company's traditional trading operations under modern conditions. None of the authorities cited is directly in point, and I think that the most apposite general statement in those authorities is that of Lawrence L.J. in Anglo-Persian Oil Co. Ltd. v Dale  [1932] 1 K.B. 124, at page 141. It "merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched." As the Lord President put it in the present case :
‘The benefit was essentially of a revenue character because the Company became able more easily to finance its day-to-day transactions, and more efficiently to carry on its day-to-day manufacture.’ " 
76.	Where no new asset of the Appellant has been created, what is important is the nature of the advantage, and not the nature of the mechanism whereby the advantage is obtained.  This can be seen from the speech of Lord Guthrie in Carron where he said (at p 70E-G):
“There was in this case nothing in the shape of the acquisition of a capital asset in the sense in which that expression is used in accountancy practice. That it was an advantage was undoubted. But was that of a capital or a revenue nature? It is in this connection that the finding of the Commissioners that the money was expended wholly and exclusively for the purposes of the Company's business is of prime importance. Mr. Phillips, for the Crown, argued that, as the supplementary charter secured a substantial alteration in the Company's structure, and as the constitution was the basis of the Company's undertaking, this expenditure must be of a capital nature. But this, in my view, is to take too narrow a view of the advantages obtained by the Company under the supplementary charter. The charter was not a mere scrap of paper altering the Company's structure. The real value and purpose inherent in the alteration was to facilitate the trading opportunities of the Company, as is evidenced by the Commissioners' findings that it was expended wholly and exclusively for purposes of the Company's trade. It is legitimate, in my view, to consider what the expenditure was intended to effect and the way in which the advantage was to be used ...”
77.	Mr Grodzinski urged us not to concentrate too much on purpose, but rather on whether what was acquired was of an enduring or current nature.  He referred us in particular to the criticism levelled at the special commissioners in Granada Motorway Services by Lord Edmund Davies in the House of Lords (at p 402d) for relying excessively on purpose.  As he said, applying purpose or motive as the sole or principal test must be wrong, as the purpose of any payment will generally be to improve a company’s profits, even a payment for the purchase of an obvious capital asset.  There was, in Granada Motorway Services, an admitted capital asset (a disadvantageous lease), but this does not, in our view, affect the general tenor of what Lord Edmund Davies was saying.  We agree therefore that we should not place undue weight on the Appellant’s purpose in making the payment to the Trustee Company, but we are equally clear that the fact that an advantage is long-term, or even permanent, is not determinative.  As Lord Wilberforce said in Granada Motorway Services (at p 369g), the fact that the benefit obtained is enduring in the sense that it might last for a considerable period (there, 40 years) is not sufficient to make a payment a capital payment.  What matters is whether there is an identifiable asset (see per Lord Wilberforce at p 397f), or an advantage or benefit that endures in the way that fixed capital endures.
78.	In his speech in Carron, Lord Wilberforce contrasted that case with Atherton.  He said (at p 75):
“In British Insulated & Helsby Cables Ltd. v Atherton it is true that the expenditure did not produce a capital asset of the company, such as would appear as such in its balance sheet: but it did produce a permanent and enduring thing-the nucleus of a pension fund-the existence which would continue to give rise to advantages in the running of the company. Given that the company had power to expend its money in order to create the fund, it seems inevitable to regard it in the same way as if it were an asset of the company. Again, as was pointed out by Lord Morris of Both-y-Guest in Strick v Regent Oil Co. Ltd. [1966] A.C. 295, at page 329, an asset may be of a capital nature whether it is of a tangible or of an intangible nature. I respectfully agree, but this does not assist the Solicitor-General's argument. Finally, the Solicitor-General relied for support in his contention upon Mallett v Staveley Coal & Iron Co. Ltd. [1928] 2 K.B. 405, but this only shows that the disposition of a source of liability may be equivalent to the acquisition of source of profit an extension perhaps, but not an exception, to the principle that in some sense or other an asset of a capital nature, tangible or intangible, positive or negative, must be shown to be acquired. If this is correct - and until a case arises which constitutes a true exception I shall continue to think that it is - the present expenditure cannot be brought within the capital class. It procured indeed an advantage - important and not of a transitory nature - but one essentially of a revenue character in that it enabled the management and conduct of the Company's business to be carried on more efficiently.”
