In Alway Sheet Metal and others v HMRC [2017] UKFTT 198 (24 February 2017), the FTT found that payments made to employee benefit trusts by three companies were not deductible.
The three appeals raised similar issues relating to the deductibility, for corporation tax purposes, of payments made to discretionary trusts established for the benefit of employees and their families. The main question was whether the payments to the EBTs were made wholly and exclusively for the purposes of the companies’ trades.
Referring to Scotts Atlantic Management [2015] UKUT 66 and ‘the authorities referred to in it’, the FTT noted that:
(1) if any expenditure is incurred partly for a purpose other than the trade, the test is failed;
(2) in order to determine the taxpayer’s object in incurring the expense, the tribunal must look ‘into the taxpayer’s mind’;
(3) what matters is the object of the payment (rather than its effect); and
(4) where a payment is part of a wider set of arrangements, the relevant question is still the object of the payment (and not the purpose of the wider arrangements).
The tribunal observed that the mere fact that a choice is influenced by tax consequences does not mean that the payment has a dual purpose; but also that the mere fact that a payment is made to directors does not compel the conclusion that the payment is wholly and exclusively for the purpose of the trade.
The FTT found that the object of the payments to the EBTs was (at least partly) to provide the EBTs with funds that could be put at the disposal of directors in such a way as to defer (perhaps indefinitely) the PAYE and NIC costs that would arise on a payment of a cash bonus, while at the same time obtaining a corporation tax deduction for the payment, which would not have been available on a dividend payment. The tribunal pointed out that no other explanation had been put forward for the convoluted arrangements, which necessitated the creation of offshore trusts and extensive advice.
Why it matters: The FTT robustly rejected the notion that there is a presumption that sums paid to employees are deductible and that special circumstances are needed to displace this presumption. It noted that where a company makes a payment to an employee, in order to obtain a deduction for that payment, it must establish that the payment is ‘wholly and exclusively’ for the purposes of the trade. This is often, but not always, straightforward.
In Alway Sheet Metal and others v HMRC [2017] UKFTT 198 (24 February 2017), the FTT found that payments made to employee benefit trusts by three companies were not deductible.
The three appeals raised similar issues relating to the deductibility, for corporation tax purposes, of payments made to discretionary trusts established for the benefit of employees and their families. The main question was whether the payments to the EBTs were made wholly and exclusively for the purposes of the companies’ trades.
Referring to Scotts Atlantic Management [2015] UKUT 66 and ‘the authorities referred to in it’, the FTT noted that:
(1) if any expenditure is incurred partly for a purpose other than the trade, the test is failed;
(2) in order to determine the taxpayer’s object in incurring the expense, the tribunal must look ‘into the taxpayer’s mind’;
(3) what matters is the object of the payment (rather than its effect); and
(4) where a payment is part of a wider set of arrangements, the relevant question is still the object of the payment (and not the purpose of the wider arrangements).
The tribunal observed that the mere fact that a choice is influenced by tax consequences does not mean that the payment has a dual purpose; but also that the mere fact that a payment is made to directors does not compel the conclusion that the payment is wholly and exclusively for the purpose of the trade.
The FTT found that the object of the payments to the EBTs was (at least partly) to provide the EBTs with funds that could be put at the disposal of directors in such a way as to defer (perhaps indefinitely) the PAYE and NIC costs that would arise on a payment of a cash bonus, while at the same time obtaining a corporation tax deduction for the payment, which would not have been available on a dividend payment. The tribunal pointed out that no other explanation had been put forward for the convoluted arrangements, which necessitated the creation of offshore trusts and extensive advice.
Why it matters: The FTT robustly rejected the notion that there is a presumption that sums paid to employees are deductible and that special circumstances are needed to displace this presumption. It noted that where a company makes a payment to an employee, in order to obtain a deduction for that payment, it must establish that the payment is ‘wholly and exclusively’ for the purposes of the trade. This is often, but not always, straightforward.
