DECISION
1.
The Appellant, Boyer Allan Investment Services Limited (“Boyer Allan”)
appeals against discovery assessments made by HMRC under paragraph 41 of
Schedule 18 to the Finance Act 1998 (“FA 1998”) in relation to two accounting
periods ended 30 April 2000 (“the 2000 assessment”) and 30 April 2001 (“the
2001 assessment”).
2.
The appeal arises out of a number of payments made by Boyer Allan to the
trustees of a discretionary trust for the benefit of its employees (“the
employee benefit trust” or “the EBT”) in the accounting periods in question.
In its corporation tax returns for those periods Boyer Allan deducted those
payments in computing its trading profits under Schedule D, Case 1.
3.
As has subsequently transpired, and it is common ground, these
deductions were not due as a matter of law. This is the consequence of the
judgment, first of all in the Court of Appeal, and later in the House of Lords,
in Macdonald v Dextra Accessories Ltd [2004] STC 339 (CA); [2005] STC 1111 (HL). The trust deed of the EBT conferred on the trustees an absolute and
uncontrolled discretionary power to make payments out of the trust fund to
employees, which in most circumstances would be emoluments in the hands of the
employees. Accordingly, Boyer Allan’s payments to the EBT were held by the
trustees on terms which allowed a realistic possibility that they would be paid
out as emoluments to employees, and so the payments were “potential emoluments”
within s 43(11) of the Finance Act 1989.
4.
As potential emoluments, the payments to the EBT were not deductible in
the period of account in which they were paid (or would otherwise have been
deductible), unless payments were made as emoluments within nine months of the
end of the period, or if not, unless and until payments of emoluments were made
(s 43(1), (2)).
5.
No enquiry was opened into Boyer Allan’s returns for either of the
accounting periods in question. Before July 2005 HMRC discovered that as
regards each of those periods the amounts paid to the EBT had not been paid out
in their entirety as emoluments before the expiry of the applicable nine-month
period. On 22 July 2005, under FA 1998, Sch 18, para 41, HMRC issued the
discovery assessment for each period on the basis that in each case an amount
which ought to have been assessed to tax had not been assessed and/or an
assessment to tax had become insufficient and/or a relief had been given which
had become excessive.
The appeals
6.
The sole issue on which we are asked to make a determination at this
stage is whether the 2000 assessment is invalidated by the restriction
contained in FA 1998, Sch 18, para 45, on the ground that (a) the insufficiency
of Boyer Allan’s self-assessment or the excessive relief given is attributable
to a mistake in the 2000 return as to the basis on which Boyer Allan’s
liability ought to have been computed, and (b) the return was in fact made on
the basis or in accordance with the practice generally prevailing at the time
when it was made.
7.
Although that is the scope of this decision, it is not the only ground
of appeal. There is also an issue as to the extent deductions should be
allowed in respect of each of the periods by reference to payments that were
made within the relevant nine-month period. This is a matter which might be
resolved between the parties, but if it is not, then the parties are at liberty
to return to the Tribunal for a determination. One particular issue is the
extent to which, if at all, a deduction should be given for employer’s national
insurance contributions (NICs) in such a case. Other issues may also arise
depending on our determination on the para 45 issue.
Background
8.
By way of background, we set out below the statement of agreed facts
helpfully provided to us by the parties.
Statement of Facts
1. The Company
1.1 Boyer Allan Investment Services Limited (“the
Company”) was incorporated on 20 February 1998 in England and Wales with company number 03514279 and with the name Boyer Allan Investment Management Limited. The
business of the Company was to provide the service of investment fund
management, in return for fees consisting of management fees and performance
related fees.
1.2 The current sole shareholder of the Company is:
Boyer Allan Holding Company Limited
1.3 The shareholders of the Company at the time its
Corporation Tax returns for the accounting periods ended 30 April 2000 and 2001
were submitted were:
2000 Nicholas Timothy Allan; and
Jonathan Mark Edward Boyer
2001 Nicholas Timothy Allan;
Jonathan Mark Edward Boyer;
Richard William Whittall;
Alexander Griffin;
Guy Commaille; and
Andrew Tay
1.4 The current directors of the
Company are:
Nicholas Allan
Andrew Tay
1.5 The directors of the Company at the time its Corporation
Tax returns for the accounting periods ended 30 April 2000 and 2001 were
submitted were:
2000 Nicholas
Allan;
Jonathan Mark Edward Boyer;
and
Richard William Whittall
2001 Nicholas
Allan;
Jonathan Mark Edward Boyer;
and
Richard William Whittall
1.6 The Company’s accounting periods end on 30 April in
each year. In accordance with Schedule 18 Finance Act 1998 the Company is
required to submit its Corporation Tax return for each accounting period within
12 months of the end of it and pay such tax as may be due.
2. The Employee Benefit Trust (“the Trust”)
2.1 The Trust was settled by the Company on 28 January
2000, to be known as the “Boyer Allan Investment Management Limited Employee
Benefit Trust”. The trustees are Schroder Cayman Bank and Trust Company
Limited, whose registered office is at PO Box 1020 GT, Harbour Centre, Grand
Cayman, British West Indies and Schroder Trust A.G. of 8 Rue d’Italie, 1204 Geneva, Switzerland.
2.2 The sum contributed to the Trust on the date it was
settled was One Hundred Pounds (£100).
2.3 The proper law of the Trust is that of the Cayman Islands (clause 13). The trustees have power to change the proper law of the
settlement to that of any jurisdiction they see fit, so long as that
jurisdiction recognises the validity of the trusts and the interests of the
beneficiaries. The trustees have not to date exercised that power.
2.4 The Trust has a “trust period” defined as 150 years
from the date of the settlement or ending on such earlier date as the trustees
may specify by deed.
2.5 The trustees have the powers associated with a
discretionary settlement: power to accumulate income, power to appoint capital
and income for the benefit of any beneficiary as they think fit and power to
alter the class of beneficiaries. Subject thereto, the Trust Fund (as defined)
is to be held for charitable purposes.
2.6 The beneficiaries of the Trust are defined as the
employees of the company and the wives, husbands, widows, widowers, children or
step-children and remoter issue of the employees.
2.7 Certain individuals are defined as being excluded
from potential benefit by reference to the provisions in Section 13(2) and
Section 13(3) Inheritance Tax Act 1984 ("Excluded Person").
3. Contributions to the Trust
Contributions to the Trust were made on the following
dates in the following amounts:
|
Date
|
Amount
|
Relevant
Accounting Period
|
|
31 January 2000
|
£23,172,000*
|
1999-2000
|
|
27 March 2001
|
£750,000
|
2000-2001
|
* This is the sterling amount at which a $38 million contribution
on that day was recognised in the company’s accounts.
4. Payments out of the Trust
4.1 The trustees of the Trust exercised their discretion
to provide benefits for certain employee beneficiaries in 2000, 2001 and 2002
as follows.
|
Beneficiary
|
Date
|
Payment (net of
PAYE/E’ees NI)
|
|
N Allan
|
26 October 2000
|
£1,200,000
|
|
Sarah J S Macaulay
|
2 February 2001
|
£2,100
|
|
R Usher Smith
|
2 February 2001
|
£1,587
|
|
Jacqueline Booker
|
2 February 2001
|
£18,000
|
|
Keiko Hesketh
|
2 February 2001
|
£22,800
|
|
G Commaille
|
2 February 2001
|
£60,000
|
|
A H H Griffin
|
2 February 2001
|
£90,000
|
|
Robbi Mathie
|
2 February 2001
|
£22,800
|
|
N Allan
|
28 June 2001
|
£450,000
|
|
N Allan
|
1 February 2002
|
£300,000
|
|
J Boyer
|
1 February 2002
|
£500,000
|
|
G Commaille
|
1 February 2002
|
£27,000
|
|
R Mathie
|
1 February 2002
|
£21,720
|
|
K Hesketh
|
1 February 2002
|
£12,600
|
|
J Booker
|
1 February 2002
|
£16,500
|
|
G Hunter
|
1 February 2002
|
£3,066
|
The parties’ respective positions as to the accounting
period in which the relevant emoluments paid are allowable deductions S43(1) and
(2) FA 1989 and amount allowable are set out in the attached table [Not
included in present print].
4.2 Income Tax and employer’s and employees’ National
Insurance Contributions in relation to the payments were duly accounted for by
the Company on the due dates under the Pay as You Earn Regulations.
4.3 The trustee[s] transferred funds to the Company to
reimburse it for the Income Tax and employees’ national insurance contribution
liabilities of the Beneficiaries as well as the Company’s employer’s national
insurance contribution liabilities, referred to in paragraph 4.2, as follows:
9 November 2000 £1,044,000
9 February 2001 £188,877
3 July 2001 £389,250
11 February 2002 £761,843
5. The Company’s Corporation Tax Returns
5.1 The Company’s corporation tax return for the
accounting period ended on 30 April 2000 was signed and dated by the Company on
24 January 2001 and submitted to HM Revenue and Customs
by a firm known as RSM Robson Rhodes, the company’s then auditors and tax
advisers, together with a copy of the company’s audited report and financial
statements for the relevant period of account. Receipt of the return and
accompanying documents was acknowledged by HM Revenue and Customs by letter
dated 7 February 2001.
5.2 The submission of the Company’s accounts with its
corporation tax self assessment was in compliance with Paragraph 11 Schedule 18
Finance Act 1998. The due filing date for this return was 30 April 2001
(Paragraph 14 Schedule 18 Finance Act 1998). Note 2 to the accounts, at page
9, contains a list of the items charged in arriving at the company’s operating
profit, including “Contributions to employee benefit trust” amounting to
£23,172,000. In the computation submitted with the Company’s corporation tax
return the contribution to the Trust was included in the sum of £24,298,177
listed as “Salaries” under “Administration Expenses”. The contribution to the Trust
was treated as a deductible expense for corporation tax purposes.
5.3 The Company’s corporation tax return for the accounting
period ended on 30 April 2001 was submitted by Ernst & Young, the company’s
then auditors and tax advisers on 30 April 2002 together with a copy of the
company’s audited report and financial statements for the relevant period of
account. The due filing date for this return was 30 April 2002. Note 3 to the
accounts, at page 9, contains a list of the items charged in arriving at the
company’s operating profit, including “Contributions to employee benefit trust”
amounting to £750,000. In the computation submitted with the Company’s
corporation tax return the contribution to the EBT was shown as a component of
Staff costs.
5.4 Pursuant to Paragraph 24 Schedule 18 Finance Act
1998 HM Revenue and Customs may enquire into a company tax return on giving notice
to the company of their intention to do so within the time allowed. At the
material times the time allowed in that paragraph was 12 months from the filing
date for the company tax return, provided that the return was submitted on or
before the filing date. As such (1) HM Revenue and Customs were obliged to
provide any notice of enquiry into the return for the accounting period ended
on 30 April 2000 on or before 30 April 2002; and (2) HM Revenue and Customs
were obliged to provide any notice of enquiry into the return for the
accounting period ended on 30 April 2001 on or before 31 July 2003. No such
notice was given to the Company in respect of those periods.
5.5 The Company’s corporation tax return for the
accounting period ended on 30 April 2002 was submitted by Ernst & Young on
15 April 2003 together with a copy of the company’s audited report and
financial statements for the relevant period of account. The due filing date
for this return was 30 April 2003. Note 3 to the accounts, at page 9, contains
a list of the items charged in arriving at the Company’s operating profit,
including “Contributions to employee benefit trust” amounting to £1,050,000.
5.6 By letter dated 29 January 2004 the Company’s then
Inspector of Taxes, a Mr D.D. Ryan, gave notice to the Company that he intended
to enquire into its tax return for the accounting period ended on 30 April
2002. This notice was validly given in relation to the period of account in
question, having been served within 12 months of the filing date for the tax
return on 30 April 2003.
