MacDonald (Inspector of Taxes) v Dextra Accessories Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOFFMANN,LORD NICHOLLS OF BIRKENHEAD,LORD HOPE OF CRAIGHEAD,LORD WALKER OF GESTINGTHORPE,LORD SCOTT OF FOSCOTE |
| Judgment Date | 07 July 2005 |
| Neutral Citation | [2005] UKHL 47 |
| Date | 07 July 2005 |
| Court | House of Lords |
[2005] UKHL 47
HOUSE OF LORDS
Appellate Committee
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Hope of Craighead
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Appellants:
Andrew Thornhill QC
Jonathan Peacock QC
Rupert Baldry
(instructed by Levy Watters)
Respondents:
Timothy Brennan QC
David Ewart
(instructed by HM Revenue and Customs)
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. For the reasons he gives, with which I agree, I would dismiss this appeal.
My Lords,
Until 1989 the emoluments of an office or employment were taxed under Schedule E as income of the year of assessment in which they were earned. It did not matter when they were paid: see Heasman v Jordan [1954] Ch 744. On the other hand, for the purpose of computing his profits taxable under Schedule D, an employer was entitled to deduct his liability to pay emoluments to employees in the year in which, in accordance with normal accounting principles, that liability accrued.
Section 37 of the Finance Act 1989, which inserted new sections 202A and 202B into the Taxes Act 1988, changed the basis of Schedule E assessment from the year in which emoluments were earned to the year in which they were paid. This gave rise to the possibility of a delay in payment causing a substantial timing disparity between the year in which the emoluments were deductible by the employer and the year in which they were taxable in the hands of the employee. Particularly in a case in which employer and employee were closely associated, for example, as a company and its directors, the tax liability of the company could be reduced without creating an immediate personal liability on the part of the directors.
Section 43 of the 1989 Act was intended to deal with this situation. It is necessary to refer only to a few subsections:
"43.(1) Subsection (2) below applies where –
(a) a calculation is made of profits or gains which are to be charged under Schedule D and are for a period of account ending after 5th April 1989,
(b) relevant emoluments would (apart from that subsection) be deducted in making the calculation, and
(c) the emoluments are not paid before the end of the period of nine months beginning with the end of that period of account.
(2) The emoluments –
(a) shall not be deducted in making the calculation mentioned in subsection (1)(a) above, but
(b) shall be deducted in calculating profits or gains which are to be charged under Schedule D and are for the period of account in which the emoluments are paid.
(10) For the purposes of this section, 'relevant emoluments' are emoluments for a period after 5th April 1989 allocated either –
(a) in respect of particular offices or employments (or both) or
(b) generally in respect of offices or employments (or both).
(11) This section applies in relation to potential emoluments as it applies in relation to relevant emoluments, and for this purpose-
(a) potential emoluments are amounts or benefits reserved in the accounts of an employer, or held by an intermediary, with a view to their becoming relevant emoluments;
(b) potential emoluments are paid when they become relevant emoluments which are paid.
(12) In deciding for the purposes of this section whether emoluments are paid at any time after 5th April 1989, section 202B of the Taxes Act 1988 (time when emoluments are treated as received) shall apply as it applies for the purposes of section 202A(1)(a) of that Act, but reading 'paid' for 'received' throughout."
The core of this provision is in subsections (1) and (2). The old rule that emoluments may be deducted in the year in which, on ordinary accounting principles, liability to pay them has accrued, is to apply only if they are actually paid during that year or within a grace period of nine months thereafter. Otherwise they may be deducted only in the year in which they are paid. Thereby the possibility of a substantial timing disparity between deduction by the employer and payment to the employee is avoided.
This basic rule of non-deductibility without actual payment applies to "relevant emoluments", defined in subsection (10) as emoluments which have been "allocated" in respect of a particular office or employment or generally in respect of offices or employments. "Allocated" presumably means allocated in drawing up the accounts, as sums for which a liability to pay emoluments is regarded on accounting principles as having accrued.
Subsection (11) then extends this rule of non-deductibility to "potential emoluments" as defined. The question in this appeal is whether certain payments made by the taxpayer companies to an employee benefit trust ("EBT") were potential emoluments within the meaning of section 43(11)(a).
