Boyer Allan Investment Services Ltd (formerly Boyer Allan Investment Management Ltd)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 August 2012 |
| Neutral Citation | [2012] UKFTT 558 (TC) |
| Date | 30 August 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 558 (TC)
Judge Roger Berner, Tym Marsh
Kevin Prosser QC and Jonathan Bremner, instructed by Farrer & Co LLP, appeared for the Appellant
Christopher Tidmarsh QC and James Rivett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax - discovery assessment - whether invalid - appellant made contributions to an employee benefit trust (EBT) - following Dextra, FA 1989, Finance Act 1989 section 43 subsec-or-para 11s. 43(11) applies - FA 1998, Finance Act 1998 schedule 18 subsec-or-para 45Sch. 18, para. 45 - whether the appellant's company tax return for the year ended 30 April 2000 was in fact made on the basis or in accordance with the practice generally prevailing when it was made
The First-tier Tribunal decided that there was no practice generally prevailing with respect to the application of Finance Act 1989 ("FA 1989"), Finance Act 1989 section 43s. 43 to the deductibility of payments to trustees of an employee benefit trust established by a taxpayer company. It found that the taxpayer's tax return for the relevant period was not in accordance with the practice generally prevailing at the time when it was made. HMRC's internal practice would not be generally prevailing, however precise in its terms, until such time as it could be identified with sufficient precision by the taxpayer and their advisers. The Tribunal accepted 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 HMRC inspectors. However, it was unable to discern that the clarity and consistency of approach could be regarded as translating into a practice, either to apply FA 1989, Finance Act 1989 section 43s. 43 in a particular case or not to apply it outside the particular defined cases on the part of HMRC at the material time.
The taxpayer company appealed against HMRC's discovery assessments made under Finance Act 1998 ("FA 1998"), Finance Act 1998 schedule 18 subsec-or-para 41Sch. 18, para. 41 in relation to the two accounting periods ended 30 April 2000 and 30 April 2001.
The taxpayer's business was to provide the service of investment fund management in return for management fees and performance-related fees. On 28 January 2000, it established an employee benefit trust ("EBT"), the trustees of which were empowered to accumulate income, to appoint capital and income for the benefit of a beneficiary, and to alter the class of beneficiaries. Subject thereto, the trust fund was to be held for charitable purposes.
In the years 2000 and 2002, several contributions were made to EBT. Thus, the trustees exercised their discretion to provide benefits for certain employee beneficiaries. The trustees then transferred funds to the taxpayer to reimburse it for the income tax and employees' National Insurance contribution liabilities of the beneficiaries.
The taxpayer submitted its tax return for the accounting period ended 30 April 2000. There, the contributions to EBT were treated as deductible expense for corporation tax purposes. The taxpayer submitted its corporation tax return for the accounting period ended on 30 April 2001, in which contributions to EBT were shown as a component of staff costs.
In respect of those two returns, HMRC did not give notice of enquiry. However, they enquired into the taxpayer's tax return for the accounting period ended 30 April 2002. In the exchanges of correspondences, the taxpayer did not disclose the amounts that had not been paid out of the EBT on its accounts, computations or returns for any of the periods 30 April 2000 or 30 April 2001. On 22 July 2005, HMRC completed their enquiries and held that the taxpayer's deductions in respect of contributions to the trust should be restricted. They then issued discovery assessments to recover tax and accrued interest in respect of the accounting period 30 April 2000 and 30 April 2001.
The taxpayer contended that for a practice to be one that was generally prevailing, it had to be relatively long-established and had to be accepted by HMRC and the taxpayers' advisers alike. It added that it was not necessary for the practice to be readily ascertainable by interested parties. The reference to a practice generally prevailing could not be confined to publicly-stated practices on the part of HMRC. The taxpayer argued that a distinction had to be drawn between something that was a shared view, which was applied in practice by the taxpayers and HMRC alike, and the reasons why that view was adopted.