5.7 By a letter dated 16 March 2004 Ernst & Young
wrote to HM Revenue and Customs enclosing details of certain payments that had
been made by the trustees from the Trust. That letter was accompanied by a
copy of the Trust Deed and certain board minutes recording the decision to
establish the Trust.
5.8 By a letter dated 29 April 2004 HM Revenue and
Customs wrote to Ernst & Young and commented that from the details provided
by Ernst & Young on 16 March 2004 as follows:
“I note that sums have been paid out and PAYE and
NIC operated on these. The sums paid out in 2002 are in excess of the sums
paid in, are the amounts paid in, in this period, the ones paid out and from
which period would you say the balance came? There are significant amounts
still held within the funds that are part of the EBT contributions. I think it
is worth stating that if the Dextra decision is upheld ie that S43
always applied to such contributions, that the previous years in which
contributions were made will have to take account of this. If S43 applies the
accounts would be correct, but computational adjustment should have been made
for any amount not paid within 9 months of the end of the accounting period
and, in effect, the returns would be incorrect for those periods.”
5.9 None of the accounts, computations or returns
submitted to HM Revenue and Customs for any of the periods 30/4/00 or 30/04/01
disclosed amounts that had not been paid out of the EBT.
5.10 By a letter dated 22 July 2005 the Company’s
Inspector gave notice to it that he had completed his enquiries into the
company’s tax return for the period ended 30 April 2002. In relation to the
company’s claim to corporation tax relief in respect of its contribution to the
Trust, he referred to the decision in Macdonald v Dextra Accessories Limited
(decision of the House of Lords dated 7 July 2005, reported at [2005] 4 All ER 107) and suggested that deductions in respect of contributions to the
Trust should be restricted. He also proposed to issue discovery assessments in
relation to the accounting periods ended 30 April 2000 and 2001 under Paragraph
41(1) Schedule 18 Finance Act 1998.
5.11 An assessment was issued on 22 July 2005 by HM
Revenue and Customs to recover tax of £8,439,315 and accrued interest of
£2,423,461 in respect of the accounting period to 30 April 2000.
5.12 A further assessment was issued by HM Revenue and
Customs on 22 July 2005 to recover tax of £515,837.10 and accrued interest of
£67,697.02 in respect of the accounting period to 30 April 2001(…).
[End of Statement of Facts]
9.
In addition to this agreed statement of facts, we heard evidence from a
number of witnesses, primarily in relation to the question of what practice, if
any, was, at the relevant time, adopted by taxpayers, on the one hand, and HMRC
on the other, in relation to the deductibility of payments into employee
benefit trusts of the nature of the EBT. We were also provided with a number
of bundles of documents. From this evidence we shall make further findings of
fact. But we turn first to the law and the issue of construction of the phrase
“on the basis or in accordance with the practice generally prevailing”, as it
appears in FA 1998, Sch 18, para 45.
The law
10.
Although this appeal is concerned with FA 1998, Sch 18, para 45, the
underlying tax assessments were made by virtue of FA 1989, s 43, and we shall
be referring to it throughout this decision. We therefore set that section out
in full:
“43 Schedule D: computation
(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.
(3) Subsections (4) and (5) below apply where—
(a) a calculation such as is mentioned
in subsection (1)(a)
above is made,
(b) the calculation is made before the
end of the period of nine months beginning with the end of the period of
account concerned,
(c) relevant emoluments would (apart
from subsection (2) above) be deducted in making the calculation, and
(d) the emoluments have not been paid
when the calculation is made.
(4) It shall be assumed for the purpose of making
the calculation that the emoluments will not be paid before the end of that
period of nine months.
(5) But the calculation shall be adjusted if—
(a) the emoluments are paid after the
calculation is made but before the end of that period of nine months,
(b) a claim to adjust the calculation is
made to the inspector, and
(c) the claim is made before the end of
the period of two years beginning with the end of the period of account
concerned.
...
(8) In a case where the period of account mentioned
in subsection (1)(a)
above begins before 6th April 1989 and ends before 6th April 1990, the
references in subsections (1)(c),
(3)(b), (4)
and (5)(a)
above to nine months shall be construed as references to eighteen months.
(9) In this section “period of account” means a
period for which an account is made up.
(10) For the purposes of this section “relevant
emoluments” are emoluments for a period after 5th April 1989 allocated either—
(a) in respect of particular offices or
employments (or both), or
(b) generally in respect of offices or
employments (or both).
(11) This section applies in relation to potential
emoluments as it applies in relation 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.
(12) In deciding for the purposes of this section
whether emoluments are paid at any time after 5th April 1989, section 202B of
the Taxes Act 1988 (time when emoluments are treated as received) shall apply
as it applies for the purposes of section 202A(1)(a) of that Act, but reading “paid” for
“received” throughout.
(13) In section 436(1)(b) of the Taxes Act 1988 (profits to be
computed in accordance with provisions of that Act applicable to Case I of
Schedule D) the reference to that Act shall be deemed to include a reference to
this section.”
11.
There is no dispute that the discovery assessments were not validly made
for any reason apart from the application of FA 1998, Sch 18, para 45. That
paragraph provides as follows:
Return made in accordance with prevailing
practice
45 No discovery assessment for an accounting
period for which the company has delivered a company tax return, or discovery
determination, may be made if—
(a)
the situation mentioned in paragraph 41(1) or (2) is attributable to a mistake
in the return as to the basis on which the company's liability ought to have
been computed, and
(b)
the return was in fact made on the basis or in accordance with the practice
generally prevailing at the time when it was made.
12.
There is no dispute on para (a) of para 45. It is common ground that
Boyer Allan’s return for the 2000 period was made on the footing of a mistake
as to the legal basis on which the deductions for the payments to the EBT
should properly be claimed. The dispute between the parties is solely
concerned with para 45(b).
13.
It is also common ground that the burden of proof that the return for
the 2000 period was in fact made on the basis or in accordance with the
practice generally prevailing at 24 January 2001 (the date of filing of the
return) rests on Boyer Allan, to the usual standard of proof, namely the
balance of probabilities.
14.
Submissions by both parties focused on the meaning of the phrase “in
accordance with the practice generally prevailing”. It was recognised that
para 45(b) contains two tests, the other being that the return is made “on the
basis … generally prevailing”. However, Mr Prosser submitted, and Mr Tidmarsh
did not argue to the contrary, that these are not alternative tests, but rather
represent expressions of the same test. We accordingly confine our
consideration to the question of what is meant by “practice generally
prevailing”.
15.
We start with a case in the High Court which addresses this question in
the very same context, namely the application of s 43 FA 1989 to an employee
benefit trust. In Revenue and Customs Commissioners v Household Estate
Agents Ltd [2008] STC 2045, the taxpayer company established an employee
benefit trust in 1998. In 1999 a payment was made into the trust, and a
deduction was claimed. On 23 November 2005 HMRC made a discovery assessment
for the 1999 period disallowing the deduction.
16.
The case went to the General Commissioners. So far as material, those
commissioners decided that FA 1998, Sch 18, para 45 did not apply because HMRC
had not satisfied them that the return was not made in accordance with a
generally prevailing practice. In the High Court, Henderson J held that this
was an error of law. The legal burden of establishing that para 45 applies rests
on the taxpayer.
17.
Before the General Commissioners the taxpayer had submitted that no
published view of HMRC on the application of s 43 FA 1989 to contributions to
an EBT had been found or drawn to the taxpayer’s attention. For HMRC, it had
also been submitted that, prior to Dextra, there was no prevailing
practice such that HMRC and the accountancy profession were in agreement.
However, neither party had been aware of guidance published in para 1049 of the
Inspector’s Manual, Sch D under the heading “Trade deductions: relevant/potential
emoluments”, the relevant part of which stated:
“… payments made by a company to the trustees of an
[EBT] to
provide benefits in the form of cash or shares to employees of the company will
often not constitute potential emoluments. But any case in which it appears
that such a trust is being used by a company largely to channel emoluments to
employees so as to obtain a deduction for the payments when charged whilst
deferring the receipt of the emoluments in the hands of the employee should be
submitted to Business Profits Division (Schedule D).”
18.
In this connection, Henderson J observed (at [53]:
“I observe at once that this guidance was at best
inconclusive. It says only that payments made by a company to the trustees of
an EBT to provide benefits to employees in the form of cash or shares will
'often' not constitute potential emoluments, which implies that s 43 will not
apply in such cases. However, it does not disclose the relevant criterion for
distinguishing those cases from ones where s 43 will apply. The guidance then
goes on to say that cases where EBTs are used largely to 'channel' emoluments
so as to obtain a timing disparity between deduction and receipt of the
emoluments should be submitted to Business Profits Division, but again no clear
criterion is stated for identifying such cases, and all that can safely be
deduced is that the Revenue thought they needed to be carefully scrutinised
because of the potential for tax avoidance.”
19.
The learned judge was then left with the question of what to do in the
light of his conclusions. The alternatives were to remit the matter to the
commissioners for them to reconsider the application of para 45 on the basis
that the burden of proof lay on the taxpayer, or simply allow the appeal and
affirm the assessment. The judge decided not to remit. After referring to a
submission by counsel for the taxpayer that HMRC’s representative had
misrepresented HMRC’s practice to the commissioners, Henderson J gave his
reasons as follows (at [58] – [60]):
“[58] In the first place, if one leaves aside
the alleged misrepresentation, the position is in my view straightforward. If
the company wished to rely on para 45 at the hearing before the commissioners,
the burden was on the company to establish both an operative mistake in the
return and the practice generally prevailing in August 2000. The company failed
to adduce evidence on either of those questions, and relied only on the
submissions recorded in para 6 of the case stated. Those submissions refer to
what was alleged to be 'the profession's view' that s 43 of the Finance
Act 1989 did not apply to contributions to EBTs. However, without any evidence
to support that assertion, and without any evidence that the Revenue took the
same view, there was no material before the commissioners which could support a
conclusion that a settled practice existed, let alone a settled practice which
could properly be described as 'the practice generally prevailing at the time'.
Without attempting to give an exhaustive definition, it seems to me that a
practice may be so described only if it is relatively long-established, readily
ascertainable by interested parties, and accepted by HMRC and taxpayers'
advisers alike: compare the decision of the Special Commissioners (Dr A N Brice
and Mr John Walters QC) in Rafferty v Revenue and Customs Comrs [2005] STC (SCD) 484,
para 114. Accordingly, on the basis of the material before them, and on the
assumption that they had directed themselves correctly on the burden of proof,
the commissioners could only have concluded that para 45 did not apply. There
would therefore be no point in remitting the matter to them for
reconsideration.
[59] The next question is whether the alleged
misrepresentation makes any difference to the above analysis. In my judgment it
does not. Even if the commissioners had been informed of the relevant passage
in the manual, its terms are far too vague and inconclusive to support the
inference that the company made its return in accordance with the generally
prevailing practice. I consider that the same is true of a short, anonymous
article in The Law Society Gazette of 4 October 1989, upon which Mr
Woolf also relied, which gave a brief indication of the Revenue's reported
views on the application of s 43 to payments into non-statutory share ownership
trusts. Thus the position would have been no different if this material had in
fact been before the commissioners, and again there would be no point in
remitting the matter to them for further consideration.
[60] It was in recognition of this fact, I
think, that Mr Woolf argued for a remitter with permission to adduce fresh
evidence generally on the para 45 issue. However, such an order should only be
made in exceptional circumstances, and I can see no good reason in the present
case why the company should be given a second chance to adduce evidence which
it could and should have adduced at the first hearing. HMRC cannot in any way
be blamed for the company's failure to come to the hearing armed with such
evidence. All that would be needed to remedy any prejudice to the company
caused by Mrs Morris's failure to disclose the relevant extract from the manual
would be for it to be looked at and taken into account; but as I have already
said there would be no point in doing this, because it could not make any
difference to the result.”
