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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Boyer Allan Investment Services Ltd v Revenue & Customs [2012] UKFTT 558 (TC) (30 August 2012) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02235.html Cite as: [2012] UKFTT 558 (TC), [2013] STI 66, [2013] SFTD 73 |
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[2012] UKFTT 558 (TC)
TC02235
Appeal number: TC/2009/15632
Corporation tax – discovery assessment – whether invalid – Appellant made contributions to an employee benefit trust (EBT) – following Dextra, FA 1989, s 43(11) applies - FA 1989, Sch 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
FIRST-TIER TRIBUNAL
TAX CHAMBER
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BOYER ALLAN INVESTMENT SERVICES LIMITED (formerly BOYER ALLAN INVESTMENT MANAGEMENT LIMITED) |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
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REVENUE & CUSTOMS |
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TRIBUNAL: |
JUDGE ROGER BERNER |
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TYM MARSH |
Sitting in public at 45 Bedford Square, London WC1 on 23 – 24 January 2012, 6 – 10 February 2012 and 10 July 2012
Kevin Prosser QC and Jonathan Bremner, instructed by Farrer & Co LLP, for the Appellant
Christopher Tidmarsh QC and James Rivett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2012
DECISION
1. The Appellant, Boyer Allan Investment Services Limited (“Boyer Allan”) appeals against discovery assessments made by HMRC under paragraph 41 of Schedule 18 to the Finance Act 1998 (“FA 1998”) in relation to two accounting periods ended 30 April 2000 (“the 2000 assessment”) and 30 April 2001 (“the 2001 assessment”).
2. The appeal arises out of a number of payments made by Boyer Allan to the trustees of a discretionary trust for the benefit of its employees (“the employee benefit trust” or “the EBT”) in the accounting periods in question. In its corporation tax returns for those periods Boyer Allan deducted those payments in computing its trading profits under Schedule D, Case 1.
3. As has subsequently transpired, and it is common ground, these deductions were not due as a matter of law. This is the consequence of the judgment, first of all in the Court of Appeal, and later in the House of Lords, in Macdonald v Dextra Accessories Ltd [2004] STC 339 (CA); [2005] STC 1111 (HL). The trust deed of the EBT conferred on the trustees an absolute and uncontrolled discretionary power to make payments out of the trust fund to employees, which in most circumstances would be emoluments in the hands of the employees. Accordingly, Boyer Allan’s payments to the EBT were held by the trustees on terms which allowed a realistic possibility that they would be paid out as emoluments to employees, and so the payments were “potential emoluments” within s 43(11) of the Finance Act 1989.
5. No enquiry was opened into Boyer Allan’s returns for either of the accounting periods in question. Before July 2005 HMRC discovered that as regards each of those periods the amounts paid to the EBT had not been paid out in their entirety as emoluments before the expiry of the applicable nine-month period. On 22 July 2005, under FA 1998, Sch 18, para 41, HMRC issued the discovery assessment for each period on the basis that in each case an amount which ought to have been assessed to tax had not been assessed and/or an assessment to tax had become insufficient and/or a relief had been given which had become excessive.
6. The sole issue on which we are asked to make a determination at this stage is whether the 2000 assessment is invalidated by the restriction contained in FA 1998, Sch 18, para 45, on the ground that (a) the insufficiency of Boyer Allan’s self-assessment or the excessive relief given is attributable to a mistake in the 2000 return as to the basis on which Boyer Allan’s liability ought to have been computed, and (b) the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.
1. The Company
1.1 Boyer Allan Investment Services Limited (“the Company”) was incorporated on 20 February 1998 in England and Wales with company number 03514279 and with the name Boyer Allan Investment Management Limited. The business of the Company was to provide the service of investment fund management, in return for fees consisting of management fees and performance related fees.
1.2 The current sole shareholder of the Company is:
Boyer Allan Holding Company Limited
1.3 The shareholders of the Company at the time its Corporation Tax returns for the accounting periods ended 30 April 2000 and 2001 were submitted were:
2000 Nicholas Timothy Allan; and
Jonathan Mark Edward Boyer
2001 Nicholas Timothy Allan;
Jonathan Mark Edward Boyer;
Richard William Whittall;
Alexander Griffin;
Guy Commaille; and
Andrew Tay
1.4 The current directors of the Company are:
Nicholas Allan
Andrew Tay
1.5 The directors of the Company at the time its Corporation Tax returns for the accounting periods ended 30 April 2000 and 2001 were submitted were:
2000 Nicholas Allan;
Jonathan Mark Edward Boyer; and
Richard William Whittall
2001 Nicholas Allan;
Jonathan Mark Edward Boyer; and
Richard William Whittall
1.6 The Company’s accounting periods end on 30 April in each year. In accordance with Schedule 18 Finance Act 1998 the Company is required to submit its Corporation Tax return for each accounting period within 12 months of the end of it and pay such tax as may be due.
2. The Employee Benefit Trust (“the Trust”)
2.1 The Trust was settled by the Company on 28 January 2000, to be known as the “Boyer Allan Investment Management Limited Employee Benefit Trust”. The trustees are Schroder Cayman Bank and Trust Company Limited, whose registered office is at PO Box 1020 GT, Harbour Centre, Grand Cayman, British West Indies and Schroder Trust A.G. of 8 Rue d’Italie, 1204 Geneva, Switzerland.
2.2 The sum contributed to the Trust on the date it was settled was One Hundred Pounds (£100).
2.3 The proper law of the Trust is that of the Cayman Islands (clause 13). The trustees have power to change the proper law of the settlement to that of any jurisdiction they see fit, so long as that jurisdiction recognises the validity of the trusts and the interests of the beneficiaries. The trustees have not to date exercised that power.
2.4 The Trust has a “trust period” defined as 150 years from the date of the settlement or ending on such earlier date as the trustees may specify by deed.
