Sempra Metals (formerly Metallgesellschaft Ltd) v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 07 July 2008 |
| Date | 07 July 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr AN Brice, Edward Sadler
Andrew Thornhill QC with Jonathan Bremner, Counsel, for the Appellant
Timothy Brennan QC with Diya Sen Gupta, Counsel instructed by the Solicitor of HM Revenue and Customs for the Respondents
Corporation tax - computation of profits - deductions - payments by appellant before 2001 to employee benefit trust and after 2002 to family benefit trust - whether wholly and exclusively expended for the purposes of the appellant's trade - yes - whether appellant's profits computed in accordance with generally accepted accountancy practice - yes - whether payments to employee benefit trust were potential emoluments and so precluded from deduction for corporation tax purposes when paid - yes - whether payments to family benefit trust were made to an employee benefit scheme and so precluded from deduction for corporation tax purposes when paid - yes - ICTA 1988 Income and Corporation Taxes Act 1988 section 42 section 74sss. 42 and 74; FA 1989 Finance Act 1989 section 43 subsec-or-para 11s. 43(11); FA 2003 Finance Act 2003 section 143 schedule 24s. 143 and Sch. 24 Employment income - whether payments by Appellant to trusts were payments of emoluments or earnings giving rise to an obligation to deduct income tax and pay it to the Revenue - no - before 2003 ICTA 1988 Income and Corporation Taxes Act 1988 section 19 subsec-or-para 1 section 131 section 203 subsec-or-para 1sss. 19(1), 131 and 203(1) and Income Tax (Employments) Regulations 1993 (SI 1993/744); after 2003 ITEPA 2003 Income Tax (Earnings and Pensions) Act 2003 section 1 section 6sss. 1, 6, and Income Tax (Earnings and Pensions) Act 2003 section 684684 and Income Tax (PAYE) Regulations 2003 (SI 2003/2682), reg. 80 National Insurance contributions - whether payments by Appellant to trusts were earnings paid for the benefit of earners - no - Social Security Contributions and Benefits Act 1992, Social Security Benefits and Contributions Benefits Act 1992 section 6 subsec-or-para 1s. 6(1); Social Security Contributions (Transfer of Functions, etc) Act 1999, Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8 subsec-or-para 1s. 8(1)(c)
Payments by the taxpayer company to an employee benefit trust were potential emoluments and so precluded from deduction for corporation tax purposes when paid and payments after 2002 to a family benefit trust were made to an employee benefit scheme and so also precluded from deduction for corporation tax purposes when paid. The payments by the taxpayer to the trusts were not payments of emoluments or earnings giving rise to an obligation to deduct income tax and pay National Insurance contributions (NICs).
The taxpayer company carried on business dealing in metals. Before 1995 bonuses were paid to senior employees in addition to their salary. An employee benefit trust ("EBT") was then established with an Isle of Man trustee. The amount of annual bonuses when determined was paid to the EBT which made the money available to employees by way of loans or invested it.
In 2002 the taxpayer replaced the EBT with a family benefit trust ("FBT") which was similar to the EBT, except that the beneficiaries were the members of the family of the present or former directors, officers or employees of the taxpayer.
In calculating its profits and gains for the relevant accounting periods, the taxpayer deducted the payments to the EBT and the FBT for corporation tax purposes. The Revenue considered that those payments were not deductible since the payments to the EBT were "potential emoluments" within Finance Act 1989 section 43 subsec-or-para 11FA 1989, s. 43(11)(a) which defined potential emoluments as amounts or benefits reserved in the accounts of an employer, or held by an intermediary, with a view to their becoming relevant emoluments; the FBT was an "employee benefit scheme" under FA 2003, Finance Act 2003 schedule 24 subsec-or-para 9Sch. 24, para. 9(1) and the payments to both trusts constituted, for accounting periods ending before 5 April 2003, the payment of "emoluments" as defined in Income and Corporation Taxes Act 1988 section 131ICTA 1988, s. 131, including "all salaries, fees, wages, perquisites and profits whatsoever" or, for accounting periods ending after 5 April 2003, the payment of "earnings".