79.	From this we derive the principle that for the expenditure to be capital in the Atherton sense it must either produce a capital asset or produce an enduring thing that falls to be regarded in the same way as a capital asset of the company.  We agree in this respect with Mr Thornhill that the true ratio of Atherton can be derived from the speech of Lord Wilberforce in Carron.  The kind of nucleus payment with which Atherton was concerned was derived from the funding by the company of the actuarial value of an estimated deficiency arising by the admission to the pension fund of more senior members of staff.  This could have been achieved by a sum being set aside in the company’s accounts which, it is perfectly clear, would have been a capital asset of the company.  Where instead the company made a once-and-for-all lump sum payment into a separate fund, that advantage was of a nature that fell to be treated as equivalent to a capital asset of the company; accordingly that expenditure was capital in nature.
80.	In P-E Consulting the issue also concerned an employee share scheme.  We have described the facts earlier.  The Court of Appeal took the view, in relation to the capital/revenue question, that the facts of P-E Consulting were closer in all the circumstances to those of Carron than to those of Atherton (see, for example, per Orr LJ at p 328D).  Although the payments in P-E Consulting were annual payments, and were found not to be instalments of capital, it is clear to us that, having regard to the fact that the particular payment in issue in Carron was itself a single payment, this comparison was based on the nature of the advantage obtained, and not the method of payment.
81.	In considering the purposes of the scheme in P-E Consulting, Buckley LJ turned to the findings of fact by the special commissioners that the objects were to give staff an opportunity to purchase a stake in the company and to eliminate outside interference.  He found that both were directly related to the conduct of the company’s trade.  He said (at p 325):
“The first of those two objectives is one intimately connected with the day-to-day operation of the Company's business, for the goodwill of the staff was something which might change or fluctuate from day to day. The advantage to be obtained by giving the staff an incentive to greater effort is one which would depend upon the state of the Company's business from time to time and the state of the employer-employee relations between the Company and its employees from time to time. It was also an objective directly related to the profitability of the Company's business from time to time. The Company was one which in its character depended for the efficient conduct of its trade upon the high qualifications and expertise of its employees. The Company's business was that of business management and industrial consultants, and the value of the services which it provided depended to a very great extent upon the quality and expertise of those whom it employed and, as I think it right to infer, upon these employees being permitted to carry out their functions as management and industrial consultants uninterfered with or uninhibited by interference by any persons who were not as well qualified to deal with the problems which had to be dealt with as they were themselves. It was therefore a case in which the independence as well as the qualifications of the staff - independence, I mean, from inhibiting superior supervision - were very important to the welfare of the trade of the Company, and in that respect it appears to me that the second objective which the Commissioners found to obtain in this case was one directly related to the conduct of the Company's trade.”
82.	After referring to certain passages in the speech of Lord Wilberforce in Carron, in particular that at page 75 which we have already quoted, Buckley LJ said (at p 326G):
“Now, I for my part would say that in the present case the objects of this scheme were to enable this Company's business to be carried on more efficiently; they were directed to improving and maintaining the trading potential of the Company and facilitating its trading to advantage. I would myself think that the present case fell much nearer to the Carron case than to Atherton's case; but once again I would say the case must be considered on its own facts and not, I think, be decided by reference to other cases with similar but not identical facts as binding authority. On the facts of this particular case I have reached the conclusion that the learned Judge was right in upholding the Commissioners in the view that this was an expenditure of a revenue nature.”
83.	It is of course the case that P-E Consulting was different from the instant appeal in one material respect, namely that the payments in that case were annual payments and not a lump sum.  That factor was clearly one that played an important part in the decision on the facts of P-E Consulting.  Lord Denning (at p 321) referred to both the purpose of the payments and the fact that those payments were annual payments in equating them more to the annual payments in Atherton (accepted as revenue in nature) than the nucleus fund (capital).  Buckley LJ likewise contrasted the annual payments in P-E Consulting with the single payment in Atherton.  He said (at p 324H):
“In the first place, whereas the payment in question in Atherton's case was a single payment, we are here concerned with a series of payments being made annually under the covenant contained in the trust deed. No one of those payments was in itself sufficient to achieve the object of the scheme incorporated in the trust deed. The aggregate of those payments was unpredictable. The payments year by year were to be calculated by reference to the fair value for the time being of the shares in the Company, which might vary year by year, and so it would be impossible at any stage to say what moneys would have to be contributed by the Company in the future in order to achieve the objective of buying 40 per cent. of the shares of the Company at their fair value. Moreover, the Company could under the trust deed at any time have discontinued these contributions or brought the whole scheme to an end. It is not a case in which the payments can be regarded as instalments of a specified purchase price.”