2.5 The trustees have the powers associated with a discretionary settlement: power to accumulate income, power to appoint capital and income for the benefit of any beneficiary as they think fit and power to alter the class of beneficiaries. Subject thereto, the Trust Fund (as defined) is to be held for charitable purposes.
2.6 The beneficiaries of the Trust are defined as the employees of the company and the wives, husbands, widows, widowers, children or step-children and remoter issue of the employees.
2.7 Certain individuals are defined as being excluded from potential benefit by reference to the provisions in Section 13(2) and Section 13(3) Inheritance Tax Act 1984 ("Excluded Person").
3. Contributions to the Trust
Contributions to the Trust were made on the following dates in the following amounts:
Date |
Amount |
Relevant Accounting Period |
31 January 2000 |
£23,172,000* |
1999-2000 |
27 March 2001 |
£750,000 |
2000-2001 |
* This is the sterling amount at which a $38 million contribution on that day was recognised in the company’s accounts.
4. Payments out of the Trust
4.1 The trustees of the Trust exercised their discretion to provide benefits for certain employee beneficiaries in 2000, 2001 and 2002 as follows.
Beneficiary |
Date |
Payment (net of PAYE/E’ees NI) |
N Allan |
26 October 2000 |
£1,200,000 |
Sarah J S Macaulay |
2 February 2001 |
£2,100 |
R Usher Smith |
2 February 2001 |
£1,587 |
Jacqueline Booker |
2 February 2001 |
£18,000 |
Keiko Hesketh |
2 February 2001 |
£22,800 |
G Commaille |
2 February 2001 |
£60,000 |
A H H Griffin |
2 February 2001 |
£90,000 |
Robbi Mathie |
2 February 2001 |
£22,800 |
N Allan |
28 June 2001 |
£450,000 |
N Allan |
1 February 2002 |
£300,000 |
J Boyer |
1 February 2002 |
£500,000 |
G Commaille |
1 February 2002 |
£27,000 |
R Mathie |
1 February 2002 |
£21,720 |
K Hesketh |
1 February 2002 |
£12,600 |
J Booker |
1 February 2002 |
£16,500 |
G Hunter |
1 February 2002 |
£3,066 |
The parties’ respective positions as to the accounting period in which the relevant emoluments paid are allowable deductions S43(1) and (2) FA 1989 and amount allowable are set out in the attached table [Not included in present print].
4.2 Income Tax and employer’s and employees’ National Insurance Contributions in relation to the payments were duly accounted for by the Company on the due dates under the Pay as You Earn Regulations.
4.3 The trustee[s] transferred funds to the Company to reimburse it for the Income Tax and employees’ national insurance contribution liabilities of the Beneficiaries as well as the Company’s employer’s national insurance contribution liabilities, referred to in paragraph 4.2, as follows:
9 November 2000 £1,044,000
9 February 2001 £188,877
3 July 2001 £389,250
11 February 2002 £761,843
5. The Company’s Corporation Tax Returns
5.1 The Company’s corporation tax return for the accounting period ended on 30 April 2000 was signed and dated by the Company on 24 January 2001 and submitted to HM Revenue and Customs[1] by a firm known as RSM Robson Rhodes, the company’s then auditors and tax advisers, together with a copy of the company’s audited report and financial statements for the relevant period of account. Receipt of the return and accompanying documents was acknowledged by HM Revenue and Customs by letter dated 7 February 2001.
5.2 The submission of the Company’s accounts with its corporation tax self assessment was in compliance with Paragraph 11 Schedule 18 Finance Act 1998. The due filing date for this return was 30 April 2001 (Paragraph 14 Schedule 18 Finance Act 1998). Note 2 to the accounts, at page 9, contains a list of the items charged in arriving at the company’s operating profit, including “Contributions to employee benefit trust” amounting to £23,172,000. In the computation submitted with the Company’s corporation tax return the contribution to the Trust was included in the sum of £24,298,177 listed as “Salaries” under “Administration Expenses”. The contribution to the Trust was treated as a deductible expense for corporation tax purposes.
5.3 The Company’s corporation tax return for the accounting period ended on 30 April 2001 was submitted by Ernst & Young, the company’s then auditors and tax advisers on 30 April 2002 together with a copy of the company’s audited report and financial statements for the relevant period of account. The due filing date for this return was 30 April 2002. Note 3 to the accounts, at page 9, contains a list of the items charged in arriving at the company’s operating profit, including “Contributions to employee benefit trust” amounting to £750,000. In the computation submitted with the Company’s corporation tax return the contribution to the EBT was shown as a component of Staff costs.
5.4 Pursuant to Paragraph 24 Schedule 18 Finance Act 1998 HM Revenue and Customs may enquire into a company tax return on giving notice to the company of their intention to do so within the time allowed. At the material times the time allowed in that paragraph was 12 months from the filing date for the company tax return, provided that the return was submitted on or before the filing date. As such (1) HM Revenue and Customs were obliged to provide any notice of enquiry into the return for the accounting period ended on 30 April 2000 on or before 30 April 2002; and (2) HM Revenue and Customs were obliged to provide any notice of enquiry into the return for the accounting period ended on 30 April 2001 on or before 31 July 2003. No such notice was given to the Company in respect of those periods.
5.5 The Company’s corporation tax return for the accounting period ended on 30 April 2002 was submitted by Ernst & Young on 15 April 2003 together with a copy of the company’s audited report and financial statements for the relevant period of account. The due filing date for this return was 30 April 2003. Note 3 to the accounts, at page 9, contains a list of the items charged in arriving at the Company’s operating profit, including “Contributions to employee benefit trust” amounting to £1,050,000.
5.6 By letter dated 29 January 2004 the Company’s then Inspector of Taxes, a Mr D.D. Ryan, gave notice to the Company that he intended to enquire into its tax return for the accounting period ended on 30 April 2002. This notice was validly given in relation to the period of account in question, having been served within 12 months of the filing date for the tax return on 30 April 2003.