20.
Mr Prosser was content to accept that, for a practice to be one that was
generally prevailing, it had to be relatively long-established and it had to be
accepted by HMRC and taxpayers’ advisers alike. However, he submitted that it
was not necessary, despite what Henderson J had said, for the practice to be
readily ascertainable by interested parties. Because we are bound by the ratio
of Household Estate Agents, this submission necessarily includes an
argument that this part of Henderson J’s judgment is obiter. Mr
Prosser says that the case was decided on the basis that the taxpayer had not
produced any evidence of any settled practice, and that the remarks of the
judge as to the attributes of a practice generally prevailing were not
necessary to his conclusion.
21.
We do not agree. Although the failure of the taxpayer in Household
Estate Agents to adduce any evidence to support its assertions was enough
for HMRC’s appeal to be allowed, that was not the end of the matter. The next
stage was to consider whether the case should be remitted. In order to decide
that question, one of the issues was whether the alleged misrepresentation by
HMRC at the original hearing would lead to a different conclusion than that the
commissioners could only have concluded that para 45 did not apply. In
deciding that it would not, Henderson J was drawing on his analysis of the
meaning of “practice generally prevailing” in determining that the passage in
the Inspector’s Manual and the article in the Law Society Gazette of 4
October 1989, if they were made available to the commissioners, would not make
any difference to the result.
22.
That being so, we are bound by the judgment of Henderson J in
this respect. We shall consider what that means in a moment. But before doing
so we should consider what the position would have been had we agreed with Mr
Prosser. In that case, of course, the remarks of Henderson J in Household
Estate Agents would nevertheless have been persuasive. But Mr Prosser
argued that we should not follow them. He referred us in this connection to
similar wording to that in para 45, but in the opposite direction, namely where
a taxpayer, in relation to income tax or capital gains tax, claims relief in
respect of an excessive assessment by reason of an error or mistake in a
return, in what was s 33 of the Taxes Management Act 1970 (“TMA”). Under that
section relief was not available in respect of an
error or mistake as to the basis on which the liability of the claimant ought
to have been computed where the return was in fact made on the basis or in
accordance with the practice generally prevailing at the time when it was made.
23.
Until its recent repeal, the wording
of s 33 had a long pedigree. Mr Prosser referred us to Rose Smith & Co Ltd
v IRC (1933) 17 TC 586 (Ch) where the High Court (Finlay J) dismissed an
appeal by the taxpayer from the Special Commissioners who had held, in relation
to a claim under s 24 of the Finance Act 1923 which, as the judge remarks (at p
591), had broken new ground in allowing a person who had been wrongly assessed
by reason of a mistake in his return to be repaid, that the company’s treatment
had in fact followed the basis generally prevailing at the relevant time. The
appeal was dismissed on the ground that there was no point of law in connection
with the computation of profits or income, and that the finding of the
commissioners was a finding of fact, so there is no discussion of the relevant
wording in the High Court.
24.
The case largely concerned the use
by the taxpayer company of an “average” or “even spread” method of calculating
costs under hire purchase agreements, instead of the “actuarial” method which
would have given rise to greater deductions in the earlier years of the
agreement. The company argued that this was an error or mistake which had led
to excessive assessments and that there was no evidence of any practice
generally prevailing which would disentitle the company from relief. The
commissioners found, on the evidence, that the practice generally prevailing
had been to deduct the “average” and not the “actuarial” hire. That finding
was accepted by the High Court as a finding of fact.
25.
Mr Prosser argued that the wording
of what was s 33 is the same as that in para 45, and the two must be construed
consistently with one another. That being so, it would be wrong to regard para
45(b) as some sort of estoppel defence, requiring the publication of a
statement on which a taxpayer places reliance. In the converse case, such as
under s 33, it is HMRC who are relying on the practice, and there can be no
question of estoppel.
26.
Pausing there, we agree. Indeed, in
the course of his submissions, Mr Tidmarsh was disposed to accept that it was
not necessary for the taxpayer to have relied upon the practice in order to
seek the protection of para 45. We find that there is no such requirement. In
their skeleton argument Mr Tidmarsh and Mr Rivett pointed out that para 45
requires that the return is made in accordance with the relevant practice, and,
they said, not merely in accord with the practice. We do not consider that
this means that there needs to be any reliance on the practice, nor indeed that
it is necessary for the taxpayer, when making the return, to have been aware of
the practice. The use of “made” in this context does not introduce any
subjective requirement that implies a need for knowledge or reliance; para
45(b) will be satisfied if the return that is made is in accordance with the
identified practice, irrespective of the state of mind of the taxpayer. That
too was accepted by Mr Tidmarsh in the course of closing submissions.
27.
By reference to the introduction of
what became s 33 in 1923, Mr Prosser submitted that the reference to a practice
generally prevailing could not be confined to publicly stated practices on the
part of the Revenue. In 1923, although we had no direct evidence, we can
accept that there was nothing like the current publicity of HMRC practice, from
statements of practice and tax bulletins to internal guidance manuals. The
former legislation, containing the same words as appear now in para 45(b), was
dealing with Revenue practice, but not with a practice that had to be publicly
stated. On this basis, Mr Prosser argued that, pace Henderson J in Household
Estate Agents, there should be no requirement that the practice should be
readily ascertainable by interested parties.
28.
In his judgment in Household
Estate Agents, Henderson J referred to an earlier decision of the Special
Commissioners, Rafferty v Revenue and Customs Commissioners [2005] STC
(SCD) 484, which had considered the issue of practice generally prevailing in
the terms of the corresponding provision to para 45(b) in the case of
individuals, namely s 29(2) TMA. The case concerned the sale of a business and
the receipt by the seller of a lump sum as consideration for his right to
receive commissions and fees after his retirement as well as goodwill. He made
his return on the basis that the whole sum received was capital and not income.
29.
The Special Commissioners allowed
the taxpayer’s appeal on the substantive question whether the relevant part of
the lump sum could be taxed as a post-cessation receipt or not. They also
considered the position had that not been the case, and whether, if there had
been an error or mistake in the taxpayer’s return, the return had been made on
the basis or in accordance with the practice generally prevailing when it was
made. On the facts they concluded that there was no evidence of such a
practice. They said (at [114]:
“… We construe s 29(2) as a protection to the
taxpayer from an assessment where the Revenue have changed their mind on a
doubtful point in a sense adverse to the taxpayer. It would in our judgment go
too far to construe it, as Mr Goldberg urged us to do, as a bar on the
Revenue from raising a discovery assessment in particular circumstances where
they had not publicly adopted a practice. We agree that a practice generally
prevailing has to be a practice, or agreement, or acceptance over a long period
whereby the Revenue agreed or accepted a certain treatment of sums in
particular circumstances. In the circumstances of this case, for there to have
been such a practice, the Revenue would have had to have agreed or accepted
that a consideration such as that received by the appellant from Fortuna was to
be treated for tax purposes as having been capital and not income. There was no
evidence of such a practice.”
30.
Although the Special Commissioners rejected the argument for the
taxpayer that the Revenue were barred from raising a discovery assessment
purely on the basis that it was the practice in making returns, and that it was
not necessary to consider the Revenue’s practice, we do not read the
commissioners’ reference to public adoption of a practice as representing a
view that there would have to be a published statement of HMRC. We agree with
the Special Commissioners that the practice has to be one that is adopted by
taxpayers and the Revenue alike.
31.
We are, as we have determined earlier, bound by the description afforded
by Henderson J in Household Estate Agents to the expression “practice
generally prevailing”. But we do not consider that the issue depends upon any
rule of precedent. In our view, the analysis is the same whether Household
Estate Agents is binding on us or not.
32.
In construing para 45(b) it is instructive, we think, to have regard to
the context in which that provision falls to be considered. Under
self-assessment, for companies as much as for individuals, the burden is placed
on the taxpayer to make returns that calculate the tax payable. That burden is
balanced by protections for taxpayers (see Langham v Veltema [2002] STC
1557, per Park J at [10]). As a general matter, where a company has made a
return, if no notice of enquiry is given by HMRC within the relevant time
limit, a discovery assessment or a discovery determination will only be capable
of being made in defined circumstances. Furthermore, as is in issue in this
appeal, even if those circumstances exist, the discovery assessment or determination
will not be capable of being made if the return was made on the basis or in accordance
with the practice generally prevailing at the time when it was made.
33.
The corresponding provisions for individuals are those in s 29 TMA. In Langham
v Veltema in the Court of Appeal [2004] STC 544, the issue concerned s
29(5), under which an inspector may make a discovery assessment if he could not
have been reasonably expected, on the basis of certain specified information
made available to him, to have been aware that there was an insufficiency of
tax etc. The question of underlying purpose was considered. At [31], Auld LJ
said:
“… it may be helpful to consider first the
underlying purpose of the new self-assessment scheme. It seems to me that its
purpose is to simplify and bring about early finality of assessment to tax,
based on an assumption of an honest and accurate return and accompanying
documentation by the taxpayer.”
34.
The twin purposes of simplicity and finality, in our view, demand both
certainty and clarity in the application of the relevant provisions. A
practice within para 45(b) must be capable of being readily ascertained;
otherwise it could not be one that was capable of general acceptance. And in
order to be readily ascertainable, the practice must have substance (in the
sense of not being inchoate), and be sufficiently precise and devoid of
uncertainty as to its application. In particular, such a practice would not
exist if it was equivocal or dependent on the ascertainment of facts, except where
the criteria for its application by reference to the facts were themselves
understood with a sufficient degree of precision so as the make the practice
one that can be readily applied in any given case.
35.
A practice of this nature will be readily ascertainable by interested
parties in a number of possible ways. There may be a published statement of
practice, concession or otherwise by HMRC. That process might be more or less
formal. But publication is not a necessary ingredient. A practice, albeit unpublished,
will be equally ascertainable if it can be readily discovered from enquiry of
HMRC themselves or from advice sought from a practitioner in the field,
particularly where the practice arises in a specialised area. Construed in
this way, as we believe is right, there is in our view nothing between Household
Estate Agents, Rafferty and Rose on this issue. Mr Tidmarsh
accepted that, although the paradigm case of a practice would be a statement of
practice or an extra-statutory concession, it was possible for something to be
identified as the practice if it were settled, defined and agreed between HMRC
and taxpayers, or communicated between HMRC and taxpayers, or otherwise sufficiently
identified to the outside world.
36.
The requirement for a practice to be relatively long-standing emphasises,
in our view, that such practice is not confined to published statements but
extends to unpublished practices which are understood and accepted as a general
matter. A new practice that is published will be unlikely, in our view, to require
the same degree of longevity as might be required for an unpublished practice.
Although each case will depend on its own facts we can envisage that an
unpublished practice of the Revenue might take longer to seep into the collective
consciousness of tax advisers generally. We believe that such a distinction
was intended to be drawn in Rafferty, when the Special Commissioners
spoke of a practice, without reference to any period of adoption, and
separately of an “acceptance over a long period”. It will be a matter of
evidence in any particular case, but in our view a published practice is likely
to be capable of being regarded as “generally prevailing” over a shorter period
than one that merely becomes established through practice.
37.
It is of course the case that, in order to be generally prevailing, the
practice must have been capable of being identified by taxpayers when making
their returns (although it is not necessary that a taxpayer has identified the
practice). An internal practice adopted by HMRC, however precise in its terms,
will not be generally prevailing until such time as it can be identified with
sufficient precision by taxpayers and their advisers. We do not consider that
communication as such is required. As custom can arise by usage, so too a
practice can become generally prevailing merely by general adoption,
irrespective of any actual communication. But there must still be the
necessary quality of precision in the manner in which the practice is generally
adopted and applied.
