Alway Sheet Metal Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 February 2017 |
| Neutral Citation | [2017] UKFTT 198 (TC) |
| Date | 24 February 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0198 (TC)
Judge Jonathan Richards
Joseph Howard and Stephen Hackett, instructed by Griffin Law, appeared for the appellant
Aparna Nathan, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Whether payments to employee benefit trusts deductible in computing profits – Whether tribunal had jurisdiction to consider issues of estoppel or legitimate expectation – Whether HMRC should be barred from defending appeal on grounds of delay – Applicability of Finance Act 1989 (FA 1989), s. 43 and Finance Act 2003 (FA 2003), Sch. 24.
The First-tier Tribunal very largely dismissed the taxpayer companies' appeals in respect of deductibility of contributions made to the EBTs (employee benefit trusts) respectively established by them.
Appeals by the three taxpayer companies were joined because they raised similar issues relating to the deductibility for corporation tax purposes of payments made to discretionary trusts established for the benefit of employees (and in one case, consultants) and their family members and descendants (“EBTs”).
JCM Limited (“JCM”) established the JCM EBT in 1997, subsequently funding it with some £2m. Under the EBT Trust Deed, M (one of two directors of and a shareholder in JCM) was excluded from benefit, but the Trust Deed did not preclude the EBT from making loans to M. M had borrowed some £400,000 from the EBT. The EBT had also purchased a property in which M resided, for £650,000, for which M paid a monthly rent of £850. Small bonus amounts were paid out to certain employees of JCM.
It was accepted that valid enquiries had been opened into JCM's corporation tax returns for each relevant accounting period.
In September 2005, following the decision in MacDonald v Dextra Accessories Ltd [2005] BTC 355, a Deed of Amendment and Rectification was executed, expressed to be retrospective to the date of execution of the Trust Deed. This provided that:
- the EBT trustee had no power to pay emoluments, nor to pay or apply trust property so as to cause sums to be potential emoluments within Finance Act 1989, s. 43A;
- the beneficiaries of the EBT would not include any employee or former employee of JCM (although spouses, dependants and remoter descendants of employees could continue to be beneficiaries).
Correspondence ensued and in July 2007 HMRC broadly accepted to leave enquiries in abeyance pending determination of a “test case”. Between July 2007 and January 2011, approximately once a year, HMRC wrote to the taxpayer's advisers referring to their “ongoing enquiry into contributions to the company's EBT/RT”, and a further letter in March 2013.
In May 2014, HMRC issued a Closure notice amending JCM's corporation tax returns for the relevant accounting periods, denying the deductibility of the contributions. JCM subsequently appealed to the Tribunal.
Over the period in question, a number of events took place that impacted on JCM's practical ability to put its case in Tribunal proceedings. The memory of JCM's principal witness, M inevitably faded (he was 78 years old at the date of the hearing). JCM had moved offices three times since the JCM EBT was established and had lost relevant documents. It had also changed IT systems and had no records from the year 1997. The local accountant from whom JCM took advice at the time it established the JCM EBT has passed away.
ASM Limited (“ASM”) established the ASM EBT in 1998, funding it in the period May 1998–February 1999 with some £490,000. Under the EBT Trust Deed, M and L (the two directors of and sole shareholders in ASM) were excluded from benefit, but the Trust Deed did not preclude the EBT from making loans to them.
In July 1998, the EBT appointed most of the Trust property on two sub-trusts, for the benefit of the widow, widowed children and remoter descendants of each of M and L respectively. Loans were made to each of M and L, with interest chargeable, such interest being added to the principal amount of the loans. Small bonus amounts were paid out to certain employees of ASM.
In 1999, HMRC issued an assessment to corporation tax against ASM in respect of the accounting period for which the deduction for the contributions to the EBT was claimed.
In October 2005, following Dextra, a Deed of Amendment and Rectification was executed, expressed to be retrospective to the date of execution of the Trust Deed. The amendments were in all material respects identical to those made in connection with the JCM EBT, above. ASM also made an application to the High Court for rectification of the EBT Trust Deed, but this was rejected by the Court.