5.7 By a letter dated 16 March 2004 Ernst & Young wrote to HM Revenue and Customs enclosing details of certain payments that had been made by the trustees from the Trust. That letter was accompanied by a copy of the Trust Deed and certain board minutes recording the decision to establish the Trust.
5.8 By a letter dated 29 April 2004 HM Revenue and Customs wrote to Ernst & Young and commented that from the details provided by Ernst & Young on 16 March 2004 as follows:
“I note that sums have been paid out and PAYE and NIC operated on these. The sums paid out in 2002 are in excess of the sums paid in, are the amounts paid in, in this period, the ones paid out and from which period would you say the balance came? There are significant amounts still held within the funds that are part of the EBT contributions. I think it is worth stating that if the Dextra decision is upheld ie that S43 always applied to such contributions, that the previous years in which contributions were made will have to take account of this. If S43 applies the accounts would be correct, but computational adjustment should have been made for any amount not paid within 9 months of the end of the accounting period and, in effect, the returns would be incorrect for those periods.”
5.9 None of the accounts, computations or returns submitted to HM Revenue and Customs for any of the periods 30/4/00 or 30/04/01 disclosed amounts that had not been paid out of the EBT.
5.10 By a letter dated 22 July 2005 the Company’s Inspector gave notice to it that he had completed his enquiries into the company’s tax return for the period ended 30 April 2002. In relation to the company’s claim to corporation tax relief in respect of its contribution to the Trust, he referred to the decision in Macdonald v Dextra Accessories Limited (decision of the House of Lords dated 7 July 2005, reported at [2005] 4 All ER 107) and suggested that deductions in respect of contributions to the Trust should be restricted. He also proposed to issue discovery assessments in relation to the accounting periods ended 30 April 2000 and 2001 under Paragraph 41(1) Schedule 18 Finance Act 1998.
5.11 An assessment was issued on 22 July 2005 by HM Revenue and Customs to recover tax of £8,439,315 and accrued interest of £2,423,461 in respect of the accounting period to 30 April 2000.
5.12 A further assessment was issued by HM Revenue and Customs on 22 July 2005 to recover tax of £515,837.10 and accrued interest of £67,697.02 in respect of the accounting period to 30 April 2001(…).
[End of Statement of Facts]
“43 Schedule D: computation
(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.
(3) Subsections (4) and (5) below apply where—
(a) a calculation such as is mentioned in subsection (1)(a) above is made,
(b) the calculation is made before the end of the period of nine months beginning with the end of the period of account concerned,
(c) relevant emoluments would (apart from subsection (2) above) be deducted in making the calculation, and
(d) the emoluments have not been paid when the calculation is made.
(4) It shall be assumed for the purpose of making the calculation that the emoluments will not be paid before the end of that period of nine months.
(5) But the calculation shall be adjusted if—
(a) the emoluments are paid after the calculation is made but before the end of that period of nine months,
(b) a claim to adjust the calculation is made to the inspector, and
(c) the claim is made before the end of the period of two years beginning with the end of the period of account concerned.
...
(8) In a case where the period of account mentioned in subsection (1)(a) above begins before 6th April 1989 and ends before 6th April 1990, the references in subsections (1)(c), (3)(b), (4) and (5)(a) above to nine months shall be construed as references to eighteen months.
(9) In this section “period of account” means a period for which an account is made up.
(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.
(13) In section 436(1)(b) of the Taxes Act 1988 (profits to be computed in accordance with provisions of that Act applicable to Case I of Schedule D) the reference to that Act shall be deemed to include a reference to this section.”
Return made in accordance with prevailing practice
45 No discovery assessment for an accounting period for which the company has delivered a company tax return, or discovery determination, may be made if—
(a) the situation mentioned in paragraph 41(1) or (2) is attributable to a mistake in the return as to the basis on which the company's liability ought to have been computed, and
(b) the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.
12. There is no dispute on para (a) of para 45. It is common ground that Boyer Allan’s return for the 2000 period was made on the footing of a mistake as to the legal basis on which the deductions for the payments to the EBT should properly be claimed. The dispute between the parties is solely concerned with para 45(b).
13. It is also common ground that the burden of proof that the return for the 2000 period was in fact made on the basis or in accordance with the practice generally prevailing at 24 January 2001 (the date of filing of the return) rests on Boyer Allan, to the usual standard of proof, namely the balance of probabilities.
15. We start with a case in the High Court which addresses this question in the very same context, namely the application of s 43 FA 1989 to an employee benefit trust. In Revenue and Customs Commissioners v Household Estate Agents Ltd [2008] STC 2045, the taxpayer company established an employee benefit trust in 1998. In 1999 a payment was made into the trust, and a deduction was claimed. On 23 November 2005 HMRC made a discovery assessment for the 1999 period disallowing the deduction.
“… payments made by a company to the trustees of an [EBT] to provide benefits in the form of cash or shares to employees of the company will often not constitute potential emoluments. But any case in which it appears that such a trust is being used by a company largely to channel emoluments to employees so as to obtain a deduction for the payments when charged whilst deferring the receipt of the emoluments in the hands of the employee should be submitted to Business Profits Division (Schedule D).”
18. In this connection, Henderson J observed (at [53]:
“I observe at once that this guidance was at best inconclusive. It says only that payments made by a company to the trustees of an EBT to provide benefits to employees in the form of cash or shares will 'often' not constitute potential emoluments, which implies that s 43 will not apply in such cases. However, it does not disclose the relevant criterion for distinguishing those cases from ones where s 43 will apply. The guidance then goes on to say that cases where EBTs are used largely to 'channel' emoluments so as to obtain a timing disparity between deduction and receipt of the emoluments should be submitted to Business Profits Division, but again no clear criterion is stated for identifying such cases, and all that can safely be deduced is that the Revenue thought they needed to be carefully scrutinised because of the potential for tax avoidance.”