The taxpayer companies are members of a group trading in mobile telephones and related services founded by Mr John Caudwell. The EBT was established by a deed executed on 18 December 1998 by Caudwell Holdings Ltd, a group company, as settlor and a Jersey company as trustee. It recites that the settlor is desirous of making an irrevocable settlement "with a view to encouraging and motivating employees." The beneficiaries are defined as the present and future officers, employees and former officers and employees of any group company, their spouses, widows, widowers, children, remoter issue and other dependents.
The deed confers upon the trustee a wide discretion over capital and income to pay money and other benefits (including pensions) to any of the named beneficiaries and a power to lend them money. The discretion is said to be absolute and uncontrolled but the trustees are entitled to take into account the recommendations of the directors of the settlor or other group companies. At the end of the trust period there is a discretionary trust for the beneficiaries with a gift over to charity.
On 21 December 1998 the six appellant companies paid a total of £2.75m to the trustees to be held on the trusts of the settlement. Under the trusts which I have described, the trustees had...
To continue reading
Request your trial
-
The Queen (on the application of HM) v Secretary of State for the Home Department
...particularly where there is scope for doubt about what the definition itself means. 82 Lord Hoffmann explained in MacDonald (Inspector of Taxes) v. Dextra Accessories Ltd. [2005] UKHL 47, [2005] 4 All ER 107 at paragraph 18:- “… a definition may give the words a meaning different from the......
-
UBS v Revenue and Customs Commissioners; Deutsche Bank Group Services (UK) Ltd v Revenue and Customs Commissioners
...[2010] EWCA Civ 118; [2010] BTC 250 Lynall v IR CommrsELRTAX [1972] AC 680; (1971) 47 TC 375 MacDonald v Dextra Accessories LtdUNKTAX [2005] UKHL 47; [2005] BTC 355 Mayes v R & C CommrsUNKTAXUNKTAX [2011] EWCA Civ 407; [2011] BTC 261; [2009] EWHC 2443 (Ch); [2009] BTC 617 NMB Holdings Ltd v......
-
Sempra Metals (formerly Metallgesellschaft Ltd) v Commissioners of Inland Revenue
...for the purposes of s. 43 so that the payments were not deductible when they were paid (MacDonald (HMIT) v Dextra Accessories LtdTAX[2005] BTC 355 applied). The FBT was a "trust, scheme or other arrangement for the benefit of persons who are, or include, [present or former] employees of the......
-
Anixter Ltd v The Secretary of State for Transport
...that the choice of the term to be defined is relevant in interpreting a definition: see, for example MacDonald v Dextra Accessories Ltd [2005] UKHL 47, [2005] 4 All ER 107; Walker v Birmingham CC [2007] UKHL 22, [2007] 2 AC 262. As Lord Hoffmann put it in Chartbrook Ltd v Persimmon Home......
-
Weekly Tax Update - 14 March 2016
...only partially covered the issues at first instance and is anyway not precedent (see MacDonald v Dextra Accessories Ltd & Others [2005] STC 1111 for the House of Lords decision on corporation tax 3.2 UBS and Deutsche Bank lose landmark case The Supreme Court has laid down statutory inte......
-
Tax Update - Monday 24 September 2012
...to UITF13 as the EBT was not regarded as under the control of the company. Following the House of Lords' decision in MacDonald v Dextra ([2005] UKHL 47), no tax deductions were strictly available at that stage. However BAISL contended that for the years in question there was a prevailing pr......
-
Weekly Tax Update - Monday 1 October 2012
...it was a present right to a present payment. This was supported by the comments of Lord Hoffman in MacDonald v Dextra Accessories Ltd ([2005} UKHL 47) and Jonathan Parker LJ in the Court of Appeal in DTE Financial Services Ltd v Wilson ([2001] EWCA Civ 455). They also considered that if rul......
-
Comment on the decision in RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45
...Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062. 9MacDonald (Her Majesty's Inspector of Taxes) v Dextra Accessories Ltd. & Others [2005] UKHL 47. 10Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51. ! 24! [2018] University of Southampton Student Law Review Vol.8 were al......