Again, in July 2007 HMRC broadly accepted to leave enquiries in abeyance pending determination of any “test case”, and HMRC wrote periodically to the taxpayer's advisers referring to their ongoing enquiry. In October 2012, HMRC's view of the matter was formally communicated to ASM, who appealed to the Tribunal in January 2013. It was accepted the long history had made it more difficult for ASM to pursue its appeal.
PC Limited (“PC”) established the PC EBT in 1998, funding it in the period December 1999–October 2001 with some £2.6m. Under the EBT Trust Deed, H and K (the two directors and sole shareholders of ASM) were excluded from benefit, but the Trust Deed did not preclude the EBT from making loans to them.
In March 2000, the EBT appointed most of the Trust property on two sub-trusts, for the benefit of the widow, and (after the relevant director's death only) children and remoter descendants of each of H and K respectively. In the case of H, the EBT had purchased at least a part-share in a property in Barbados (that H used for holidays with his family, without payment), and it appeared the EBT otherwise lent monies on commercial terms to a company in which H was interested and had contributed to the purchase of a UK property in which H resided and paid rent. No evidence was given in respect of the K sub-trust, K having died in 2014. Some £77,000 was distributed to a number of employees (and consultants) by way of outright payment.
It was accepted that valid enquiries had been opened into PC's corporation tax returns for each relevant accounting period. Subsequently, matters proceeded in much the same way as with ASM. Following Dextra, a Deed of Amendment and Rectification was executed in 2005, HMRC broadly accepted to leave enquiries in abeyance, and wrote periodically to the taxpayer's advisers referring to their ongoing enquiry. In October 2012, HMRC issued a Closure notice amending PC's corporation tax returns for the relevant accounting periods. PC subsequently appealed to the Tribunal. Again, it was accepted the long history had made it more difficult for PC to pursue its appeal.
The judge said there were six issues before the Tribunal, namely whether:
- as a result of what the companies considered to be HMRC's excessive delay, HMRC were precluded from making the assessments by principles of estoppel, abuse of process or legitimate expectation;
- in the case of ASM only, HMRC were entitled to increase the assessment;
- payments made to the EBTs were expended wholly and exclusively for the purposes of the companies' respective trades;
- certain amendments that the companies made to their EBTs, by means of Deeds of Amendment and Rectification, took effect retrospectively from the date of execution of the original Trust deeds;
- applying the decision of the Court of Session in Advocate General for Scotland v Murray Group Holdings Ltd [2015] BTC 36, sums that the companies paid to the EBTs were simply indirect remuneration; and
- the provisions of Finance Act 2003, s. 43 and Finance Act 2003, Sch. 24 applied.
Taking these in turn:
- The procedural argument: the judge concluded that the Tribunal had no jurisdiction to consider the taxpayer's arguments as to estoppel and legitimate expectation. The statutory provision conferred a right of appeal against specified HMRC decisions and made no reference to matters other than in the statutory provision (see R & C Commrs v Noor [2013] BVC 1,571). As regards the argument as to abuse of process, he considered he did have jurisdiction, and case management powers to make appropriate directions. However, it would not be a proper exercise of case management powers to penalise HMRC for what the taxpayers considered to be unacceptable delay before Tribunal proceedings were commenced. In any event he did not think HMRC were guilty of inordinate delay
- The ASM assessment: this assessment was made under TMA 1970, s. 29 as it had effect for pay and file accounting periods of companies. The judge said TMA 1970, s. 50(7) gave the Tribunal power to increase such assessments, though he did consider, however, that HMRC bore the burden of proving that the assessment should be increased under s. 50(7).
- The wholly and exclusively argument: the taxpayers' objects in making the payments included the obtaining of a corporation tax deduction and the obtaining of a PAYE and NIC benefit. The judge said he was not satisfied on the evidence in front of him that incurring expenditure with those objects was wholly and exclusively for the benefit of their respective trades (though stressed that he was not purporting to make a general statement to the effect that providing tax benefits to employees could never be wholly and exclusively for the purposes of a company's trade).In the case of JCM, it seemed likely that a large part of the £2m payment by JCM was not an expense that JCM incurred in order to earn the profits of its trade, but rather was a payment to M (in his capacity as shareholder) of profit that the trade had generated.In the cases of ASM and PC, the principal object was to provide the relevant EBT with funds that could be put at the disposal of the individuals concerned in such a way as to defer (perhaps indefinitely) the PAYE and NIC costs...
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