“[58] In the first place, if one leaves aside the alleged misrepresentation, the position is in my view straightforward. If the company wished to rely on para 45 at the hearing before the commissioners, the burden was on the company to establish both an operative mistake in the return and the practice generally prevailing in August 2000. The company failed to adduce evidence on either of those questions, and relied only on the submissions recorded in para 6 of the case stated. Those submissions refer to what was alleged to be 'the profession's view' that s 43 of the Finance Act 1989 did not apply to contributions to EBTs. However, without any evidence to support that assertion, and without any evidence that the Revenue took the same view, there was no material before the commissioners which could support a conclusion that a settled practice existed, let alone a settled practice which could properly be described as 'the practice generally prevailing at the time'. Without attempting to give an exhaustive definition, it seems to me that a practice may be so described only if it is relatively long-established, readily ascertainable by interested parties, and accepted by HMRC and taxpayers' advisers alike: compare the decision of the Special Commissioners (Dr A N Brice and Mr John Walters QC) in Rafferty v Revenue and Customs Comrs [2005] STC (SCD) 484, para 114. Accordingly, on the basis of the material before them, and on the assumption that they had directed themselves correctly on the burden of proof, the commissioners could only have concluded that para 45 did not apply. There would therefore be no point in remitting the matter to them for reconsideration.
[59] The next question is whether the alleged misrepresentation makes any difference to the above analysis. In my judgment it does not. Even if the commissioners had been informed of the relevant passage in the manual, its terms are far too vague and inconclusive to support the inference that the company made its return in accordance with the generally prevailing practice. I consider that the same is true of a short, anonymous article in The Law Society Gazette of 4 October 1989, upon which Mr Woolf also relied, which gave a brief indication of the Revenue's reported views on the application of s 43 to payments into non-statutory share ownership trusts. Thus the position would have been no different if this material had in fact been before the commissioners, and again there would be no point in remitting the matter to them for further consideration.
[60] It was in recognition of this fact, I think, that Mr Woolf argued for a remitter with permission to adduce fresh evidence generally on the para 45 issue. However, such an order should only be made in exceptional circumstances, and I can see no good reason in the present case why the company should be given a second chance to adduce evidence which it could and should have adduced at the first hearing. HMRC cannot in any way be blamed for the company's failure to come to the hearing armed with such evidence. All that would be needed to remedy any prejudice to the company caused by Mrs Morris's failure to disclose the relevant extract from the manual would be for it to be looked at and taken into account; but as I have already said there would be no point in doing this, because it could not make any difference to the result.”
22. That being so, we are bound by the judgment of Henderson J in this respect. We shall consider what that means in a moment. But before doing so we should consider what the position would have been had we agreed with Mr Prosser. In that case, of course, the remarks of Henderson J in Household Estate Agents would nevertheless have been persuasive. But Mr Prosser argued that we should not follow them. He referred us in this connection to similar wording to that in para 45, but in the opposite direction, namely where a taxpayer, in relation to income tax or capital gains tax, claims relief in respect of an excessive assessment by reason of an error or mistake in a return, in what was s 33 of the Taxes Management Act 1970 (“TMA”). Under that section relief was not available in respect of an error or mistake as to the basis on which the liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.
23. Until its recent repeal, the wording of s 33 had a long pedigree[2]. Mr Prosser referred us to Rose Smith & Co Ltd v IRC (1933) 17 TC 586 (Ch) where the High Court (Finlay J) dismissed an appeal by the taxpayer from the Special Commissioners who had held, in relation to a claim under s 24 of the Finance Act 1923 which, as the judge remarks (at p 591), had broken new ground in allowing a person who had been wrongly assessed by reason of a mistake in his return to be repaid, that the company’s treatment had in fact followed the basis generally prevailing at the relevant time. The appeal was dismissed on the ground that there was no point of law in connection with the computation of profits or income, and that the finding of the commissioners was a finding of fact, so there is no discussion of the relevant wording in the High Court.
24. The case largely concerned the use by the taxpayer company of an “average” or “even spread” method of calculating costs under hire purchase agreements, instead of the “actuarial” method which would have given rise to greater deductions in the earlier years of the agreement. The company argued that this was an error or mistake which had led to excessive assessments and that there was no evidence of any practice generally prevailing which would disentitle the company from relief. The commissioners found, on the evidence, that the practice generally prevailing had been to deduct the “average” and not the “actuarial” hire. That finding was accepted by the High Court as a finding of fact.
25. Mr Prosser argued that the wording of what was s 33 is the same as that in para 45, and the two must be construed consistently with one another. That being so, it would be wrong to regard para 45(b) as some sort of estoppel defence, requiring the publication of a statement on which a taxpayer places reliance. In the converse case, such as under s 33, it is HMRC who are relying on the practice, and there can be no question of estoppel.
26. Pausing there, we agree. Indeed, in the course of his submissions, Mr Tidmarsh was disposed to accept that it was not necessary for the taxpayer to have relied upon the practice in order to seek the protection of para 45. We find that there is no such requirement. In their skeleton argument Mr Tidmarsh and Mr Rivett pointed out that para 45 requires that the return is made in accordance with the relevant practice, and, they said, not merely in accord with the practice. We do not consider that this means that there needs to be any reliance on the practice, nor indeed that it is necessary for the taxpayer, when making the return, to have been aware of the practice. The use of “made” in this context does not introduce any subjective requirement that implies a need for knowledge or reliance; para 45(b) will be satisfied if the return that is made is in accordance with the identified practice, irrespective of the state of mind of the taxpayer. That too was accepted by Mr Tidmarsh in the course of closing submissions.
