MacDonald (Her Majesty's Inspector of Taxes (Respondent) v. Dextra Accessories Limited (Appellants)(HTML version)

Money held by an intermediary is a potential emolument under section 43(11)(a) of the Finance Act 1989 if the governing arrangements create a realistic possibility that it will become an emolument. Payment of emoluments need not be the sole, principal or dominant purpose of the fund.

The rule can therefore cover the whole of a discretionary employee benefit fund, even where the intermediary may confer non-emolument benefits. Unless and until the money is applied in paying relevant emoluments, the employer cannot deduct it under section 43. This construction prevents an employer obtaining an immediate deduction while indefinitely postponing the employees’ corresponding tax liability.

Six companies paid £2.75 million into a discretionary employee benefit trust. The trustee could pay emoluments to employees but could also confer pensions, loans and other benefits which were not emoluments. The companies claimed an immediate deduction when calculating their Schedule D profits for the accounting year ending 31 December 1998.

The Special Commissioners, in [2002] STC (SCD) 413, and Neuberger J, in [2003] EWHC 872 (Ch); [2003] STC 749, upheld the claim. The Court of Appeal allowed the Revenue’s appeal: [2004] EWCA Civ 22; [2004] STC 339.

The central issue was whether the money was held by an intermediary “with a view to” becoming relevant emoluments, and was therefore a potential emolument under section 43(11)(a) of the Finance Act 1989.

1. Appeal dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Nicholls, Lord Hope, Lord Scott and Lord Walker agreed with his reasons.

2. Per Lord Hoffmann, section 43(11)(a) of the Finance Act 1989 did not require the sole, principal or dominant purpose of the intermediary or contributor to be the payment of emoluments. Parliament could readily have used such familiar language had that been intended. In the case of a discretionary trust, attributing an advance intention to the trustees would also be artificial. The question was determined principally from the terms on which the intermediary held the money.

3. The statutory expression concerned what might realistically happen in the future. The money was therefore held with a view to becoming relevant emoluments where the governing terms created a realistic possibility that it would be used to pay emoluments. The trust deed created that possibility. The whole fund consequently fell within the statutory definition of potential emoluments, although the trustees could also use it to provide benefits which were not emoluments.

4. The label “potential emoluments” supported that construction. Although a statutory definition may alter the ordinary meaning of the defined words, the statutory label may illuminate an ambiguous definition. In ordinary language the fund was potential remuneration because it could be used to pay employees.

5. The words “with a view to” had to bear a similar meaning for money reserved in an employer’s accounts and money held by an intermediary. A reserve for a contingent bonus and a fund dependent on the exercise of trustees’ discretion each involved money which might or might not pay emoluments, but which had a realistic possibility of doing so.

6. The consequence that money never applied in paying relevant emoluments might never become deductible did not justify a narrower construction. Section 143 and Schedule 24 to the Finance Act 2003 produced the same consequence under the replacement regime. Employers could avoid it by segregating funds intended for emoluments from funds intended for other employee benefits.

7. A narrower construction would frustrate section 43. It would permit an immediate employer deduction while allowing the corresponding employee tax liability to be postponed indefinitely. The Court of Appeal’s order was accordingly affirmed.

1. House of Lords: The companies’ appeal was dismissed unanimously, affirming the Court of Appeal: [2005] UKHL 47.

2. Court of Appeal: The Revenue’s appeal was allowed. The court held that money was held with a view to becoming relevant emoluments where the governing terms created a realistic possibility that it would become such emoluments: [2004] EWCA Civ 22; [2004] STC 339.

3. High Court: Neuberger J dismissed the Revenue’s appeal. He held that paying emoluments had to be the trust’s principal or dominant intention and found that requirement unsatisfied: [2003] EWHC 872 (Ch); [2003] STC 749.

4. Special Commissioners: The commissioners rejected the Revenue’s construction. They considered that the contributing companies must have intended the money to be used to pay emoluments and found that the trust also served other purposes: [2002] STC (SCD) 413.