It was demonstrated unequivocally that there was a general acceptance by HMRC and professional advisers alike that payment by an employer to trustees of a discretionary trust for the benefit of employees was not held by an intermediary and that the payment to them was made with the intention that they should use it to pay emoluments to employees and for no other purpose. The taxpayer submitted that Finance Act 1989 section 43s. 43 should not apply to EBT.
HMRC contended that any practice could not satisfy the test in R & C Commrs v Household Estate Agents LtdTAX[2008] BTC 502 ("Household Estate Agents") that it be relatively long-established. They referred to the increase in the number of enquiries for accounting periods ended in 1998 and subsequent years. This was based on the time lag which there would have been between the accounting year in question and the opening of an enquiry. It was not until 1999-00 that HMRC began to open a large number of enquiries into EBTs. HMRC submitted 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 FA 1989, Finance Act 1989 section 43s. 43 point being pursued. HMRC posited that FA 1989, Finance Act 1989 section 43s. 43 was a theoretical line to pursue in connection with denying deductibility for contributions to an EBT, but that it all depended on the facts.
Whether there was a practice generally prevailing and whether the taxpayer's return was in accordance with that practice.
Held, dismissing the taxpayer's appeal:
The Tribunal did not consider that the common misunderstanding of taxpayer and HMRC on the interpretation of FA 1989, Finance Act 1989 section 43s. 43 was capable of giving rise to a practice that such legislation would not be applied in the circumstances. A practice not to take a particular point should have, as its foundation, the identification of that issue before the practice was adopted. Merely failing to take a point was not enough, as the taxpaying community would not be able to discern anything as a matter of practice from such an omission.
There was no evidence determining that HMRC had adopted a practice in relation to this view of the law. Nor was there any evidence that they addressed the issue. The discretionary powers of the trustees were commonly argued as evidence that the taxpayer had retained control over the contributed funds. HMRC'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 HMRC did not attack EBT contributions on the basis subsequently revealed by the Court of Appeal, and later by the House of Lords, in MacDonald (HMIT) v Dextra Accessories LtdTAX[2004] BTC 88; [2005] BTC 355, that was not the result of any practice not to do so.
It was clear that HMRC did not regard FA 1989, Finance Act 1989 section 43s. 43 as their main weapon against tax avoidance in the form of EBT. The main armoury consisted principally of the wholly and exclusively test, the capital and revenue distinction, and the accountancy arguments in relation to Accounting Standards Board Urgent Issues Task Force Abstract 13 ("UITF 13"). The focus on those issues was perfectly understandable in that FA 1989, Finance Act 1989 section 43s. 43 was framed as a last resort, as it could only be applied where a payment would otherwise be deductible. The focus on UITF 13 was instructive. Its focus was on control and it, accordingly, overlapped to a considerable extent with HMRC's view as to the possible application of FA 1989, Finance Act 1989 section 43s. 43. That said, reliance on FA 1989, Finance Act 1989 section 43s. 43 at no time was abandoned. It remained very much a part of the weaponry available to HMRC. It was considered on a regular basis by inspectors enquiring into company tax returns with the caution as to the perceived difficulties of applying it and the need to ascertain the facts. This was particularly so when the trustees were acting on the instructions of the taxpayer, which would potentially render them "intermediaries", and when a contribution was to be used to make payments to specific employees or employees in general.
A practice would be readily ascertainable by interested parties in a number of possible ways. There could be a published statement of practice, concession or otherwise by HMRC. That process would be more or less formal, but publication was not a necessary ingredient. A practice, albeit unpublished, would be equally ascertainable if it could be readily discovered from enquiry of HMRC themselves or from advice sought from a practitioner in the field, particularly where the practice arose in a specialised area.
The requirement for a practice to be relatively long-standing emphasised that such practice was not confined to published statements but extended to unpublished practices which were understood and accepted as a general matter. A new practice that was published would be unlikely to require the same degree of longevity as would be required for an unpublished practice. Although each case would depend on its own facts, it could be envisaged that an...
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