27. By reference to the introduction of what became s 33 in 1923, Mr Prosser submitted that the reference to a practice generally prevailing could not be confined to publicly stated practices on the part of the Revenue. In 1923, although we had no direct evidence, we can accept that there was nothing like the current publicity of HMRC practice, from statements of practice and tax bulletins to internal guidance manuals. The former legislation, containing the same words as appear now in para 45(b), was dealing with Revenue practice, but not with a practice that had to be publicly stated. On this basis, Mr Prosser argued that, pace Henderson J in Household Estate Agents, there should be no requirement that the practice should be readily ascertainable by interested parties.
28. In his judgment in Household Estate Agents, Henderson J referred to an earlier decision of the Special Commissioners, Rafferty v Revenue and Customs Commissioners [2005] STC (SCD) 484, which had considered the issue of practice generally prevailing in the terms of the corresponding provision to para 45(b) in the case of individuals, namely s 29(2) TMA. The case concerned the sale of a business and the receipt by the seller of a lump sum as consideration for his right to receive commissions and fees after his retirement as well as goodwill. He made his return on the basis that the whole sum received was capital and not income.
29. The Special Commissioners allowed the taxpayer’s appeal on the substantive question whether the relevant part of the lump sum could be taxed as a post-cessation receipt or not. They also considered the position had that not been the case, and whether, if there had been an error or mistake in the taxpayer’s return, the return had been made on the basis or in accordance with the practice generally prevailing when it was made. On the facts they concluded that there was no evidence of such a practice. They said (at [114]:
“… We construe s 29(2) as a protection to the taxpayer from an assessment where the Revenue have changed their mind on a doubtful point in a sense adverse to the taxpayer. It would in our judgment go too far to construe it, as Mr Goldberg urged us to do, as a bar on the Revenue from raising a discovery assessment in particular circumstances where they had not publicly adopted a practice. We agree that a practice generally prevailing has to be a practice, or agreement, or acceptance over a long period whereby the Revenue agreed or accepted a certain treatment of sums in particular circumstances. In the circumstances of this case, for there to have been such a practice, the Revenue would have had to have agreed or accepted that a consideration such as that received by the appellant from Fortuna was to be treated for tax purposes as having been capital and not income. There was no evidence of such a practice.”
33. The corresponding provisions for individuals are those in s 29 TMA. In Langham v Veltema in the Court of Appeal [2004] STC 544, the issue concerned s 29(5), under which an inspector may make a discovery assessment if he could not have been reasonably expected, on the basis of certain specified information made available to him, to have been aware that there was an insufficiency of tax etc. The question of underlying purpose was considered. At [31], Auld LJ said:
“… it may be helpful to consider first the underlying purpose of the new self-assessment scheme. It seems to me that its purpose is to simplify and bring about early finality of assessment to tax, based on an assumption of an honest and accurate return and accompanying documentation by the taxpayer.”
43. Having determined the nature of the practice which Boyer Allan must demonstrate is present to succeed in its appeal, we now turn to the evidence.
45. The witnesses for Boyer Allan were:
(1) Robin Aitchison, a partner of Ernst & Young LLP, who provided a witness statement not in that capacity, but as an adviser to the asset management industry.
(2) Karen Doe, a Director in the Business Tax Group of Rawlinson & Hunter, an international group of professional firms, specialising in financial and taxation advice. Ms Doe gave evidence based on her experience, at the material time for this appeal, working for the accounting firm Grant Thornton.
(3) Nigel Eastaway, a partner in the Private Client Services London Tax Group at BDO LLP. Mr Eastaway has an array of professional qualifications and is well-known in the tax field as an active member of various tax committees and associations, and as the author of several books on taxation. Prior to it being acquired by BDO in October 2007, Mr Eastaway was a director of Chiltern plc.
(4) Ratan Engineer, a partner in Ernst & Young LLP. Mr Engineer provided a witness statement on the accounting treatment of the contributions made by Boyer Allan to the EBT. He had signed the auditors’ report in the financial statements of Boyer Allan for the years ended 30 April 2001, 2002 and 2003. His evidence was unchallenged and we accept it. It is convenient to summarise the material points here.
For the years ended 30 April 2000 and 30 April 2001, the EBT was not shown on the balance sheet of Boyer Allan. This was the correct treatment at that time. The company did not have control of the EBT so UITF 13[3] did not apply to require the assets and liabilities of the EBT to be shown on the balance sheet of the company. Additionally, UITF 13 applied to employee share ownership plans (“ESOPs”) rather than to EBTs.
UITF 32 was issued on 13 December 2001. This required companies to recognise the assets and liabilities of EBTs on their balance sheets, by reason of UITF 32 treating the companies as having control of the EBTs. Accordingly, the accounts of Boyer Allan for the period ended 30 April 2002 referred to this change of accounting policy and noted the inclusion of an asset within current and fixed assets and an equivalent liability as a provision for liabilities and charges.
From an accounting perspective, it was immaterial when considering the deductibility of a contribution to an EBT whether a payment had been made out of the EBT. The accounts showed a debit in the profit and loss account in relation to payments made into the EBT. There was never a persuasive argument made that this did not represent a debit to the profit and loss account for accounting purposes.
(5) Robert Field, a solicitor and partner at Farrer & Co, where he is the head of the firm’s tax department. At the material time Mr Field was a partner in Lawrence Graham, and was involved in corporate tax work.
(6) Anthony Foreman, tax partner with PKF (UK) LLP from November 1988 until 31 March 2010, who is also the author of a number of tax books.
(7) Victoria Goode, a solicitor and partner in the Employee Incentives Department at Lewis Silkin LLP, whose evidence related to her work with Deloitte, implementing EBTs for clients and being used as an internal technical resource (drafting precedent documents etc) for EBTs.
(8) Ian Grant, a Director of Smith & Williamson Limited in their private client tax group. He gave evidence based on his experience with WJB Chiltern Plc at the material time.
