Macdonald (Inspector of Taxes) v Dextra Accessories Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Neuberger |
| Judgment Date | 16 April 2003 |
| Neutral Citation | [2003] EWHC 872 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2002/APP/0841 |
| Date | 16 April 2003 |
[2003] EWHC 872 (Ch).
Chancery Division.
Neuberger J.
Timothy Brennan QC and Hugh McKay (instructed by the Solicitor of Inland Revenue) for the Crown.
Andrew Thornhill QC (instructed by Ernst & Young LLP) for the taxpayer.
The following cases were referred to in the judgment:
Bray (HMIT) v BestTAXWLR [1989] BTC 102; [1989] 1 WLR 167
Cutts, Re WLR[1956] 1 WLR 728
EMI Group Electronics Ltd v Coldicott (HMIT)TAXWLR [1999] BTC 294; [2000] 1 WLR 540
Heather v P-E Consulting Group Ltd TAX(1972) 48 TC 293
Peat v Gresham Trust Ltd ELR[1934] AC 252
Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300
Westmoreland Investments Ltd v MacNiven (HMIT) TAX[2001] BTC 44
Income tax - Employment - Emoluments - Employee benefit trust ("EBT") - EBT set up for benefit of director-shareholders of company - Inland Revenue rejected deduction of payments into EBT until employee taxed on fund as emolument - Whether allocation of EBT funds to sub-trusts for individual directors and families taxable as emoluments, earnings or benefits in kind - Whether contributions to EBT held by trustees with dominant purpose of their becoming relevant emoluments -Income and Corporation Taxes Act 1988 section 154Income and Corporation Taxes Act 1988, s. 154 - Finance Act 1995 section 11 subsec-or-para 43Finance Act 1989, s. 43(11).
This was an appeal by the Inland Revenue against a decision of the special commissioners ((2002) Sp C 331) raising the question whether s. 43(11) of the Finance Act 1989 prevented the deductibility of payments into an employee benefit trust (EBT).
The respondents were six members of a group of companies which sold mobile telephones and mobile air time. It had developed extremely successfully from 1989 onwards. In December 1998 an EBT was set up and each of the six respondents decided to make a substantial contribution to it. Thereafter, various benefits were made available by the EBT trustees to three shareholder directors, the wives of two of the directors, and the mother of two of the directors. Under para. 1 of sch. 3 to the EBT "the beneficiaries" extended to "all officers and employees of any participating company…and all persons who become such officers and employees" and under para. 2 and 3 to "spouses and co-habitees from time to time, widows, widowers and the children and remoter issue…[and] any person who has at any time been financially dependent upon" any person falling within para. 1.
The Revenue argued that s. 43(11) of the Finance Act 1989 prevented the deduction of payments into the EBT until the employee was taxed on the fund as an emolument. The purpose of s. 43 was to prevent a Sch. D taxpayer (which included a company within the charge to corporation tax) from achieving a deduction for tax purposes for moneys (if they were to be emoluments) which were set aside for the purpose of rewarding employees in a period of account, but which were not used for that purpose within nine months of the end of that period. The contributions by the six companies to the EBT constituted "potential emoluments" within s. 43(11)(a) because they were held by an intermediary, namely the trustees, "with a view to their becoming relevant emoluments". The special commissioners allowed the companies' appeals holding that for the subsection to apply the contributing company's purpose in making the payments to the trustees had to be that the funds should be used to provide emoluments and that the companies had no such purpose. The Revenue appealed to the High Court.
Held, dismissing the appeal:
1. The central issue was whether the contributions to the EBT were "held by [the trustees] with a view to their becoming relevant emoluments". This gave rise to three questions: the meaning of the words "with a view"; how the "view" was to be assessed and in particular whether the intention or desire of the company was of significance; and the date by reference to which the question was to be determined.
2. In a case where the accounts were not signed off by the end of the nine-month period, it was clear from s. 43(1)(c) that emoluments which had not been "paid" by that date could not be taken into account. Any emolument which was paid by that date, however, could be taken into account. Accordingly, at least where the accounts for the relevant period had not been finally drawn up until after the expiry of the nine-month period, it followed that the expiry of the nine-month period was the relevant point in time for determining whether emoluments had been paid. Consequently, as a matter of logic and common sense, the same date applied for determining whether payments were potential emoluments within s. 43(11)(a).
3. In considering the relevance of the companies' intention the essential point to bear in mind was that, in order to decide whether the contributions were "potential emoluments", the issue was not whether they were paid by the respondents "with a view to their becoming relevant emoluments", but whether they were "held by an intermediary" with that view. The primary relevant evidence was therefore the terms of trust itself. However, one could also take into account, where appropriate, the intentions and aims of the trustees who decided, albeit within the constraints of the terms of the trust, how to deal with the assets of the trust. In the present case, one could properly take into account the wishes and intentions of taxpayers, to the limited extent that the trustees might be influenced in their decisions by requests from the companies which had funded the trust and would provide further funds to the trust in the future. Accordingly, the taxpayers' views were only relevant in so far as they had been communicated to the intermediary, namely the trustees, and to the extent that it could be shown that they had been taken into account by the trustees.
4. In the context of s. 43(11)(a) the meaning of "with a view to" was the meaning for which the respondents contended, namely it had to be the principal or dominant intention. That was the natural meaning of the words read in context. Certain payments or benefits to employees, former employees, their dependants, or surviving former dependants, might or might not, constitute emoluments. The purpose of s. 43 was not to prevent payments of benefits to employees and others being taken into account when assessing liability to tax, but merely to delay their being so taken into account until they were actually paid to the employees or others. Viewed in the context of s. 43 as a whole and bearing in mind the purpose of s. 43, a narrow construction of s. 43(11)(a) was to be preferred.
5. It was unnecessary to remit the case back to the commissioners. Even assuming that it was not clear what conclusion the commissioners would have reached, on the facts, they could not have been satisfied that the dominant purpose for which the contributions were held by the trustees under the EBT was the provision of emoluments. The most important factor was that the terms of the trust were very general in nature. Given that payments to any of the people within the class of "beneficiaries" might or might not be emoluments, it could not be said that the contributions were held under the EBT for the dominant intention or purpose of "their becoming relevant emoluments". On the terms of the EBT they were at least as likely to become benefits outside the concept of relevant emoluments as they were to become relevant emoluments. The dominant purpose test was therefore not satisfied.
Neuberger J:
[1] This is an appeal brought by the Revenue against a decision of the special commissioners (Dr John F Avery Jones CBE and Mr A Edward Sadler) given on 3 September 2002 ((2002 Sp C 331). It raises a short, and not altogether easy, point as to the meaning and effect of s. 43(11)(a) of the Finance Act 1989.
[2] The respondents are six members of a group of companies known as the Caudwell group. That group is in the business of selling mobile telephones and mobile airtime, a business which it has developed very successfully from 1989 onwards.
[3] In spring 1998, the Caudwell group was advised by its accountants, Ernst & Young, to set up an employee benefit trust "to act as a vehicle to reward employees, including directors". In a paper subsequently prepared by those accountants, it was explained that such a trust "offers flexibility as the trustees can provide benefits in a wide range of ways which may also be tax efficient". It was also mentioned that such benefits to employees could include cash and non-cash payments, loans, and "providing use of assets".
[4] On 18 December 1998, an employee benefit trust ("EBT") was set up. The six respondent...
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