38.
The same quality of clarity and precision must be present in the
understanding of HMRC and taxpayers and their advisers alike. It is not enough
that an interested party be able to ascertain from HMRC what its approach to a
particular issue might be. It must be possible to demonstrate that the same
answer to the enquiry would be given by the broad community of tax
professionals engaged in a particular area.
39.
In order that a practice may be regarded as generally prevailing, it
must have been adopted by HMRC and generally, if not universally, by the
taxpayer community. Furthermore, if a practice encompasses a number of
aspects, or includes exceptions or caveats, all aspects of the practice must be
so adopted and consistently applied. A practice will not be generally
prevailing if it is not agreed, or respected, as a whole, either by HMRC
failing to apply every element of the practice in every case where it should be
applied, or by taxpayers adopting only those parts that are favourable to them,
but disputing others that are not.
40.
The practice must be settled. This will not be the case if it is
articulated or applied otherwise than in a consistent manner. In Household
Estate Agents, at [58], Henderson J refers to the need for there to be
evidence of a “settled practice”. In our view, for there to be a practice of
the nature envisaged by para 45(b), it must be on the basis of settled
criteria. Those criteria must not be subject to change depending on the
particular circumstances or the facts of a particular case. If the facts are
relevant to the application of a practice, the relevant factors must themselves
be clear and unequivocal. That is not to say that a practice must be
immutable. It can of course be subject to change, but if it is changed, then
the existence of the practice must be tested anew to ascertain if and when it
can be regarded as generally prevailing.
41.
We consider that mere inactivity can, in appropriate circumstances, give
rise to a practice. This may be the product of a conscious response to a
particular issue or a defined set of circumstances, or it may simply arise as a
result of repetition of an omission to act in a different way, provided that
the omission to act is based on a consideration of the issue, such as the
applicability of a relevant statutory provision, or of the circumstances. But
such an omission must also be capable of articulation in the same way as a
positive act. It must have both clarity and substance. Its parameters must be
clearly defined so that the general acceptance amounts to the same unequivocal
understanding.
42.
Mr Prosser argued that a distinction has to be drawn between something
that is a shared view, which is applied in practice by taxpayers and HMRC
alike, and the reasons why that view is adopted. We agree that if there is a
sufficiently precise practice that is adopted and followed by both taxpayers as
a general matter and HMRC, then the underlying rationale for any particular
party deciding to adopt such a practice, or to act or omit to act, is not
relevant. What matters is that there is a mutual understanding to proceed in a
particular way in particular defined circumstances. There does not need to be
an identical thought process on all sides in arriving at the settled practice.
But in determining whether there is a practice at all, it will often be
relevant to consider the underlying rationale for what has emerged.
The evidence
43.
Having determined the nature of the practice which Boyer Allan must
demonstrate is present to succeed in its appeal, we now turn to the evidence.
44.
We had evidence from a number of witnesses, to whom we refer below, and
a significant amount of documentary evidence. We have considered all of that
in coming to our decision, but we shall refer in detail only to those parts we
consider to have been most material to our determination.
45.
The witnesses for Boyer Allan were:
(1)
Robin Aitchison, a partner of Ernst & Young LLP, who provided a
witness statement not in that capacity, but as an adviser to the asset
management industry.
(2)
Karen Doe, a Director in the Business Tax Group of Rawlinson &
Hunter, an international group of professional firms, specialising in financial
and taxation advice. Ms Doe gave evidence based on her experience, at the
material time for this appeal, working for the accounting firm Grant Thornton.
(3)
Nigel Eastaway, a partner in the Private Client Services London Tax
Group at BDO LLP. Mr Eastaway has an array of professional qualifications and
is well-known in the tax field as an active member of various tax committees
and associations, and as the author of several books on taxation. Prior to it
being acquired by BDO in October 2007, Mr Eastaway was a director of Chiltern
plc.
(4)
Ratan Engineer, a partner in Ernst & Young LLP. Mr Engineer
provided a witness statement on the accounting treatment of the contributions
made by Boyer Allan to the EBT. He had signed the auditors’ report in the
financial statements of Boyer Allan for the years ended 30 April 2001, 2002 and
2003. His evidence was unchallenged and we accept it. It is convenient to
summarise the material points here.
For the years ended 30 April 2000 and 30 April 2001, the
EBT was not shown on the balance sheet of Boyer Allan. This was the correct
treatment at that time. The company did not have control of the EBT so UITF 13
did not apply to require the assets and liabilities of the EBT to be shown on
the balance sheet of the company. Additionally, UITF 13 applied to employee
share ownership plans (“ESOPs”) rather than to EBTs.
UITF 32 was issued on 13 December 2001. This required
companies to recognise the assets and liabilities of EBTs on their balance
sheets, by reason of UITF 32 treating the companies as having control of the
EBTs. Accordingly, the accounts of Boyer Allan for the period ended 30 April
2002 referred to this change of accounting policy and noted the inclusion of an
asset within current and fixed assets and an equivalent liability as a
provision for liabilities and charges.
From an accounting perspective, it was immaterial when
considering the deductibility of a contribution to an EBT whether a payment had
been made out of the EBT. The accounts showed a debit in the profit and loss
account in relation to payments made into the EBT. There was never a
persuasive argument made that this did not represent a debit to the profit and
loss account for accounting purposes.
(5)
Robert Field, a solicitor and partner at Farrer & Co, where he is
the head of the firm’s tax department. At the material time Mr Field was a
partner in Lawrence Graham, and was involved in corporate tax work.
(6)
Anthony Foreman, tax partner with PKF (UK) LLP from November 1988 until
31 March 2010, who is also the author of a number of tax books.
(7)
Victoria Goode, a solicitor and partner in the Employee Incentives
Department at Lewis Silkin LLP, whose evidence related to her work with
Deloitte, implementing EBTs for clients and being used as an internal technical
resource (drafting precedent documents etc) for EBTs.
(8)
Ian Grant, a Director of Smith & Williamson Limited in their private
client tax group. He gave evidence based on his experience with WJB Chiltern
Plc at the material time.
(9)
Aidan Langley, a non-practising solicitor. Mr Langley’s evidence
concerned his experience with EBTs at PricewaterhouseCoopers (“PwC”) between
1997 and 2001 and thereafter at Deloitte & Touche.
(10)
Thomas Moore of Duncan & Toplis. Mr Moore’s evidence related to his
EBT experience when he was employed by PwC.
(11)
Michael Sherry, a barrister at Temple Tax Chambers, specialising in
taxation since 1985. Mr Sherry is the author of “Tax Planning for Family
Shareholders” (1992).
(12)
Andrew Thornhill QC, the renowned tax silk who appeared, as counsel for
the taxpayer, in Dextra. One of the areas of Mr Thornhill’s
specialisation has been tax on employment income.
(13)
Avril Whitfield, a former Inspector of Taxes until January 2001 when she
joined KPMG. Ms Whitfield was a partner in Mazars LLP and with that firm head
of tax in London until 31 August 2012.
(14)
Francis Cochrane, a former partner of Latham Crossley and Davies (which became
RSM Tenon), who now acts as a non-executive director and trustee, in most cases
with particular responsibility for tax matters.
46.
Apart from Mr Engineer, those witnesses for Boyer Allan referred to in
the previous paragraph gave evidence in relation to the practice adopted in
relation to the question of the deductibility of contributions to EBTs. In
addition we had evidence from Nicholas Allan, a director and shareholder of
Boyer Allan, and Gordon Matthew, chief executive of Schroder Trust AG, concerning
the establishment and conduct of the EBT from January 2000 to April 2001.
47.
The witnesses for HMRC were:
(1)
Ronald Macdonald, currently a team leader in the HMRC Anti-Avoidance
Group, who leads that group on employment income tax avoidance issues. Mr Macdonald
commenced his role in August 1999. He was the named respondent in Dextra,
and has since 1999 advised on most of the EBT litigation in which HMRC has been
involved.
(2)
Steven Terry, an aspect enquiry team leader within HMRC. Mr Terry
provided a witness statement to explain the work carried out by HMRC in
identifying documents disclosed for the purpose of these proceedings. His
statement was not challenged, and we accordingly accept it.
(3)
Desmond Ryan, an Inspector of Taxes who, up to 2008, was responsible
within HMRC for the tax affairs of Boyer Allan. Mr Ryan provided a witness
statement to explain the circumstances in which the discovery assessments at
issue in this appeal were made by HMRC. His evidence was not challenged and we
accept it.
Findings from the evidence
48.
The primary question for us is the extent to which the evidence shows
the existence of a generally prevailing practice in accordance with which the
company tax returns submitted by Boyer Allan were made. This entails an
examination of the relevant understandings of both taxpayers and their
representatives and HMRC, to consider the extent to which this gave rise to a
mutually accepted practice. This is not a case, as was Household Estate
Agents, where there is a paucity of evidence.
Published HMRC statements
49.
The natural starting point is to look at the material published by HMRC
in this area.
50.
During the consultations that took place during the passage of the
Finance Bill which led to the enactment of s 43 FA 1989, the Law Society raised
the question whether the rules restricting the deduction for Schedule D
purposes of payments to intermediaries might prevent a deduction in respect of
a company’s contribution to a non-statutory ESOP. The Law Society Gazette,
No 25, 4 October 1989 records that:
“The Inland Revenue have considered this question
and concluded that this will not generally be the case. This is because a
payment to an ESOP by a company will not generally be made with a view to that
payment becoming an emolument, given the variety of ways in which the trustees
of non-statutory ESOPs may properly use the contributions they receive, for
example, to pay expenses or interest on money they had borrowed.
The Inland Revenue have said that they will keep the
position under review and they would be glad to hear of any particular
non-statutory ESOP where there appears to be a strong prima facie case
that the s 43 rules about potential emoluments might apply.”
51.
Public guidance to Inland Revenue Inspectors in the relevant period also
referred to s 43. Paragraph IM1049 of the Inspector’s Manual (1995) refers to
the definitions of “relevant emoluments” and potential emoluments” in s 43(10)
and (11), and to cases where items in respect of emoluments would be properly
deductible, on normal accounting principles. An example is then given of
payments made by an employer to a third party to enable that third party to
make payments to, or provide benefits for, employees which will constitute
emoluments in the employees’ hands at some future date, perhaps, on the
occasion of the happening of some contingency. The paragraph then goes on to
say:
“In this context payments made by a company to the
trustees of an employee benefit trust to provide benefits in the form of cash
or shares to employees of the company will often not constitute potential
emoluments. But in any case in which it appears that such a trust is being
used by a company largely to channel emoluments to employees so as to obtain a
deduction for the payments when charged whilst deferring the receipt of the
emoluments in the hands of the employee should be submitted to Business Profits
Division (Schedule D).”
52.
The same theme appears in para IM689 of the Inspector’s Manual. We were
shown the version from April 2001. It describes the position as follows:
“… payments made by the company to the trustees of
an ESOT or other employee benefit trust to provide benefits in the form of cash
or shares to employees of the company will not normally constitute potential
emoluments for the purposes of Section 43(11) FA 1989. Any case in which it
appears, however, that such a trust is being used by a company largely to
channel emoluments to employees so as to obtain a deduction for the payments
when charged whilst deferring the receipt of the emoluments in the hands of the
employee should be referred to Business Profits Division, Schedule D, before
the company payments are challenged as constituting potential emoluments within
Section 43(11).
Refer any points of difficulty arising in connection
with such payments to Business Profits Division, Schedule D, for advice.”
53.
The Tax Bulletin issued by the Inland Revenue in February 1997 included
an article on the tax treatment of an employer’s contributions to an Employee
Share Ownership Trust (“ESOT”). It focused on the case where the trust was not
a statutory ESOT, the contributions were revenue in character and not capital,
but where normal accounting practice required UITF 13 to be applied, with the
result that the making of the contributions was treated as giving rise to an
asset in the employer’s accounts.