(9) Aidan Langley, a non-practising solicitor. Mr Langley’s evidence concerned his experience with EBTs at PricewaterhouseCoopers (“PwC”) between 1997 and 2001 and thereafter at Deloitte & Touche.
(10) Thomas Moore of Duncan & Toplis. Mr Moore’s evidence related to his EBT experience when he was employed by PwC.
(11) Michael Sherry, a barrister at Temple Tax Chambers, specialising in taxation since 1985. Mr Sherry is the author of “Tax Planning for Family Shareholders” (1992).
(12) Andrew Thornhill QC, the renowned tax silk who appeared, as counsel for the taxpayer, in Dextra. One of the areas of Mr Thornhill’s specialisation has been tax on employment income.
(13) Avril Whitfield, a former Inspector of Taxes until January 2001 when she joined KPMG. Ms Whitfield was a partner in Mazars LLP and with that firm head of tax in London until 31 August 2012.
(14) Francis Cochrane, a former partner of Latham Crossley and Davies (which became RSM Tenon), who now acts as a non-executive director and trustee, in most cases with particular responsibility for tax matters.
46. Apart from Mr Engineer, those witnesses for Boyer Allan referred to in the previous paragraph gave evidence in relation to the practice adopted in relation to the question of the deductibility of contributions to EBTs. In addition we had evidence from Nicholas Allan, a director and shareholder of Boyer Allan, and Gordon Matthew, chief executive of Schroder Trust AG, concerning the establishment and conduct of the EBT from January 2000 to April 2001.
47. The witnesses for HMRC were:
(1) Ronald Macdonald, currently a team leader in the HMRC Anti-Avoidance Group, who leads that group on employment income tax avoidance issues. Mr Macdonald commenced his role in August 1999. He was the named respondent in Dextra, and has since 1999 advised on most of the EBT litigation in which HMRC has been involved.
(2) Steven Terry, an aspect enquiry team leader within HMRC. Mr Terry provided a witness statement to explain the work carried out by HMRC in identifying documents disclosed for the purpose of these proceedings. His statement was not challenged, and we accordingly accept it.
(3) Desmond Ryan, an Inspector of Taxes who, up to 2008, was responsible within HMRC for the tax affairs of Boyer Allan. Mr Ryan provided a witness statement to explain the circumstances in which the discovery assessments at issue in this appeal were made by HMRC. His evidence was not challenged and we accept it.
48. The primary question for us is the extent to which the evidence shows the existence of a generally prevailing practice in accordance with which the company tax returns submitted by Boyer Allan were made. This entails an examination of the relevant understandings of both taxpayers and their representatives and HMRC, to consider the extent to which this gave rise to a mutually accepted practice. This is not a case, as was Household Estate Agents, where there is a paucity of evidence.
49. The natural starting point is to look at the material published by HMRC in this area.
“The Inland Revenue have considered this question and concluded that this will not generally be the case. This is because a payment to an ESOP by a company will not generally be made with a view to that payment becoming an emolument, given the variety of ways in which the trustees of non-statutory ESOPs may properly use the contributions they receive, for example, to pay expenses or interest on money they had borrowed.
The Inland Revenue have said that they will keep the position under review and they would be glad to hear of any particular non-statutory ESOP where there appears to be a strong prima facie case that the s 43 rules about potential emoluments might apply.”
“In this context payments made by a company to the trustees of an employee benefit trust to provide benefits in the form of cash or shares to employees of the company will often not constitute potential emoluments. But in any case in which it appears that such a trust is being used by a company largely to channel emoluments to employees so as to obtain a deduction for the payments when charged whilst deferring the receipt of the emoluments in the hands of the employee should be submitted to Business Profits Division (Schedule D).”
“… payments made by the company to the trustees of an ESOT or other employee benefit trust to provide benefits in the form of cash or shares to employees of the company will not normally constitute potential emoluments for the purposes of Section 43(11) FA 1989. Any case in which it appears, however, that such a trust is being used by a company largely to channel emoluments to employees so as to obtain a deduction for the payments when charged whilst deferring the receipt of the emoluments in the hands of the employee should be referred to Business Profits Division, Schedule D, before the company payments are challenged as constituting potential emoluments within Section 43(11).
Refer any points of difficulty arising in connection with such payments to Business Profits Division, Schedule D, for advice.”
55. We accept the evidence of all the advisers.
74. In cross-examination Mr Thornhill was shown a copy of an opinion he had given in November 2000 on a proposal to establish an EBT. In that opinion, which of course post-dated the January 2000 contribution by Boyer Allan but was before the date on which Boyer Allan submitted its tax return for the 1999-2000 period, Mr Thornhill had said:
“The Revenue have become very much aware of EBTs and their usefulness in securing deductions for the employer and deferring tax for the employee. This has resulted in a considerable number of challenges to deductions claimed. It is very difficult to know what will happen here. In principle this seems to be a case where the EBT is a very commercial way of rewarding and retaining key employees.”
In response to a presumption of instructing solicitors that any loans would need to be made within nine months of the end of the accounting period in which the relevant contributions were made in order to avoid relief being deferred by virtue of s 43, Mr Thornhill had said:
“To assuage the Revenue, benefits of a taxable nature should be provided as soon as possible. However, in my view, this is not legally necessary.”
83. In his evidence Mr Macdonald referred to the HMRC Public Folder which is a method of information dissemination within HMRC. The folder in relation to EBTs held copies of presentations and speaking notes from head office specialists and advice on HMRC’s views on EBTs. Mr Macdonald produced his slides and notes from one such presentation, in which he referred to s 43 in conjunction with UITF 13, capital and revenue, wholly and exclusively and Ramsay[4] and sham. His speaking notes indicate that s 43 would be dealt with by Linda Grant who, Mr Macdonald explained, was the person within the Revenue’s head office who was responsible for policy in this area.