84.	Taking all the facts and circumstances of this case into consideration, we are of the view that, like P-E Consulting before it, this case has more in common with Carron than it does with Atherton.  What the Appellant created here was a constitutional structure designed to perpetuate the structural efficiency of the former Pensions Trust Company arrangement.  It did this, as we have found, wholly and exclusively for the purposes of its trade.  It is not possible to distinguish that purpose from the equivalent purpose in P-E Consulting on the ground that the management consultants in that case were highly qualified or expert.  The Appellant relied upon the loyalty of its workforce at all levels in the same way.
85.	No asset of the Appellant was created, nor was the expenditure related to any existing asset of the Appellant.  There was an advantage to the Appellant and that advantage was one that extended, or could extend, over a lengthy period; that was the intention of the Appellant.  But unlike the nucleus of the pension fund in Atherton, we do not consider that the advantage was such as to be regarded as enduring in the same way as if it were a fixed asset of the Appellant, which is the proper test.  The expenditure enabled the Trustee Company to acquire an asset, and that asset was intended to be retained by the Trustee Company for the long term, but that was not an asset of the Appellant, nor could it be regarded in the same way as such an asset.  The advantage that the Appellant obtained for its payment was in establishing a structure for the welfare of its employees. This facilitated the day-to-day operations of the Appellant and the payment was accordingly of a revenue nature.
86.	While we agree with Mr Grodzinski that the lump sum payment in this case has nothing in common with the attributes of the payments in P-E Consulting as described by Buckley LJ (at p 324H – 325A), this does not deflect us from our conclusion that the payment here is revenue in nature and not capital.  The lump sum character of the payment is one of the indicia that we have to weigh in the balance in this case.  We have decided that it cannot outweigh the conclusion we have reached that the advantage to the Appellant is not one that endures in the way that a fixed asset endures.  We regard this conclusion as consistent with the authorities, going back to Viscount Cave in Atherton.  The expenditure must not only be once and for all (although this does not preclude instalment payments), it must also be with a view to bringing into existence an asset or advantage for the enduring benefit of a trade.  The absence of an advantage of a fixed asset character in this case, as we have found, means that the second part of this test is not met.  The fact that the payment was made once and for all cannot of itself impress the payment with the character of capital.
87.	Accordingly, for these reasons, we find that the payment by the Appellant to the Trustee Company was a revenue, and not a capital, payment.
Issue (3) Section 43(11) FA 1989 – potential emoluments
88.	By virtue of s 43 FA 1989, “relevant emoluments” may only be deducted from taxable profits if they are paid within nine months of the end of the accounting period in which the deduction is claimed.  “Potential emoluments” are to be treated in the same way as relevant emoluments.  No emoluments were paid from the funds contributed by the Appellant to the Trustee Company during the relevant period.  Accordingly, if the sum of £3m paid by the Appellant is “potential emoluments”, the payment will not be capable of being deducted in computing the Appellant’s taxable profits for the accounting period ended 31 December 1997.
89.	The material parts of s 43, as applicable at the material time, are as follows:
“(1)  Subsection (2) below applies where-
(a) a calculation is made of profits or gains which are to be charged under Schedule D and are for a period of account ending after 5th April 1989,
(b) relevant emoluments would (apart from that subsection) be deducted in making the calculation, and
(c) the emoluments are not paid before the end of the period of nine months beginning with the end of that period of account.
(2)  The emoluments-
(a) shall not be deducted in making the calculation mentioned in subsection (1)(a) above, but
(b) shall be deducted in calculating profits or gains which are to be charged under Schedule D and are for the period of account in which the emoluments are paid.
…
(11)  This section applies in relation to potential emoluments as it applies to relevant emoluments, and for this purpose-
(a) potential emoluments are amounts or benefits reserved in the accounts of  an employer, or held by an intermediary, with a view to their becoming relevant emoluments;
(b) potential emoluments are paid when they become relevant emoluments which are paid.”
It is common ground that the Trustee Company is an intermediary for the purpose of s 43(11).  The sole question is whether the relevant amounts or benefits were held “with a view to their becoming relevant emoluments”.