54.
The article discusses the application of Case 1 computational principles
in those circumstances. It makes the general point that the accounts are to be
followed for tax purposes unless overridden by a specific tax rule. The
question it poses is whether the time at which contributions to non-statutory
ESOTs are charged against profits under UITF is overridden by some general tax
principle. It concludes, based on relevant case law in this connection (Threlfall
v Jones; Gallagher v Jones 66 TC 77 and Johnston v Britannia
Airways Ltd 67 TC 99), that no general principle would override the
accounting treatment required by UITF 13. The Tax Bulletin article does not
refer to s 43. This is not surprising, because s 43 can only apply if the
contributions would otherwise be deductible.
The advisers’ evidence
55.
We accept the evidence of all the advisers.
56.
We accept the submissions of Mr Prosser and Mr Bremner in this respect
that these advisers were well aware that trust deeds of EBTs conferred on
trustees a broad power to make payments to employee-beneficiaries, but that
those advisers were nevertheless advising their employer clients that payments
into such a trust were in principle deductible. Those advisers did not advise that
the payment was or might be a “potential emolument” within s 43(11) because of
such a power. They consistently advised that the payment was deductible if it
was revenue in nature, it was made wholly and exclusively for the purpose of
the employer’s trade and the employer’s accounts were computed in accordance
with GAAP. In some cases the advisers would specify that the purpose must not
be to “channel” emoluments from the employer to employees via trustees under
their control.
57.
The evidence of Ms Doe was that when giving advice she (and the rest of
her team) focused primarily on the wholly and exclusively test, and on whether
all the employees were benefiting, or were at least capable of benefiting, from
the EBT. Although s 43 would occasionally be raised as part of her own, and
others’, technical analysis, it was always dismissed and not considered
further. Nor was it included as a risk factor in Grant Thornton’s standard
advisory letter, or raised in relevant instructions to counsel.
58.
The reason, as explained by Ms Doe, was that s 43 was not thought to
apply to the type of circumstances she and her firm were envisaging when Grant
Thornton’s clients were setting up an EBT. The idea was not that the trust
should be some sort of short term conduit for delivering cash to employees, but
rather that it should be set up for longer-term planning to do with employee
incentivisation and the possible provision of benefits other than cash
payments.
59.
Mr Eastaway’s evidence was that, in connection with the obtaining of a
corporation tax deduction, he and his firm would always advise the taxpayer
company to ensure that a carefully drafted trust deed (settled by counsel) was
in place. Advice was given on the importance of having fully independent
trustees, and the need to identify all the beneficiaries of the EBT. Sometimes
not all the employees would be included as beneficiaries (for example,
administrative staff would sometimes be excluded). However, Mr Eastaway’s firm
always advised clients to make sure the benefit was spread to several
employees, to ensure that the EBT was genuinely for the benefit of the trade
generally.
60.
Mr Eastaway and his firm also advised that there should be regularity of
contributions into the EBT. Normally the company would start by making a small
contribution that would be a capital payment, and so not deductible. This
would then be followed by a larger contribution. Regular contributions would
continue to be made after that, and the company would claim a deduction each
year. At the material time Mr Eastaway and his firm did not consider s 43 a
serious risk. Mr Eastaway did not recall even raising it with clients prior to
the decision of the Special Commissioners in Dextra.
61.
Mr Eastaway’s evidence was that there was a widespread view amongst
taxpayers’ advisers the s 43 only applied if the EBT was an intermediary
between the company and its employers. If an EBT was under the control of the
trustees and if the trustees were doing their job properly, their sole duty was
to the employees, who were the beneficiaries of the trust, and to their
families and other members of the class depending on the terms of the
individual trust deed. In those cases Chiltern simply did not consider that s
43 was in point.
62.
Mr Eastaway’s evidence was supported by a number of contemporaneous
notes of advice and reports prepared by Chiltern plc. Those reports did not
refer to s 43 as an obstacle to the obtaining of a corporation tax deduction.
63.
Mr Field said that when advising clients in relation to EBTs in the relevant
period he would routinely say that there should be no question whether a
contribution to a trust was deductible for tax purposes. This would be the
case so long as the payment was properly to be treated as being on revenue
rather than capital account, that the payment was made to independent trustees
for the purposes of the trade being carried on by the company and that it was
appropriate for accounting purposes to deduct the payment in the profit and
loss account.
64.
Mr Foreman’s evidence was that during the period 1995 to 2002 his firm
encountered two main lines of enquiry into EBTs. One was whether the
contributions were wholly and exclusively for the purposes of the trade. The
other was in relation to the accounting treatment under UITF 13. He did not
hear of a case in that period where the Revenue suggested that a deduction for
a contribution should be disallowed because s 43 applied. Examples of
compromises were not, in Mr Foreman’s view, based on a s 43 argument.
65.
In Mr Foreman’s experience he did not see any Revenue enquiry, when
considering the deductibility of a contribution to an EBT, into whether a
payment had been made out of the EBT, except in relation to the issue of the
accounting treatment, or where there was doubt whether the payment was wholly
and exclusively for the purposes of the trade. He recalled that the first time
he had heard of the Revenue raising the s 43 argument was when it was put
before the Special Commissioners in Dextra. On the ground, in dealing
with Inspectors of Taxes, it was raised as an issue only after the Court of
Appeal judgment.
66.
Ms Goode’s evidence was that s 43, although given consideration, was not
thought to be more than a theoretical risk. Her practice, and that of her
colleague’s was to put a recital in the trust instrument to the effect that it
was not intended that the trust funds should be used to provide emoluments.
This was also often made clear in the letter to the trustees asking them to
establish the trust. However, there was no prohibition in the main body of the
trust instruments she prepared against the payment of emoluments.
67.
Mr Langley explained that the possible risks in relation to corporation
tax were addressed in order of perceived importance. He considered the most
important to be the question whether the contributions to the trust were wholly
and exclusively for the purpose of a company’s business, having regard to s 74
ICTA. He would then consider whether the payment was properly charged to the
accounts as a revenue item. Only after that would he give consideration to s
43.
68.
Mr Langley said that, although the public statement in the Law Society
Gazette of 4 October 1989 was comforting, it was necessary to give s 43
consideration as nobody knew whether or not the view expressed in the Gazette
would continue to be considered the correct position. The possible risk of s
43 applying was expressed so that clients were presented with the facts.
However, during his time at Deloitte, until Dextra in the Special
Commissioners, Mr Langley was not aware of any challenges by the Inland Revenue
on the basis of s 43.
69.
Mr Moore’s evidence was that the view of his firm (at the time PwC) was
that in order to claim a successful deduction for contributions to an EBT, the
company needed to ensure, (a) that it was following the correct accounting
treatment, namely that it came within UITF 13, and later UITF 32, (b) that
there was an initial capital contribution to establish the trust and that
further contributions were revenue in nature, (c) that the trust was not under
the de facto control of the company, and (d) the contributions had to be
for the benefit of the trade.
70.
Mr Moore said that there was no concern about whether money had been
paid out of the trust; questions raised by the Revenue about the purpose for
which the funds had been used were, thought Mr Moore, directed towards whether
the contributions had been made wholly and exclusively for the purposes of the
trade. Mr Moore first became aware with any certainty of the Revenue’s view
that s 43 applied to EBT contributions when the point was put before the
Special Commissioners in Dextra. He was however already aware, before
the release of the Special Commissioners’ decision on 3 September 2002, that
the Revenue had a line of attack based on s 43. This came towards the end of
2001 or early 2002 from a former HMRC officer, Steve Bould, who had been
involved at a high level in formulating the Revenue’s response to the
proliferation of EBTs, and who joined PwC at that time.
71.
Mr Sherry gave evidence based on his experience of Revenue enquiries
into company accounts and tax returns in the period from 1995 to the decision
of the Special Commissioners in Dextra. On this basis he said that
there were a few issues the taxpayer had to address in order to ensure a
successful deduction. The accounting treatment, particularly after 1998, was
often enquired into, with UITF 13 being referred to as a ground of challenge.
The payments also had to be wholly and exclusively for the purposes of the
trade, and revenue and not capital. The latter two factors were both of
significance in the case of owner-managed businesses where there was a sole
proprietor who was likely to be a significant beneficiary of the trust. It was
not uncommon for the taxpayer company to be advised to take external advice as
to the quantum of contributions and remuneration of all employees, including
the owner-manager. This had another important aspect in establishing that the
contributions were commercial and, therefore, could not be characterised as
disguised distributions to the owner manager.
72.
Mr Thornhill told us that he has over the years advised a large number
of clients in relation to the establishment of EBTs. His view at the relevant
time was that s 43 did not restrict deductibility if the intended benefits
covered more than simply paying emoluments. Mr Thornhill produced a note of
conference held on 2 July 1998, in which he expressed this view. He confirmed
to those instructing him that the classification of future payments in the accounts
of the sponsoring company as an accrual for remuneration would not necessarily
mean that such payments would be treated as “potential emoluments” as defined
in s 43(11) unless they were reserved in those accounts “with a view to their
becoming relevant emoluments”. He also advised that if the trustees of the
trust had the discretion to make payments to persons other than members of the
family of the participant or his household, as defined in s 168(4) ICTA, than
that would help to reinforce the proposition that s 43 should not apply.
73.
Mr Thornhill said that it did not occur to anyone present at the
conference that s 43(11) applied to an EBT providing a wide range of benefits.
He believed that in 1998 this represented the common view of taxpayers and HMRC
alike. On the other hand, he advised at the conference that the Inland Revenue
did not normally accept the comments made in the Law Society Gazette, 4
October 1989, and that reliance should not be placed on those comments.
Similar advice had been given by Mr Thornhill at a conference on 29 November
1995 at which he said that the Inland Revenue would certainly not wish to
extend its treatment of ESOPs to EBTs. Mr Thornhill also referred to a meeting
at Somerset House between members of the Share Scheme Lawyers Group and Inland
Revenue officials at which ways of restricting deductions for EBT contributions
in cases where the contributions were not intended to be paid out for a
considerable time had been discussed. The conclusion of the meeting was that
UITF 13 was the key to the issue; s 43(11) was not mentioned by the Inland
Revenue.
74.
In cross-examination Mr Thornhill was shown a copy of an opinion he had
given in November 2000 on a proposal to establish an EBT. In that opinion,
which of course post-dated the January 2000 contribution by Boyer Allan but was
before the date on which Boyer Allan submitted its tax return for the 1999-2000
period, Mr Thornhill had said:
“The Revenue have become very much aware of EBTs and
their usefulness in securing deductions for the employer and deferring tax for
the employee. This has resulted in a considerable number of challenges to deductions
claimed. It is very difficult to know what will happen here. In principle
this seems to be a case where the EBT is a very commercial way of rewarding and
retaining key employees.”
In response to a presumption of instructing solicitors
that any loans would need to be made within nine months of the end of the
accounting period in which the relevant contributions were made in order to
avoid relief being deferred by virtue of s 43, Mr Thornhill had said:
“To assuage the Revenue, benefits of a taxable
nature should be provided as soon as possible. However, in my view, this is
not legally necessary.”
75.
At this time Mr Thornhill had been instructed for the taxpayer in Dextra.
His evidence to us was that he would not have given advice of this nature in
1999, but that by November 2000 he had been aware of the school of thought that
s 43 could possibly apply.
76.
In their written closing submissions, Mr Tidmarsh and Mr Rivett
submitted in this connection that the obvious inference to be drawn from MR
Thornhill’s advice was that in his view, absent payments of a taxable nature,
HMRC would seek to challenge the availability of a deduction under s 43, albeit
that Mr Thornhill’s view was that they would have been wrong in law to seek to
do so. We reject this submission. The fact that Mr Thornhill was aware of a
school of thought that s 43 could possibly apply cannot give rise to an
inference as to likely action by HMRC. This possible inference was not put to
Mr Thornhill, and we do not make such a finding.