“It is likely that we may not be able to apply the legislation at S 43 FA 1989 – the 9 month rule because:-
The definition of “potential emoluments” within S 43 may not cover EBT payments, and
The Revenue, for mainly technical reasons, advised that s 43 FA 1989 would not apply to payments made to employee share ownership trusts.”
“Section 43 may have application in cases where the money in the trust is put into sub-trusts for the benefit of named employees – you may be able to argue that, at that stage, the money becomes potential emoluments and subject to the 9 month time limit. The same could be said if you can link the monies paid into the trust to specific employees at any stage.
However, this argument is far from certain and, if you think it is relevant, seek advice before running it.
Note – point will shortly be litigated. A case involving allocation of trust funds into sub-trusts should, hopefully, be brought before the Special Commissioners early next year.”
“I will keep you informed of developments on the s 43 front, the key to which is whether trustees of discretionary trusts can be considered to be ‘intermediaries’ for the purposes of section 43(11). But even if the Solicitor gives us support for arguing that that may be so in certain circumstances, it will be necessary to find out factual information how a particular trust is operated in practice and the relationship between the trustees and the company (acting through its directors).”
“You have let me have a copy of counsel’s opinion with regard to Employee Benefit Trusts. This is the standard opinion included with the ‘Introducer’s Pack’ provided by Baxendale Walker. Included in that opinion is the view that Section 43 FA 1989 does not apply to Employee Benefit Trusts. Our view is that section 43 can apply to contributions to Employee Benefit Trusts. Whether it does, depends upon the facts of each particular case.
The opinion says that this is because the sum paid into the trust will not be ‘relevant emoluments’ as there will not be a sum allocated in the accounts of the founder in respect of the emoluments of any particular office or employment, or in respect of offices or employments in general. It is a question of fact – ultimately for the Commissioners to decide if necessary – whether an employee has paid money into an Employee Benefit Trust with a view to it being allocated in respect of offices of employments (which, after all, is the common link between those eligible to be beneficiaries of Employee Benefit Trusts) or with a view to something else.
The opinion goes on to claim that the contributions will not be ‘potential emoluments’ with[in] Section 43(11) as the trustees could not be correctly characterised as an intermediary of the founder. It is a question of fact – ultimately for the Commissioners to decide if necessary – whether the trustees of an Employee Benefit Trust do, in practice, act as intermediaries between the employer and those who benefit from the trust by virtue of their, or someone else’s, office or employment.”
96. On 2 March 2001 Mrs Grant wrote advising another Inspector:
“Section 43 FA 1989
13. From the above [a discussion of UITF 13] you will gather that only if the trust is not under the ‘de facto’ control of the company might Section 43 FA 1989 be relevant. And because Section 43 only acts to defer a deduction for late-paid emoluments which are held by an intermediary (or are the subject of a provision in the employer’s accounts in accordance with GAAP), it is likely to have little application. If the trustees are not under the control of the company I doubt if they could be considered to be intermediaries for the purpose of Section 43(11) FA 1989.
14. So, I suggest you leave any Section 43 arguments for the time being, and concentrate on the further fact-finding needed to consider the ‘wholly and exclusively’ question in more detail, and/or to support an accountancy-based timing argument.”
“Inevitably employers are walking a tightrope. The trustees must have sufficient discretion so that S43 does not bite. But they cannot have a degree of discretion that might potentially defeat the overall objectives of the employer in making the contributions; that is to promote a greater degree of commitment by employees. Providing they have made a reasonable effort to walk that tightrope, we are content that they should secure relief without regard to FA89/S43. The cases that do concern us more, and where we will consider applying S43 are those –
· strictly not ESOTs, where cash bonuses, deferred remuneration, etc schemes are wrapped up in this sort of form. In other words those in which the trustees are purported to have discretion which they don’t in reality enjoy, because the employees[’] title is clearly established, perhaps in the form of a written/verbal contract between employer/employee;
· as above under ‘ordinary principles’ where the degree of discretion is such as to defeat the stated objective of the trust. In particular, where it appears that the real purpose is other than to encourage wider share ownership amon[g]st employees; or if it is unclear as to what the trust is in fact for.”
100. The RTU goes on, under the heading “Advice” to say the following:
“Although ‘employee trusts’ have been around for some time (the Heather[5] case was heard in 1972) there has been an upsurge in activity in recent years. In the main this is no doubt nothing other than a genuine desire to encourage employees to have a stake in the company for whom the[y] work. But, at the margin, there is no doubt that schemes are also being set up to counter the effects of FA89/S43; also, particularly for private companies, to operate as an off-shore money box as the more conventional ways of storing money are increasingly being attacked. This is a developing area and Business Profits Division 4 (Schedule D) would like to know of suspicious cases and to give advice. At the early stage of an enquiry a telephone call is sometimes helpful and the number is …”
Calendar year in which accounting period ended |
Number of referrals |
1992 |
1 |
1993 |
0 |
1994 |
4 |
1995 |
13 |
1996 |
32 |
1997 |
82 |
1998 |
201 |
1999 |
417 |
2000 |
445 |
2001 |
452 |
2002 |
169 |
2003 |
30 |
2004 |
16 |
2005 |
15 |
2006 |
5 |
111. The question we have to consider is whether the evidence shows that there was a practice generally prevailing and, if so, whether the return made by Boyer Allan on 24 January 2001 was in accordance with that practice.
116. In our view, the essential question is whether the internal guidance within the Inland Revenue at the material time, and the way in which it was operated and applied, amounted to a settled practice accepted or adopted by taxpayers and their advisers, such that it can be regarded as a generally prevailing practice on the basis of which Boyer Allan’s January 2001 return was made. We accept that the primary evidence of such a practice is to be derived from the views expressed by Mrs Grant, as she was acknowledged to be the policy-holder within the Inland Revenue at the relevant time. But evidence of how others within the Revenue approached the issue is also relevant in assessing whether the views of Mrs Grant, and her internal advice and guidance, were translated into a settled practice.