90.	This question, also in the context of an employee benefit trust, was addressed in Macdonald v Dextra Accessories Ltd [2004] STC 339.  In that case the trust in question was a fully discretionary trust under which the class of beneficiaries included present and future employees of participating companies, their spouses, co-habitees, children and dependants.  The companies’ claims to deduct payments to the trust were upheld by the special commissioners on the basis that the use of the funds to pay emoluments was not the only purpose of the contributing companies, and by Neuberger J in the High Court on the ground that the payment of emoluments had not been the principal or dominant intention of the trust on its terms.
91.	Each of these approaches was rejected by the Court of Appeal and the House of Lords.  In the House, Lord Hoffman (with whom all their lordships agreed), agreeing with the Court of Appeal, largely for the reasons given by Jonathan Parker LJ, held that funds are held with a view to becoming relevant emoluments if they are held on terms which allow a realistic possibility that they would become relevant emoluments.  In that case, in the ordinary use of language, the whole of the funds were potential emoluments; they could be used to pay emoluments (see per Lord Hoffman at [17], [18]).
92.	This question must be answered solely by reference to the terms of the trust deed, construed in the light of relevant background.  The extent of the relevant background to be considered was one of the issues before the special commissioners in Sempra Metals Ltd v Revenue and Customs Commissioners [2008] STC (SCD), another case on s 43(11) featuring an employee benefit trust.  In that case Mr Thornhill for the taxpayer argued that the wider background, including the meetings before the trusts were established, ought to be considered.  He sought to distinguish Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98, where Lord Hoffman had enumerated the principles of construction of documents, including the principle that relevant background does not include the previous negotiations of the parties and their declarations of subjective intent.  That argument was rejected by the special commissioners.
93.	Before us Mr Thornhill argued that the approach of the special commissioners in Sempra had, in the circumstances of this case, effectively been superseded by certain observations made by Briggs J in Breakspear v Ackland [2008] Ch 32.  That case is far removed on its facts from this appeal, but it concerned a non-binding letter of wishes and whether such a letter should be disclosed in the context of proceedings for the court’s sanction for a scheme of distribution of the trust fund.  In that context it was held that the wish document was a key document to be taken into account by the trustees and relevant to the court’s approval of the scheme.  In the course of his judgment Briggs J referred (at [61]) to the fact that particular wish letters may contain valuable background information (according to the principles of Investors Compensation Scheme) to the construction of the trust deed itself.
94.	We do not consider that Breakspear v Ackland can assist the Appellant in the circumstances of this case.  Mr Thornhill argued that in these very special circumstances the late Mr Dove should effectively be regarded as the settlor of the EBT, and the Blue Book effectively as his letter of wishes.  We do not accept that argument.  Notwithstanding that both Mr Wilton and Mr Sherlock viewed the Blue Book as a trust deed and that having signed it they regarded it as binding on them and operated in accordance with its provisions, on the facts the late Mr Dove was not the settlor of the EBT, nor is it possible for him to be regarded as such.  The Blue Book can be described as an expression of the wishes of the late Mr Dove (and the other donors) with regard to the 1954 gift of shares in the Appellant to the Pensions Trust Company, but it cannot be regarded as a letter of wishes in relation to the EBT.  We do not accept Breakspear v Ackland as affording any guidance on the proper approach to the construction of the trust deed in the circumstances of this case.
95.	The proper approach in our view is derived from the speech of Lord Hoffman in Investors Compensation Scheme where, in summarising the principles upon which contractual documents are to be construed, and which we consider material for these purposes, he said (at pp 912-3):
“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. 
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.”
On this basis, although the Blue Book cannot in our view be described as a letter of wishes in relation to the EBT, it is, we consider, part of the relevant background to the construction of the EBT, which includes the philosophy and philanthropic vision of Herbert Dove as encapsulated in the Blue Book.
96.	With these principles in mind we turn to consider the trust deed.  We look first at the effect of the trusts that will arise at the end of the trust period in default of any appointment by the trustees.  At that time the trust fund is directed to be held for the J T Dove Ltd Pension Fund or any pension fund of the Appellant that has assumed the greatest part of the assets and liabilities of that Pension Fund, or failing that absolutely for the beneficiaries then living, and ultimately in default for charity.  Mr Grodzinski argued that unless the legislation on self interest were to change it would not be possible for the trust fund, comprising shares in the Appellant, to pass to the pension fund.  To the extent that the trust fund would then be held for the then employees absolutely, there would be emoluments, and accordingly there was a realistic possibility that the shares in the Appellant would become relevant emoluments.