77.
Ms Whitfield gave evidence based on her experience as an Inspector of
Taxes up to January 2001. She confirmed that one of the expense items from a
company’s accounts or return that would be reviewed was the level and
appropriateness of contributions made into an EBT. Where the company was a
close company, the position of the controlling shareholders would be reviewed.
The main concerns were whether the contribution was revenue or capital in
nature, whether the EBT had been correctly accounted for and whether the
contribution was for the benefit of the trade or business.
78.
Ms Whitfield confirmed that the first step in any examination of the
accounts or return of a company would be to establish the facts. At that stage
there would be no particular focus on any aspect, including s 43. The
subsequent response would depend on the information provided, or not provided.
This might require an examination in greater depth, and consideration of all
the relevant statutory provisions, including s 43.
79.
Except in limited circumstances, therefore, such as where the EBT was
confined to the payment of emoluments or the purpose was the payment of
emoluments, we find from all this evidence that the general view of advisers
was that s 43 should not apply to an EBT. None of the witnesses had direct
experience of s 43 being applied. However, apart from Mr Thornhill, none of
the witnesses claimed any knowledge of whether HMRC accepted that s 43 did not
apply, or did not apply in particular circumstances. Mr Sherry was the only
witness to have referred expressly to the guidance in the Revenue Manuals,
although we note that in advice given by Jeremy Woolf of counsel in June 1996,
he also refers to that guidance, reading it as stating that s 43(11) does not
apply to payments to an EBT unless the trust is being used for channelling
purposes.
80.
We have also noted, from materials produced of internal Revenue
correspondence, that in 2000 Deloitte had raised IM680 and IM1049 as
non-technical reasons why s 43 should not be applied to contributions to EBTs.
We shall look more closely at the materials produced, which show the views
being expressed by the Revenue officer, Mrs Linda Grant, who was in charge of
policy in this area, but at this stage we note that Mrs Grant was of the view
in this connection that those statements would not prevent the application of s
43 where it could be shown that the payments in question were of potential
emoluments. Those statements were not regarded as concessionary.
HMRC evidence
81.
Mr Macdonald’s evidence was that, within the Anti-Avoidance Group at
HMRC, he took over responsibility for EBTs in August 1999. Prior to that time
it had often been the case that companies would claim a deduction for
contributions to an EBT. But in Mr Macdonald’s view it had not been until the
late 1990s that EBTs became widely-used as vehicles for the avoidance of income
tax and NICs. In his witness statement Mr Macdonald sought to attribute this
rise to the fact that other popular schemes for such avoidance had been
circumscribed by legislation, and he referred in particular to the provisions
of s 203F ICTA as having been introduced in April 1998 to close down schemes
involving readily convertible assets. However, in cross-examination Mr
Macdonald accepted that this had been an error: the relevant provisions had in
fact been introduced in 1994.
82.
In his role, Mr Macdonald acknowledged that he was dealing with the more
aggressive end of the schemes for the establishment of EBTs. He referred in
particular to schemes promoted by a firm of solicitors, Baxendale Walker. We
were shown the minutes of a meeting with representatives of Baxendale Walker
attended by Mr Macdonald and his predecessor, Winston Taylor, on 11 September
2000. Section 43 had been raised at that meeting, although the discussion as
recorded appears to have been confined to s 43(10) (relevant emoluments). The
point is made by Mr Macdonald, however, that s 43 would not have any bearing if
the Revenue were to succeed on the UITF 13 point.
83.
In his evidence Mr Macdonald referred to the HMRC Public Folder which
is a method of information dissemination within HMRC. The folder in relation
to EBTs held copies of presentations and speaking notes from head office
specialists and advice on HMRC’s views on EBTs. Mr Macdonald produced his
slides and notes from one such presentation, in which he referred to s 43 in
conjunction with UITF 13, capital and revenue, wholly and exclusively and Ramsay
and sham. His speaking notes indicate that s 43 would be dealt with by Linda Grant
who, Mr Macdonald explained, was the person within the Revenue’s head office
who was responsible for policy in this area.
84.
We had the slides of Linda Grant’s own presentation. One slide deals
with s 43, but only sets out the statutory language, and gives no indication of
the Revenue’s approach in practice.
85.
We also had a copy of a presentation by Andrew Pickering of Special
Compliance Office, Nottingham. In relation to s 43, and in the context of a
slide entitled “Global Avoiders Ltd” and postulating a contribution to an EBT
providing discretionary benefits and where the trustees are independent of the
company and its directors, Mr Pickering’s speaking notes state:
“It is likely that we may not be able to apply the
legislation at S 43 FA 1989 – the 9 month rule because:-
The definition of “potential emoluments” within S 43
may not cover EBT payments, and
The Revenue, for mainly technical reasons, advised
that s 43 FA 1989 would not apply to payments made to employee share ownership
trusts.”
86.
Mr Macdonald could not recall Mr Pickering having said during this
presentation that s 43 was not likely to apply. However, Mr Pickering had sent
Mr Macdonald a copy of his speaking notes (including the passage quoted) prior
to giving his talk, and Mr Macdonald had commented that he had himself been
arguing that s 43 did apply to payments to EBTs because they were to remunerate
employees (and were thus potential emoluments). Mr Pickering’s reply had been
that he was aware that “the door might be slightly open on S43”, and that since
Mr Macdonald would be covering that he would leave his own brief as it stood. We
should also note that Mr Pickering prefaced his remarks generally by saying
that he was speaking from an SCO perspective – namely the “dirtier end of the
market”, and that Linda Grant and others would be speaking about the “cleaner
end”.
87.
Also from the Public Folders is a presentation from 30 November 2001,
apparently by one Gary Clarkson, entitled “SCO Approach to EBTs – Some
suggestions for tackling EBT arrangements”. The speaking notes make the point
that the author is not a technical specialist in the field of EBTs, and that
appropriate advice should be sought on the issues if it is required. The notes
to the slide on s 43 are as follows:
“Section 43 may have application in cases where the
money in the trust is put into sub-trusts for the benefit of named employees –
you may be able to argue that, at that stage, the money becomes potential
emoluments and subject to the 9 month time limit. The same could be said if
you can link the monies paid into the trust to specific employees at any stage.
However, this argument is far from certain and, if
you think it is relevant, seek advice before running it.
Note – point will shortly be litigated. A case
involving allocation of trust funds into sub-trusts should, hopefully, be
brought before the Special Commissioners early next year.”
88.
The practice within the Revenue was that an Inspector wishing to
challenge the deductibility of a contribution to an EBT on the basis that the
contribution was a “potential emolument” should first submit the case to
Business Profits Division (Schedule D). We received in the course of the
hearing a large number of such submissions and responses. Those responses were
given by Linda Grant who, as we have described, was the Revenue’s “policy
holder” in this respect. Mr Prosser submitted, and we agree, that the views
expressed by Mrs Grant are the most relevant in assessing the nature of the
Revenue’s practice (if any) in relation to the deductibility of contributions
to EBTs. That is not to say that the activities of Mr Macdonald and other
revenue officers are irrelevant, as we shall later describe.
89.
In her responses, Mrs Grant advises that simply because tax planning
might have been a factor in the setting up of an EBT, that does not mean that a
deduction is not due for the contributions at the time of claim. To defer a
deduction using s 43 or accountancy-based arguments would require evidence that
the company has effective control over the trustees. The point is made that
the Revenue have “so far shied away” from using s 43 other than in the clearest
cases of avoidance.
90.
Mrs Grant discusses the question whether trustees can be
intermediaries. She says that whether the trustees are intermediaries for this
purpose depends on how they act in practice, and whether they effectively act
on the recommendations or instructions of the company on how and when they
should use the company’s contributions to make payments out of the trust to the
employees who are beneficiaries of it. In certain cases Mrs Grant is able to
point to features of the operation of the trust that would lend weight to the s
43 intermediaries argument.
91.
The question of the level of practical control is a consistent theme.
In one case Mrs Grant says that if all that the trustees have done, or will do,
with the money contributed is to pay amounts (i.e. emoluments) to beneficiaries
and invest the balance of the trust fund with a view to paying out further
amounts to, or on behalf of, beneficiaries, then Mrs Grant could see no reason
why the company’s payment to the trustees would not be a payment of “potential
emoluments” for s 43 purposes, unless the facts show that the trustees are not
just acting as intermediaries of the company. In another case, although the
amounts subject to s 43 would have been too small to justify action in that
respect, Mrs Grant refers to evidence of trustees acting on the instructions of
a company through statements of wishes provided by the company.
92.
In another case, where the terms of the EBT allowed shares in the
company to be acquired by the trustees and distributed to employees, Linda
Grant referred to the difficulty in applying s 43 if there was no guarantee
that the whole of the payment made by the company to the trustees would
eventually find its way to the employees as emoluments. She gives as an
example the case where the company’s contribution might be partly used to meet
the ordinary running costs of the trust. In the same context Mrs Grant refers
to the comments in the Law Society Gazette concerning ESOTs as a
possible stumbling block. However, she goes on to say that she does not think
that any of these obstacles are insurmountable in a suitable case where there
is factual evidence that the company intends a particular payment it makes (or,
in the case of a provision, plans to make) to the trustees to be used to make
payments to specific employees or to employees generally, and is in a position
to ensure that the trustees act in accordance with its wishes.
93.
It is apparent that in 1998, the question of the possible application of
s 43 was still in the melting pot. In one letter to an Inspector, after
referring to the fact that the Revenue have shied away from its use, Mrs Grant
informs the inspector that:
“I will keep you informed of developments on the s
43 front, the key to which is whether trustees of discretionary trusts can be
considered to be ‘intermediaries’ for the purposes of section 43(11). But even
if the Solicitor gives us support for arguing that that may be so in certain
circumstances, it will be necessary to find out factual information how a
particular trust is operated in practice and the relationship between the
trustees and the company (acting through its directors).”
94.
It also appears that there was some sensitivity to arguments on the
possible application of the statement in the Law Society Gazette in
1989. In one exchange of correspondence Mrs Grant suggests that s 43 should
not be mentioned at that stage in the process. She reasons (correctly, in the
terms of s 43) that if a deduction can be denied for accounting reasons there
will be no need to refer to s 43. This, she says, would avoid the tricky issue
of the commitment given in 1989 in relation to ESOTs, and the extent to which
it might be argued to apply to EBTs more generally.
95.
On 20 February 2001, Mrs Grant sent to Mr Macdonald a marked-up version
of a letter intended to be sent out under Mr Macdonald’s name which included
the following observation, which must have been approved by Mrs Grant:
“You have let me have a copy of counsel’s opinion
with regard to Employee Benefit Trusts. This is the standard opinion included
with the ‘Introducer’s Pack’ provided by Baxendale Walker. Included in that
opinion is the view that Section 43 FA 1989 does not apply to Employee
Benefit Trusts. Our view is that section 43 can apply to contributions to
Employee Benefit Trusts. Whether it does, depends upon the facts of each
particular case.
The opinion says that this is because the sum paid
into the trust will not be ‘relevant emoluments’ as there will not be a sum
allocated in the accounts of the founder in respect of the emoluments of any
particular office or employment, or in respect of offices or employments in
general. It is a question of fact – ultimately for the Commissioners to decide
if necessary – whether an employee has paid money into an Employee Benefit
Trust with a view to it being allocated in respect of offices of employments
(which, after all, is the common link between those eligible to be
beneficiaries of Employee Benefit Trusts) or with a view to something else.