123. On this basis we conclude that there was no practice generally prevailing with respect to the application or otherwise of s 43 FA 1989 to the deductibility of payments to trustees of EBTs. Accordingly we find that the return of Boyer Allan submitted on 24 January 2001 was not “on the basis or in accordance with the practice generally prevailing at the time when it was made.”
126. The immediate point of this is that para IM1049 does not go that far. It simply requires channelling cases to be submitted to Business Profits Division. The argument of HMRC is effectively that even if there were a practice, Boyer Allan’s tax return would not be in accordance with it because the practice not to apply s 43 as a matter of practice did not apply to channelling cases, each of which would have to be considered on its own merits. Essentially, what is said is that, even if there was a general practice as regards the application, or non-application, of s 43, that practice did not extend to channelling cases.
128. The very fact that the answer to these questions is unclear lends weight to our conclusion that there was a lack of clarity and certainty as to the position that in turn negates any possible conclusion that there was, in these circumstances, a generally prevailing practice, or indeed any relevant practice at all. But on the assumption that there was a practice, we shall consider whether the circumstances of Boyer Allan’s EBT would have taken the contributions to it outside that practice.
130. Mr Tidmarsh argued that Boyer Allan intended to use the EBT “largely to channel emoluments to employees so as to obtain a deduction for payments when charged whilst deferring the receipt of emoluments in the hands of the employee”, and did in fact do so. He relies on the following factors.
(1) Mr Tidmarsh says that a primary concern on the part of Boyer Allan and its directors was to secure a deduction for corporation tax in circumstances where sums would be paid out as emoluments. We consider this to be irrelevant. It would be surprising indeed if a company did not consider the deductibility of a payment of this nature. The fact that it did can say nothing about whether this could be regarded as a case of channelling.
(2) Mr Tidmarsh relies upon the evidence of Mr Allan that the only payments that have been made from the EBT have been payments of cash, and that was the only way in which the payments were expected to have been made. Again, this does not in our view go to show the channelling of emoluments.
(3) Mr Tidmarsh refers to clause 11.1.1 of the trust deed which provides that benefits could be granted in favour of participants (as defined in s 13(2) of the Inheritance Tax Act 1984, but excluding persons within s 13(3)) in Boyer Allan only by way of emoluments. On the basis that at all material times each of Mr Boyer and Mr Allan owned 50% and 44.5% of Boyer Allan’s issued share capital, and so were participants, Mr Tidmarsh says that it follows that the only benefits that could be granted to them were emoluments. We agree, but we do not regard the terms of the trust deed itself as indicative of channelling, any more than in January 2001 the Revenue would have relied on those terms. The Revenue at that time were looking for evidence of what happened in practice, outside the terms of the trust.
(4) As we heard in evidence, the contribution to the Boyer Allan EBT made in the year ended 30 April 2000 was, from the moment of its receipt, notionally and informally “earmarked” for Mr Allan and Mr Boyer. This meant that they were presumptively entitled to the sums allocated, although Mr Matthew told us that the allocations were provisional and could increase or decrease by reference to discussions with the board of the company, investment performance and payments out to beneficiaries. It was at all times open to the trustees to apply the funds for the benefit of other beneficiaries of the EBT.
Mr Prosser argues in this connection that the earmarking of the funds did not mean that the funds somehow “belonged to” or were “destined for” Mr Boyer and/or Mr Allan. He submitted that this does not therefore mean that this is a case of channelling.
On analysis we believe that Mr Prosser may well be right. But whether he is or not is not the question we have to consider. We have to determine whether the circumstances of this case are likely to have fallen on the “channelling” side of the line as far as the Revenue were concerned in January 2001. We consider that it would, simply because of the allocations that had been made. Whether, absent what turned out to be the proper construction of Dextra, a court would have found that this was a case falling within s 43 is not to the point. We are satisfied that these circumstances would have taken the Boyer Allan EBT out of the normal case (to which the assumed practice would have applied), such that the assumed practice not to apply s 43 would not have operated in this case. A subsequent finding that this was not a channelling case would not have altered the position.
(5) For completeness, Mr Tidmarsh referred to the fact that from the inception of the EBT until 30 April 2002 the only benefits granted by the trustees were payments of emoluments. The sums paid out as emoluments in that period (including the payment of tax and employees’ NICs on the relevant sums) were significant: £2m, £362,000, £750,000 and £1,468,000. We do not consider that this of itself would have led the Revenue to consider this to be a channelling case. However, we do consider that the payments to Mr Allan (on 26 October 2000 of £1,200,000, on 28 June 2001 of £450,000 and on 1 February 2002 of £300,000) would have contributed to the Revenue concluding at the relevant time that this was a channelling case.
131. For these reasons, therefore, we conclude that, if we had found that there was a generally prevailing practice with regard to s 43 and the deductibility of contributions, we would nevertheless have found that in the circumstances of the Boyer Allan EBT that practice would not have applied. In our view, that would have been a case where it would have appeared to the Revenue that the trust was being used to channel emoluments to employees so as to obtain a deduction for the payments when charged whilst deferring the receipt of the emoluments in the hands of the employee.
132. For the reasons we have given we dismiss the appeal with respect to para 45, Sch 18, FA 1998.
133. The parties have liberty to apply in respect of the outstanding issues.
This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
[1] “HM Revenue and Customs” includes its predecessor department, the Inland Revenue.
[2] Section 33 was replaced by TMA 1970, Sch 1AB with effect for claims made on or after 1 April 2010. See now Sch 1AB, para 2(8), (9).
[3] Accounting Standards Board Urgent Issues Task Force Abstract 13 issued in June 1995: “Accounting for ESOP Trusts”.
[4] W T Ramsay Ltd v IRC [1981] STC 174
[5] Heather v P-E Consulting Group Ltd (1972) 48 TC 293