97.	We do not agree that ultimate trusts that could only apply prospectively at the end of a trust period that could last 80 years can be regarded as a realistic possibility at the inception of the trust, which is the relevant time when this issue falls to be considered.  Whilst even at a distance of 80 years it can be said that it is theoretically possible for the trust fund to end up in the hands of the employees, that depends on what happens in relation to the pension fund, and so much can happen in that period, including by way of legislative changes and exercise by the trustees of their powers, that nothing, at that distance, can be regarded as a realistic possibility.  After all, the changes in the pensions investment rules that gave rise to the establishment of the EBT itself could not have been foreseen when the original Pensions Trust Company was established in 1954.  Only if there were to be a complete failure of the gift to the pension fund, or a successor pension fund, could employees (assuming there are some) have any entitlement at all.  The interests of the employees in this respect are too remote, and we do not regard there as being a realistic possibility that the trust fund would become relevant emoluments at the end of the trust period.
98.	We next turn to the dispositive powers of appointment of the trustees over the capital of the trust fund which are found in clause 5 of the trust deed.  The trustees can in their absolute discretion pay or apply or transfer to the benefit of any beneficiary, including the employees of the Appellant, the whole or any part of the trust fund; they can grant options over shares in the Appellant (or shares replacing those shares) to any beneficiary; and they can enter into any agreement with the Appellant or a subsidiary to enable beneficiaries to acquire such shares or options over such shares.
99.	Viewed on its own, clause 5 could in our view only be construed as giving the trustees the same unfettered discretion as was found on the facts to have existed in Dextra.  In that case the employee benefit trust provided that every discretion should be an absolute and uncontrolled discretion, although the trustees were entitled to take into account the recommendations of the settlor company or other group companies (see per Lord Hoffman at [9]).  Here clause 8 of the trust deed (leaving aside for the moment that it is subject to clause 9) contains similar wide powers.  In those circumstances this case would in our view be indistinguishable from Dextra, and we would be bound to hold that there was a realistic possibility that the trust fund would be used to pay emoluments.
100.	There is however a difference in the trust deed in this appeal from that in Dextra.  Mr Thornhill pointed us to clause 9 which provides certain restrictions on the transfers of shares by the trustees in the exercise of their discretion.  It allows such a transfer only in two circumstances, firstly (clause 9.1.1) in accordance with any agreement entered into by the trustees with the Appellant under the powers conferred by clause 5.3, and secondly (clause 9.1.2) where the transfer has been sanctioned at separate meetings of all of the trustees, directors of the Appellant and employees.
101.	Taking the second of these circumstances first, we ask ourselves the question: on the proper construction of clause 9.1.2, applying the principles we have described, is that provision a real and substantial fetter on the exercise of the trustees’ discretion under clause 5?  In our view this is a valid enquiry, because we consider it is not sufficient that there be a mere theoretical possibility that the trust fund might become relevant emoluments; the need for the possibility to be “realistic” involves a value judgement as to the extent of the trustees’ discretion.  The reference by Lord Hoffman in Dextra (at [18]) to the fact that the whole of the funds could be used to pay emoluments must be regarded in the same light.  The possibility must not be merely theoretical; it must be realistic.  At paragraph [19] of his speech Lord Hoffman referred to the need for the words “with a view to their becoming relevant emoluments” to bear the same meaning in relation to reserves in the accounts of an employer as they do for amounts held by an intermediary.  He said:
“What, therefore, are potential emoluments reserved in the account which are properly deductible in computing the profits of the employer (sub-s (1)(b)) but are not already relevant emoluments? Mr Thornhill QC, who appeared for the taxpayers, said that relevant emoluments were contractually or constructively payable, whereas a reserve should properly be made for potential emoluments because they are payable only upon the occurrence of a contingency; for example, a bonus payable if a certain profit is achieved. It seems to me, however, that if that is a correct description of potential emoluments for which a reserve has been made, it would be equally true to say that amounts held by an intermediary were for the payment of emoluments upon a contingency, namely the exercise of a discretion by the trustees. In both cases, the sums in question may or may not be used to pay emoluments but there is at least a realistic possibility that they will be.”
102.	Where payments depend upon the exercise of a discretion it is therefore relevant to consider the nature of that discretion, and consequently the extent of the contingency affecting the payment of emoluments.  What must be ascertained is the extent to which the discretion is qualified or fettered in order to determine whether the possibility of the funds being used to pay relevant emoluments is a realistic one.