The opinion goes on to claim that the contributions will
not be ‘potential emoluments’ with[in] Section 43(11) as the trustees could not
be correctly characterised as an intermediary of the founder. It is a question
of fact – ultimately for the Commissioners to decide if necessary – whether the
trustees of an Employee Benefit Trust do, in practice, act as intermediaries
between the employer and those who benefit from the trust by virtue of their,
or someone else’s, office or employment.”
96.
On 2 March 2001 Mrs Grant wrote advising another Inspector:
“Section 43 FA 1989
13. From the above [a discussion of UITF 13] you
will gather that only if the trust is not under the ‘de facto’ control
of the company might Section 43 FA 1989 be relevant. And because Section 43
only acts to defer a deduction for late-paid emoluments which are held by an
intermediary (or are the subject of a provision in the employer’s accounts in
accordance with GAAP), it is likely to have little application. If the
trustees are not under the control of the company I doubt if they could
be considered to be intermediaries for the purpose of Section 43(11) FA 1989.
14. So, I suggest you leave any Section 43 arguments
for the time being, and concentrate on the further fact-finding needed to
consider the ‘wholly and exclusively’ question in more detail, and/or to
support an accountancy-based timing argument.”
97.
In all of the evidence we have seen the position adopted has been that s
43 is a theoretical line to pursue in connection with denying deductibility for
contributions to an EBT, but that it all depends on the facts. The view taken
is that other avenues should first be pursued, which of course was entirely
correct as a matter of law; s 43 could only apply if a deduction were otherwise
available (s 43(1)(b)). Nevertheless, the facts should be examined to
ascertain whether the trustees could be regarded as “intermediaries” within s
43(11); the focus prior to Dextra being on whether the trustees were
under the effective control of the company in relation to the making of
distributions out of the trust. Prior to Dextra, there was no
indication that s 43 was engaged simply as a result of the terms of the trust
deed.
98.
The correspondence makes reference in many instances to Regional
Technical Updates (“RTUs”) produced by Mrs Grant. We were provided with two
examples, the first from 1995 and the second from 1999. These repeat the
perceived need that, to have any prospect of contending successfully that an
employer’s contribution to an EBT is a payment of potential emoluments,
Inspectors had to obtain evidence to show that the trustees merely act as
intermediaries of the employing company in making payments, or distributing
benefits, to employees. In appropriate cases it is suggested that there be an
examination of the level of discretion that the trustees actually have in
practice.
99.
In the first RTU (1995), after referring to the statement in the Law
Society Gazette, Mrs Grant questions whether the approach adopted in that
statement might be considered legalistic or artificial. She poses the
rhetorical questions: Can it really be said that trustees have any real
discretion? Is that not inconsistent with the employer’s supposed object in
making the contribution? In answer to those questions, Mrs Grant writes:
“Inevitably employers are walking a tightrope. The
trustees must have sufficient discretion so that S43 does not bite. But they
cannot have a degree of discretion that might potentially defeat the overall
objectives of the employer in making the contributions; that is to promote a
greater degree of commitment by employees. Providing they have made a
reasonable effort to walk that tightrope, we are content that they should
secure relief without regard to FA89/S43. The cases that do concern us more,
and where we will consider applying S43 are those –
·
strictly not ESOTs, where cash bonuses, deferred remuneration,
etc schemes are wrapped up in this sort of form. In other words those in which
the trustees are purported to have discretion which they don’t in reality
enjoy, because the employees[’] title is clearly established, perhaps in the
form of a written/verbal contract between employer/employee;
·
as above under ‘ordinary principles’ where the degree of
discretion is such as to defeat the stated objective of the trust. In
particular, where it appears that the real purpose is other than to encourage
wider share ownership amon[g]st employees; or if it is unclear as to what the
trust is in fact for.”
100. The RTU goes on,
under the heading “Advice” to say the following:
“Although ‘employee trusts’ have been around for
some time (the Heather
case was heard in 1972) there has been an upsurge in activity in recent years.
In the main this is no doubt nothing other than a genuine desire to encourage
employees to have a stake in the company for whom the[y] work. But, at the
margin, there is no doubt that schemes are also being set up to counter the
effects of FA89/S43; also, particularly for private companies, to operate as an
off-shore money box as the more conventional ways of storing money are
increasingly being attacked. This is a developing area and Business Profits
Division 4 (Schedule D) would like to know of suspicious cases and to give
advice. At the early stage of an enquiry a telephone call is sometimes helpful
and the number is …”
101. In another RTU
(1999), a number of practical examples are provided. One is of an EBT,
expressed to have been set up as a bulwark against a takeover, with trustees
consisting of two directors, two employees and one independent. The RTU makes
the point that it is doubtful whether either UITF 13 or s 43 could apply. With
the unusual constitution of the trustees it would be difficult, the note
states, to contend that the company has control of the trust. In another case,
the usual comments are made as to the difficulty in satisfying the potential
emoluments definition if there is no guarantee that the payment to the trustees
will find its way to the employees as emoluments, reference being made to the
possibility that it might be used to meet ordinary running costs. But the point
is once again made that s 43 might apply if there is factual evidence that the
company intends a particular payment it makes (or, in the case of a provision,
plans to make) to the trustees to be used to make payments to specific
employees or to employees generally, and is in a position to ensure that the
trustees act in accordance with its wishes.
102. The conclusion
to be drawn from all of this material is that the Revenue regarded the possible
application of s 43 as wholly dependent on the particular facts of each case.
The Revenue regarded as particularly significant, firstly, whether it could be
said that the trustees were acting on the instructions of the company, and
secondly, whether there was factual evidence that the company intended a
particular payment to be used to make payments to specific employees or
employees generally, and was in a position to ensure that the trustees acted in
accordance with its wishes. At no stage prior to Dextra in the High
Court did the Revenue take the view that s 43 applied so as to delay the
deductibility of a contribution to an EBT merely because the terms of the trust
deed admitted of a realistic possibility that the funds could be used to pay
emoluments.
HMRC enquiries
103. We received
evidence from Mr Macdonald of EBT enquiries notified to SIS, together with
enquiries where accountancy advice was sought by tax inspectors from HMRC
accountants in connection with EBT enquiries and enquiries collated in the
mid-2000s by some HMRC regional offices where enquiries were made into EBTs.
An analysis of this data shows the following:
|
Calendar year in which accounting period ended
|
Number of referrals
|
|
1992
|
1
|
|
1993
|
0
|
|
1994
|
4
|
|
1995
|
13
|
|
1996
|
32
|
|
1997
|
82
|
|
1998
|
201
|
|
1999
|
417
|
|
2000
|
445
|
|
2001
|
452
|
|
2002
|
169
|
|
2003
|
30
|
|
2004
|
16
|
|
2005
|
15
|
|
2006
|
5
|
104. The documents
produced by HMRC of cases that were referred to Business Profits Division
demonstrate that s 43 was being considered, and raised by the Revenue in a
number of cases. However, we are unable to derive a clear factual finding on
the enquiry position on the basis of this evidence. In his witness statement,
Mr Terry, who was responsible for compiling these documents accepted that it
was not possible for HMRC to identify instances where returns were submitted
before January 2001 in which taxpayers making contributions to EBTs had made
adjustments to their tax computations under s 43. Nor, except in cases where
discovery assessments had been made and remained under appeal, had it been
possible for HMRC to identify instances prior to 31 January 2001 where HMRC had
failed to challenge the tax treatment of contributions to EBTs.
105. On the basis of
the evidence before us we conclude that specific challenges under s 43 were the
exception rather than the rule. In many cases, on the advice of Mrs Grant, s
43 was not specifically raised, because of the concomitant accounting issue
that, if it could be sustained, would mean that s 43 would fall out of account
altogether. In other cases its application was kept in reserve pending ascertainment
of the full facts.
Discussion
106. It is clear, and
there was common ground in this respect, that at the material time, and prior
to Dextra, taxpayers’ advisers generally and the Inland Revenue shared a
common misunderstanding on the interpretation of s 43. Neither the advisers
nor the Revenue considered that it applied merely because an EBT contained a
discretionary power to provide emoluments to employees.
107. We do not
consider that such a common misunderstanding is capable, of itself, of giving
rise to a practice that s 43 would not be applied in those circumstances.
There is a difference, in our view, between what simply happens in practice and
the identification, or establishment, of a particular practice. The latter
requires clarity and substance, as we have described. A practice not to take a
particular point, therefore, must have as its foundation the identification of
that issue before the practice is adopted. Merely failing to take a point is
not enough, as the taxpaying community would not be able to discern anything as
a matter of practice from such an omission. There is no evidence of the Inland
Revenue having determined to adopt a practice in relation to this view of the
law. Nor is there any evidence that the Revenue addressed the issue. The
evidence is that the discretionary powers of the trustees were commonly argued
by taxpayers to counter suggestions by the Revenue that the company had
retained control over the contributed funds, and that the Revenue’s response
was to focus on the way the trustees had used those powers rather than on the
powers themselves. Although it was the case that the Revenue did not attack
EBT contributions on the basis subsequently revealed in Dextra, that was
not in our view the result of any practice not to do so.
108. It is clear that
the Revenue did not regard s 43 as its main weapon against tax avoidance in the
form of EBTs. The main armoury consisted principally of the wholly and
exclusively test, the capital and revenue distinction, and the accountancy
arguments in relation to UITF 13. As we have described, the focus on those
issues is perfectly understandable; s 43 is framed as a last resort, as it can
only be applied where a payment would otherwise be deductible.
109. The focus on
UITF 13 is instructive. Its focus was on control, and it accordingly
overlapped to a considerable extent with the Revenue’s then view as to the
possible application of s 43. It was natural, therefore, for the Revenue to
concentrate on UITF 13. If the “control” argument could prevail in that
respect there would be no need to look at s 43.
110. That said, at no
time was possible reliance on s 43 abandoned. It remained very much a part of
the weaponry available to the Revenue. It was considered on a regular basis by
Inspectors enquiring into company tax returns, and was consistently referred to
by Linda Grant in her advice and guidance to Inspectors, with the caution as to
the perceived difficulties of applying it, and the need to ascertain the facts,
particularly as to whether the trustees were acting on the instructions of the
company, so as potential to render them “intermediaries”, and whether a
contribution was to be used to make payments to specific employees or employees
generally (which could be regarded as “channelling”).
111. The question we
have to consider is whether the evidence shows that there was a practice
generally prevailing and, if so, whether the return made by Boyer Allan on 24
January 2001 was in accordance with that practice.
112. Mr Tidmarsh
submitted that any such practice as may be found in this case could not satisfy
the test in Household Estate Agents that it be relatively
long-established. He referred to the increase in the number of enquiries for
accounting periods ended in 1998 and subsequent years. His argument was based
on the time lag there would have been between the accounting year in question
and the opening of an enquiry. We were referred to the law on this both pre-
and post- self assessment, but we need not refer to that. On this basis, Mr
Tidmarsh submitted that it was not until 1999/2000 that the Inland Revenue
began to open a large number of enquiries into EBTs, and he relied also on
evidence of those witnesses who said that EBTs were becoming more widely used
in the late 1990s.
113. In his closing
submissions Mr Tidmarsh was originally disposed to submit that nothing could be
inferred from the fact that no enquiries were opened in some cases. If there
was a practice generally prevailing, it could only be based on the opening of
enquiries into EBTs and the closing of those enquiries without the s 43 point
being pursued. We reject that submission, which cannot be right. The failure
to open an enquiry can obviously be based on a settled practice; indeed that
would be a most likely outcome of the application of such a practice.
114. On our raising
this issue with Mr Tidmarsh, he accepted that the enquiry position was no more
than evidential. It was directed at the issue whether there was a track record
that could be regarded as relatively long-established.
