Why a provision for a future payment isn’t deductible.
The recent decision in AD Bly Groundworks and Civil Engineering Ltd v HMRC [2022] UKUT 23 (TCC) contained some unexpected and interesting features. It was all about whether a provision in the company’s accounts in respect of liabilities to make future pension payments was deductible for corporation tax purposes.
It is generally accepted that remuneration and benefits payable to or for the benefit of employees is almost certain to be an allowable deduction from the company’s profits under CTA 2009 s 54 as being ‘incurred wholly and exclusively for the purposes of the trade’ – although one can imagine circumstances when it might be disallowed. One of those circumstances was referred to by the Court of Appeal in the case of Hoey v HMRC [2022] EWCA Civ 656: ‘For example, the wages may be deliberately inflated so as to confer a personal benefit on the employee or with the object of artificially reducing the employers taxable profit.’
This must be an extreme example because there is lots of authority to the effect that expenditure incurred with a tax motivation does not give rise to a duality of purpose so as to disqualify the expense. Indeed, this principle was acknowledged in Hoey where it was said that even engaging in a tax avoidance scheme cannot amount to a separate object of the employers in making the payment.
Be that as it may, in the case of AD Bly the conclusion of the tribunal was not that there was a duality of purpose, but that the primary purpose of the company was to reduce their liability to tax without incurring actual expenditure, and not to benefit the employees.
As a result, the deduction was disallowed by the tribunal, which perhaps indicates that the company may have rather overdone things.
However, there was a very puzzling aspect to this case. The issue was whether a provision in the company’s accounts in respect of liabilities to make future pension payments was deductible for corporation tax purposes under s 54, that is to say, the expense must be ‘incurred wholly and exclusively for the purposes of the trade’ (emphasis added).
There was no suggestion that there was anything wrong with the provision – only whether it was tax deductible. For example, it satisfied the tests for a valid provision set out in HMRC’s Business Income Manual at BIM46250.
However, it was a provision: a figure which the accountants considered the company would probably have to pay sometime in the future. But s 54 requires the expense to be ‘incurred’. It is clear that no expense had been incurred and this was confirmed by the FTT which said that the primary purpose of the company was to reduce their liability to tax without incurring actual expenditure. The Upper Tribunal said: ‘We think that it would have been more accurate for the FTT to have referred to the incurring of actual expenditure in the accounting period in which the deduction arose for tax purposes, since in AD Bly’s case it did incur some of the expenditure albeit in subsequent accounting periods.’
In other words, the company had not incurred any expenditure in the accounting period for which it made the claim. This must be right because if the company had incurred an expense and it remained unpaid, that would not have given rise to a provision – it would have been a creditor.
So all the arguments about whether it was wholly and exclusively for the purposes of the trade seem to have been irrelevant anyway.
Why a provision for a future payment isn’t deductible.
The recent decision in AD Bly Groundworks and Civil Engineering Ltd v HMRC [2022] UKUT 23 (TCC) contained some unexpected and interesting features. It was all about whether a provision in the company’s accounts in respect of liabilities to make future pension payments was deductible for corporation tax purposes.
It is generally accepted that remuneration and benefits payable to or for the benefit of employees is almost certain to be an allowable deduction from the company’s profits under CTA 2009 s 54 as being ‘incurred wholly and exclusively for the purposes of the trade’ – although one can imagine circumstances when it might be disallowed. One of those circumstances was referred to by the Court of Appeal in the case of Hoey v HMRC [2022] EWCA Civ 656: ‘For example, the wages may be deliberately inflated so as to confer a personal benefit on the employee or with the object of artificially reducing the employers taxable profit.’
This must be an extreme example because there is lots of authority to the effect that expenditure incurred with a tax motivation does not give rise to a duality of purpose so as to disqualify the expense. Indeed, this principle was acknowledged in Hoey where it was said that even engaging in a tax avoidance scheme cannot amount to a separate object of the employers in making the payment.
Be that as it may, in the case of AD Bly the conclusion of the tribunal was not that there was a duality of purpose, but that the primary purpose of the company was to reduce their liability to tax without incurring actual expenditure, and not to benefit the employees.
As a result, the deduction was disallowed by the tribunal, which perhaps indicates that the company may have rather overdone things.
However, there was a very puzzling aspect to this case. The issue was whether a provision in the company’s accounts in respect of liabilities to make future pension payments was deductible for corporation tax purposes under s 54, that is to say, the expense must be ‘incurred wholly and exclusively for the purposes of the trade’ (emphasis added).
There was no suggestion that there was anything wrong with the provision – only whether it was tax deductible. For example, it satisfied the tests for a valid provision set out in HMRC’s Business Income Manual at BIM46250.
However, it was a provision: a figure which the accountants considered the company would probably have to pay sometime in the future. But s 54 requires the expense to be ‘incurred’. It is clear that no expense had been incurred and this was confirmed by the FTT which said that the primary purpose of the company was to reduce their liability to tax without incurring actual expenditure. The Upper Tribunal said: ‘We think that it would have been more accurate for the FTT to have referred to the incurring of actual expenditure in the accounting period in which the deduction arose for tax purposes, since in AD Bly’s case it did incur some of the expenditure albeit in subsequent accounting periods.’
In other words, the company had not incurred any expenditure in the accounting period for which it made the claim. This must be right because if the company had incurred an expense and it remained unpaid, that would not have given rise to a provision – it would have been a creditor.
So all the arguments about whether it was wholly and exclusively for the purposes of the trade seem to have been irrelevant anyway.