103.	We ignore for the moment clause 9.1.1, and focus solely on clause 9.1.2.  If that had been the only permissible way in which the Appellant’s shares could have been transferred by the trustees, then construing this provision from the perspective of the reasonable man with the relevant background knowledge, we would have decided that clause 9 was a real and substantial fetter on the exercise of the trustees’ discretion in this respect.  We do not accept the argument of Mr Grodzinski that clause 5 is not subject to clause 9 because it is not expressed to be so subject.  Clause 9 is clear on its face to be of general application, and the fact that clause 8, which marks out the extent of the trustees’ powers, is expressly subject to clause 9 demonstrates conclusively that clause 9 restricts the trustees’ discretions under clause 5.
104.	The reasonable man must be assumed to have all the background knowledge reasonably available to the parties at the time of the establishment of the EBT, other than the negotiations of the parties and their declarations of subjective intent.  What has happened – or not happened – since that time is not material to the construction of the deed.  Nor are the views of the parties as to how the trustees’ powers are likely to be exercised.  Nevertheless, the reasonable observer can be assumed to have knowledge of the history, including the philanthropic vision of Herbert Dove and the encapsulation of his philosophy in the Blue Book.  Taking all those matters into consideration, and having regard only to clause 9.1.2, we consider that requirement for transfers of shares to be approved by a series of meetings of the trustees, directors and employees is not mere machinery or an administrative procedure but is a real inhibition intended to preserve the integrity of the independent holding of shares in the Appellant as encapsulated in the Blue Book.
105.	Mr Grodzinski argued that the Blue Book did not contain any particular prohibition on the transfer of shares to employees.  He pointed to clause 34 which required meetings to sanction transfers only in the case of amalgamations.  However, we consider that the Blue Book did impose a general restriction on the transfer of shares in the Appellant.  Although clause 19 is expressed to relate to loans, its terms in our view fall to be construed as having wider application.  There was, in our view, under clause 19 a general prohibition on the transfer or issue of ordinary shares in the Appellant.  This is apparent from the express relaxation of this rule only in the case of amalgamation provided for by clause 34.  An amalgamation would not ordinarily be associated with a mere lending transaction; accordingly the prohibition on transfers or issues of shares must have had a wider context than financing transactions alone.
106.	Absent clause 9.1.1, therefore, we would have decided that the effect of clause 9, construed in the light of the relevant background, was to fetter the exercise of the trustees’ discretion to transfer shares to such an extent that there was no realistic possibility of those shares becoming relevant emoluments.  If clause 9 had operated as a restriction on the whole of the trustees’ discretionary powers under clause 5, then in our view the only realistic possibility would have been that the benefits of the EBT would be provided by retention of the shares of the Appellant and not by any transfer of shares or payment of the proceeds of sale of those shares to employees.
107.	However, what clause 9.1.1 does is effectively to disapply the fetter on the exercise of the trustees’ discretion that is provided by clause 9.1.2, in a case where shares are transferred in accordance with an agreement entered into by the trustees with the Appellant under clause 5.3 of the trust deed.  Clause 9 expressly provides no restriction in that case, and in those circumstances the matter falls to be determined on the construction of clause 5.3.  As to this, in our view, applying the principles of Dextra, the answer is plain.  Dextra confines the enquiry to the construction of the Trust Deed, in the context of the relevant background.  So construed, Clause 5.3 is an unfettered and absolute discretion on the part of the trustees to enter into an agreement with the Appellant and to transfer shares to employees pursuant to or in furtherance of that agreement, whether or not pursuant to the exercise of options granted by the Appellant. 
108.	We do not regard the requirement for an agreement to be entered into (and the fact that there is no such agreement and never has been) operates as a fetter on the trustees’ discretion in this respect.  Clause 9.1.2, and the requirement for approvals, which we consider in the circumstances of this case can constitute a fetter, does not apply in a case where transfers of shares are made pursuant to such an agreement.  We would take this view whether or not the Trustee Company controlled the Appellant, but it must also be said that such control leaves us in no doubt that the trustees could procure that the Appellant would enter into an agreement, if they were to decide to exercise their discretion in this way.  Furthermore, such a transfer of shares, being made under the EBT, would not be subject to the powers of the Appellant’s directors under the articles of association to refuse to register a transfer.