115. We do not find
this statistical evidence of any assistance. The evidence of what the Revenue
were doing can be more readily discerned from the internal material with which
we have been provided, as well as the evidence of the Revenue’s external
statements. Although it was in the context of ESOPs, there was a published
view of the Revenue from as far back as 1989. The Inspectors’ Manual of 1995
refers to s 43 in the context of EBTs, and the RTUs, including advice about s
43, commenced in 1995. We are in no doubt that, to the extent a practice can
be identified for this purpose, it will not be prevented from being a generally
prevailing practice by reason of any lack of longevity.
116. In our view, the
essential question is whether the internal guidance within the Inland Revenue
at the material time, and the way in which it was operated and applied,
amounted to a settled practice accepted or adopted by taxpayers and their
advisers, such that it can be regarded as a generally prevailing practice on
the basis of which Boyer Allan’s January 2001 return was made. We accept that
the primary evidence of such a practice is to be derived from the views
expressed by Mrs Grant, as she was acknowledged to be the policy-holder within
the Inland Revenue at the relevant time. But evidence of how others within the
Revenue approached the issue is also relevant in assessing whether the views of
Mrs Grant, and her internal advice and guidance, were translated into a settled
practice.
117. As we have
described, we have formed the view that, to be a practice for this purpose, it
must be something capable of being clearly articulated, and articulated not
just by the Revenue, or just by taxpayers’ advisers, but by both, and by both
in the same terms. An interested enquirer, seeking to establish whether there
is a practice on a particular point, must be given the same answer, whomever he
might turn to within those who have the relevant knowledge. The answer in each
case must be clear and unequivocal, characteristics that follow from the
context of providing certainty, for the Revenue and taxpayers alike, in which
para 45(b) finds itself.
118. What this means
is that the criteria for the application of the practice must be clearly
identified. If the practice is dependent on the factual position, that factual
position itself must be clearly expressed. There can be no lack of clarity as
to which cases fall on which side of the factual dividing line.
119. Mr Prosser and
Mr Bremner, in their closing written submissions, submitted that the evidence
before us demonstrated unequivocally that there was a general, albeit not
universal, acceptance by the Revenue and professional advisers alike that,
firstly, payment by an employer to trustees of a discretionary trust for the
benefit of employees was not “held by an intermediary with a view to … becoming
… emoluments” and therefore was not a payment of “potential emoluments” within
s 43(11), merely because the trust deed conferred an absolute and uncontrolled
discretionary power on the trustees to make payments to employees, and
secondly, that there was a payment of potential emoluments only where the facts
of the particular case were that the trustees were under the control of the
employer (and therefore an intermediary), and the payment to them was made with
the intention that they should use it to pay emoluments to employees and for no
other purpose (a “channelling case”). If those were not the facts, then it was
appropriate to claim a deduction for corporation tax purposes in respect of the
contributions.
120. We accept that
the intermediary issue, the question of control and the intentions of the
company as to the payments to employees were all aspects of the guidance
provided to Inspectors by Linda Grant. But we are unable to discern in all of
this the clarity and consistency of approach that could be regarded as
translating into a practice, either to apply s 43 in a particular case or not
to apply s 43 outside particular defined cases, on the part of the Inland
Revenue at the material time. In this regard, we accept the submissions of Mr
Tidmarsh that the Revenue had not formulated a practice; it had merely
formulated internal practice guidance. It was advice to Inspectors as to
avenues of enquiry to explore when investigating the facts, coupled with
caveats on the view being taken as to the application of s 43. The doubts
expressed by Mrs Grant as to the applicability of s 43 cannot be regarded as
constituting a settled practice not to apply that section.
121. We saw no
consistent evidence of practitioners generally extolling any element of Revenue
practice as regards the application or otherwise of s 43 except, and this was
in limited circumstances only, by reference to the Revenue’s own published
materials. We do not believe that advisers would, in January 2001, have been
able to articulate the Revenue’s alleged practice in this respect in the manner
in which we are now invited to find that such a practice existed and was
generally prevailing. On this basis no such practice could in any event be
regarded as “generally prevailing”
122. Although we have
formed the view that it is not a necessary condition for there to be a practice
that it be published, we also concluded that it is essential that, on enquiry,
the same effective answer as to the position has to be capable of being given
by the Revenue and the taxpayer or tax adviser community alike. In this case,
we consider that the likely answer to the interested enquirer would have been
to refer to the Revenue’s Inspectors’ Manual, and to the passages at paras
IM689 and IM1049. Those statements are, as they were described by Henderson J
in Household Estate Agents, inconclusive, and are not sufficient to
amount to a practice generally prevailing for para 45(b) purposes. There is no
evidence that either the Revenue or tax advisers generally would have identified
a practice in the terms submitted by Mr Prosser and Mr Bremner.
123. On this basis we
conclude that there was no practice generally prevailing with respect to the
application or otherwise of s 43 FA 1989 to the deductibility of payments to
trustees of EBTs. Accordingly we find that the return of Boyer Allan submitted
on 24 January 2001 was not “on the basis or in accordance with the practice
generally prevailing at the time when it was made.”
Channelling
124. Our conclusion
in that respect effectively disposes of that aspect of the appeal with which
this decision is concerned. However, because we heard argument on it, we
should also, if relatively briefly, comment on the issue of “channelling” in
relation to this case.
125. What HMRC say in
this respect is that, even if the published Revenue guidance could amount to a
generally prevailing practice (which we have found that it cannot), the use of
an EBT in this case in fact fell within the terms of para IM1049 of the
Inspectors’ Manual such that s 43 would apply.
126. The immediate
point of this is that para IM1049 does not go that far. It simply requires
channelling cases to be submitted to Business Profits Division. The argument
of HMRC is effectively that even if there were a practice, Boyer Allan’s tax
return would not be in accordance with it because the practice not to apply s
43 as a matter of practice did not apply to channelling cases, each of which
would have to be considered on its own merits. Essentially, what is said is
that, even if there was a general practice as regards the application, or
non-application, of s 43, that practice did not extend to channelling cases.
127. The argument
between the parties was whether this case was or was not a channelling case.
The difficulty is that before we can address that question we effectively have
to decide what a channelling case is. Where a company establishes an EBT with
a view to benefitting its employees, where is the line to be drawn between
cases that are channelling and cases that are not? Does this depend on whether
the company has de facto control of the trustees, is it necessary for
emoluments to have been earmarked for specific employees, or is it sufficient
that the trustees simply adhere to a non-binding letter of wishes given by the
company to the trustees? And these are all questions that have to be
considered in the context of the position in January 2001.
128. The very fact
that the answer to these questions is unclear lends weight to our conclusion
that there was a lack of clarity and certainty as to the position that in turn
negates any possible conclusion that there was, in these circumstances, a
generally prevailing practice, or indeed any relevant practice at all. But on
the assumption that there was a practice, we shall consider whether the circumstances
of Boyer Allan’s EBT would have taken the contributions to it outside that
practice.
129. Some indication
of what the Revenue, in January 2001, might have regarded as channelling may be
gleaned from considering the basics facts of Dextra. There the various
group companies that had made contributions to the EBT provided the trustees
with schedules setting out the provision that those companies wished the
trustees to make, expressed either as rewards for past performance (for three
director-shareholders and certain relatives of two of them) or future
performance (other employees). The relevant amounts were placed in sub-funds,
and the beneficiaries were informed of the allocations and the future
performance criteria, where relevant.
130. Mr Tidmarsh
argued that Boyer Allan intended to use the EBT “largely to channel emoluments
to employees so as to obtain a deduction for payments when charged whilst
deferring the receipt of emoluments in the hands of the employee”, and did in
fact do so. He relies on the following factors.
(1)
Mr Tidmarsh says that a primary concern on the part of Boyer Allan and
its directors was to secure a deduction for corporation tax in circumstances
where sums would be paid out as emoluments. We consider this to be
irrelevant. It would be surprising indeed if a company did not consider the
deductibility of a payment of this nature. The fact that it did can say
nothing about whether this could be regarded as a case of channelling.
(2)
Mr Tidmarsh relies upon the evidence of Mr Allan that the only payments
that have been made from the EBT have been payments of cash, and that was the
only way in which the payments were expected to have been made. Again, this
does not in our view go to show the channelling of emoluments.
(3)
Mr Tidmarsh refers to clause 11.1.1 of the trust deed which provides
that benefits could be granted in favour of participants (as defined in s 13(2)
of the Inheritance Tax Act 1984, but excluding persons within s 13(3)) in Boyer
Allan only by way of emoluments. On the basis that at all material
times each of Mr Boyer and Mr Allan owned 50% and 44.5% of Boyer Allan’s issued
share capital, and so were participants, Mr Tidmarsh says that it follows that
the only benefits that could be granted to them were emoluments. We
agree, but we do not regard the terms of the trust deed itself as indicative of
channelling, any more than in January 2001 the Revenue would have relied on
those terms. The Revenue at that time were looking for evidence of what
happened in practice, outside the terms of the trust.
(4)
As we heard in evidence, the contribution to the Boyer Allan EBT made in
the year ended 30 April 2000 was, from the moment of its receipt, notionally
and informally “earmarked” for Mr Allan and Mr Boyer. This meant that they
were presumptively entitled to the sums allocated, although Mr Matthew told us
that the allocations were provisional and could increase or decrease by
reference to discussions with the board of the company, investment performance
and payments out to beneficiaries. It was at all times open to the trustees to
apply the funds for the benefit of other beneficiaries of the EBT.
Mr Prosser argues in this connection that the earmarking
of the funds did not mean that the funds somehow “belonged to” or were
“destined for” Mr Boyer and/or Mr Allan. He submitted that this does not
therefore mean that this is a case of channelling.
On analysis we believe that Mr Prosser may well be
right. But whether he is or not is not the question we have to consider. We
have to determine whether the circumstances of this case are likely to have
fallen on the “channelling” side of the line as far as the Revenue were
concerned in January 2001. We consider that it would, simply because of the
allocations that had been made. Whether, absent what turned out to be the
proper construction of Dextra, a court would have found that this was a
case falling within s 43 is not to the point. We are satisfied that these
circumstances would have taken the Boyer Allan EBT out of the normal case (to
which the assumed practice would have applied), such that the assumed practice
not to apply s 43 would not have operated in this case. A subsequent finding
that this was not a channelling case would not have altered the position.
(5)
For completeness, Mr Tidmarsh referred to the fact that from the
inception of the EBT until 30 April 2002 the only benefits granted by the
trustees were payments of emoluments. The sums paid out as emoluments in that
period (including the payment of tax and employees’ NICs on the relevant sums)
were significant: £2m, £362,000, £750,000 and £1,468,000. We do not consider
that this of itself would have led the Revenue to consider this to be a
channelling case. However, we do consider that the payments to Mr Allan (on 26
October 2000 of £1,200,000, on 28 June 2001 of £450,000 and on 1 February 2002
of £300,000) would have contributed to the Revenue concluding at the relevant
time that this was a channelling case.
131. For these
reasons, therefore, we conclude that, if we had found that there was a generally
prevailing practice with regard to s 43 and the deductibility of contributions,
we would nevertheless have found that in the circumstances of the Boyer Allan
EBT that practice would not have applied. In our view, that would have been a
case where it would have appeared to the Revenue that the trust was being used
to channel emoluments to employees so as to obtain a deduction for the payments
when charged whilst deferring the receipt of the emoluments in the hands of the
employee.
Decision
132. For the reasons
we have given we dismiss the appeal with respect to para 45, Sch 18, FA 1998.
133. The parties have
liberty to apply in respect of the outstanding issues.
Costs
134. Any application
for costs must be made within 28 days after the date of release of this decision.
As any direction as to costs will be for detailed assessment, it will not be
necessary for the application to be accompanied by a schedule of costs.
Application for permission to appeal
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: 30 August 2012