The Revenue issued estimated assessments to corporation tax for the tax years before 30 September 1998 and amendments to corporation tax self-assessments for later periods, and notices of determination and decisions that the taxpayer was liable to pay PAYE tax and NICs. The taxpayer appealed.
Whether the payments to the EBT and later the FBT were wholly and exclusively laid out or expended for the purposes of the taxpayer's trade under Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1ICTA 1988, s. 74(1)(a); whether the taxpayer's profits had been computed in accordance with generally accepted accountancy practice within the meaning of Finance Act 1998 section 42 subsec-or-para 1FA 1998, s. 42(1); whether the payments to the EBT were precluded from deduction as potential emoluments within the meaning of Finance Act 1989 section 43 subsec-or-para 11FA 1989, s. 43(11)(a); whether the payments to the FBT were precluded from deduction by the provisions of Finance Act 2003 schedule 24 subsec-or-para 9FA 2003, Sch. 24, para. 9(1); whether the payments to the trusts were payments of emoluments or earnings giving rise to an obligation to deduct income tax and pay NICs.
The special commissioners (Dr Nuala Brice and Edward Sadler) dismissed the appeals against the assessments to corporation tax and the amendments to the corporation tax self-assessments, but allowed the appeals against the notices of determination and decisions.
The payments made by the taxpayer to both the EBT and the FBT were wholly and exclusively expended for the purposes of the taxpayer's trade within Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1ICTA 1988, s. 74(1)(a). The payments to both trusts were made to preserve and maintain the competitiveness of the taxpayer in the market in which it operated. The payments to both trusts were for the benefit of the employees and the relevant employees chose that the bonuses should be paid to the trust rather than in cash. In the light of the expert evidence, the profits of the taxpayer's trade were computed according to generally accepted accountancy practice.
The payments made by the taxpayer to the EBT were held "with a view to becoming relevant emoluments" within Finance Act 1989 section 43 subsec-or-para 11FA 1989, s. 43(11)(a). Under the terms of the trust deed, the trustee had power to use the funds not only in paying emoluments to the employees but also power to make payments which were not emoluments. Accordingly all the funds were potential emoluments. The trustee of the EBT in the present case fell within the definition of intermediary 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 employer" in Finance Act 2003 schedule 24 subsec-or-para 9FA 2003, Sch. 24, para. 9(1) which referred to a "trust, scheme or other arrangement for the benefit of employees" and indicated a much wider meaning than employees having to be direct beneficiaries. On the facts the employees benefited both indirectly because of the financial payments to their families, and directly in those cases where the loans by the trustee to the nominated beneficiaries were paid into joint accounts with the employee or to discharge loans on jointly owned property.
Therefore, the payments made by the taxpayer to the FBT were not deductible under Finance Act 1989 section 43FA 1989, s. 43 and Finance Act 2003 schedule 24FA 2003, Sch. 24 so that the appeals against the assessments to corporation tax and the amendments to the corporation tax self-assessments would be dismissed in principle.
There was no payment by the taxpayer of emoluments or earnings giving rise to an obligation to deduct income tax and pay it to the Revenue. It was clear that the taxpayer did not make payments direct to its employees, and the payments did not constitute the payment "of perquisites or profits" (before April 2003) or the payment of "any other profit or incidental benefit of any kind being money or money's worth" (after 5 April 2003). Although the employees benefited from the arrangements, the payments to the trusts did not necessarily amount to the payment of money or a profit equivalent to cash to the employees. The employees (or their nominated beneficiaries) were not free to do whatever they liked with their allocated funds since they had to apply for loans, or request the making of other investments. The final decision remained at the discretion of the trustee. The loans were real loans on which interest was paid, and in respect of which, in some cases, principal was repaid. The result was that the appeal against the notices of determinations would be allowed in principle. For similar reasons the payments made by the taxpayer to both trusts did not constitute the payment of earnings for the benefit of earners and the taxpayer was not liable for Class 1 NICs in respect of the payments.
1. Sempra Metals Limited (the Appellant) appeals against:
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(2) a number of estimated assessments to corporation tax for years before 30 September 1998 and amendments to corporation tax self-assessments for periods after that date;
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(3) a number of notices of determination dated 30 March 2007 and 2 November 2007 determining tax payable by the Appellant under regulation 80 of the Income Tax (Pay as You...
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