109.	In contrast to the question of the extent of the fetter provided by the requirement for approvals under clause 9.1.2, where we consider that the background is material to the construction of that provision, we do not consider that the background to the establishment of the EBT can affect the construction of the plain words of clause 5.3 and clause 9.1.1.  In our view the clear intention to be evinced from these provisions is that the trustees were to have absolute and unfettered discretion to enter into an agreement with the Appellant for the purpose of enabling beneficiaries (including employees) to acquire or take up shares or options over shares, and of transferring shares to those beneficiaries (including employees) on the exercise of options or otherwise.
110.	Whilst, having regard to all the evidence, we are satisfied that the intention of the trustees was, and remains, to perpetuate the Blue Book principles that there should be no transfers of shares, including to employees, that is not reflected in the powers of the trustees that were included in the trust deed of the EBT.  Transfers of shares under an agreement entered into by virtue of clause 5.3 are permitted without any restriction.  The Blue Book principles have expressly not been translated in this respect into the terms of the EBT.  The inclusion of clause 5.3, and the intended absence, by virtue of clause 9.1.1, of any restriction on the exercise of the trustees’ discretion in that respect, opened the door to the realistic possibility that shares in the Appellant would be transferred to employees.  The knowledge of the reasonable observer as to the history of the late Mr Dove’s philanthropy and his vision for the maintenance of the independence of the Appellant through the holding in perpetuity of the shares in the Appellant, would not in our view assist in any way the construction of clause 5.3 of the trust deed, uninhibited as it is by clause 9.  Where, as here, the trust provides different rules to those which operated under the Blue Book, the meaning of those different rules cannot be construed so as to accord with the earlier philosophy if that construction would be result in the new provisions effectively being re-written.  In our view to construe clause 5.3 and clause 9.1.1 otherwise than as providing the trustees with an absolute and unfettered discretion in that respect would be to do just that.  The intentions of the trustees and the way they have exercised their powers since the EBT was established are not relevant considerations.  As Lord Hoffmann said in Dextra (at [15]):
"[The Trustees'] only intention would be to act (if at all) within the powers conferred by the deed.  So the question must be answered solely by reference to the terms of the deed, construed no doubt in the light of any relevant background."
111.	The expression "with a view to" in s 43(11)(a) is concerned with what may happen in the future, rather than with reasons or motives.  We find that the trust deed itself contemplates a transfer of shares, and in clause 9.1.1 such a transfer is contemplated in an unfettered manner.  This provision was incorporated into the trust deed itself in the full knowledge of what the Blue Book had hitherto said, but nevertheless those establishing the new trust had evidently thought fit to include this express power to transfer shares.
112.	It would be wrong in our view to construe such an express power as being somehow inhibited by an earlier document and a former underlying philosophy that could have been preserved by the framers of the EBT, but expressly were not.  We accept that the directors of the Trustee Company consider themselves as continuing to be bound by the Blue Book and what it stood for, but the powers of the Trustee Company in this respect now emanate from the EBT trust deed, and it is that we are required to construe.  The fact that the directors may intend that the Trustee Company exercises its powers under that deed so as to retain rather than transfer the shares is not a factor that can affect the construction of the deed itself.
113.	On this basis we have concluded that, properly construing the relevant provisions of the trust deed, the trustees have an absolute and unfettered discretion to enter into an agreement with the Appellant and to transfer shares to employees pursuant to that agreement.  This is therefore in our view one of the range of realistic possibilities available to the trustees and accordingly, on the authority of Dextra, we are bound to find that the shares in the Appellant, and accordingly the payment made by the Appellant to the Trustee Company that was used to acquire those shares, were amounts or benefits held by the trustees “with a view to” their becoming relevant emoluments within the meaning of s 43(11) FA 1989 and are therefore “potential emoluments” for the purpose of section 43.
Summary of conclusions
114.	In summary our conclusions on the three issues before us are:
(1)	On Issue (1), the payment of £3 million by the Appellant to the Trustee Company was wholly and exclusively for the purposes of the Appellant’s trade;
(2)	On Issue (2), the payment by the Appellant to the Trustee Company was a revenue, and not a capital, payment; and
(3)	On Issue (3), that payment was a “potential emolument” within the meaning of s 43(11) FA 1989.
Decision
115.	Although the Appellant has succeeded on two out of the three issues before us, our conclusion on the third issue that the payment was a “potential emolument” within the meaning of s 43 FA 1989 means that this appeal must be dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 1 December 2010