Revenue And Customs v NCL Investments Ltd & Anor

Under sections 46 and 48 of the Corporation Tax Act 2009, a debit properly brought into account under generally accepted accounting practice is an expense for calculating trading profits. Section 54(1)(a) does not additionally require an actual or prospective outgoing.

Whether such an expense is wholly and exclusively for the trade depends on the transaction or economic activity represented by the debit. Employee services consumed for the trade satisfy that requirement. A debit representing those services is a revenue item even where the corresponding balance-sheet credit is treated as a capital contribution.

The grant of an option is not an employee benefit contribution merely because shares may later be transferred to fulfil the resulting contractual entitlement.

The taxpayer companies employed staff whose services they supplied to other companies in their group for a marked-up fee. Trustees of an employee benefit trust granted those employees options over shares in the group holding company. IFRS 2 required the taxpayers to recognise profit-and-loss debits measured by the options’ fair value, notwithstanding that the debits were independent of any cash outflow.

The First-tier Tribunal allowed the taxpayers’ appeals against closure notices disallowing the deductions. The Upper Tribunal dismissed HMRC’s appeal. HMRC appealed to the Court of Appeal.

The issues were whether the debits were expenses incurred wholly and exclusively for the taxpayers’ trades, whether they were capital items, and whether sections 1290–1291 of the Corporation Tax Act 2009 denied or deferred their deduction as employee benefit contributions.

1. Disposition. The appeal was dismissed unanimously. The debits required by IFRS 2 were deductible in calculating the taxpayers’ trading profits.
2. Meaning of an incurred expense. Sections 46 and 48 of the Corporation Tax Act 2009 define expenses, in this context, by reference to debits brought into account under generally accepted accounting practice. Section 48(2) confirms that an expense need not correspond to an amount actually paid. The word “incurred” in section 54(1)(a) does not impose an additional requirement for an actual or prospective outgoing. HMRC’s construction would deprive section 48 of its intended definitional effect and was inconsistent with the statutory structure. The IFRS 2 debits therefore qualified as expenses even though they were not themselves records of cash outflows.
3. Trade purpose. The purpose of an accounting debit is determined by examining the underlying transaction or activity which it records. The debits represented the taxpayers’ consumption of employee services, for which the options formed part of the remuneration. Those services were consumed wholly and exclusively in supplying staff services to group companies for profit. Section 54(1)(a) was therefore satisfied. The Recharge additionally demonstrated a purpose directed towards the trades, although the conclusion did not depend upon it.
4. Revenue character. The debits were revenue rather than capital items for section 53(1). They represented the consumption of employee services in carrying on the trades. The options’ fair value merely supplied a surrogate measure of those services. The corresponding balance-sheet treatment as a capital contribution did not change the character of the profit-and-loss debits.
5. Employee benefit contributions. Sections 1290–1291 did not deny or defer the deductions. Once granted, the options were contractual rights held absolutely by the employees, rather than property held under an employee benefit scheme. Nor did shares held or acquired by the trustee to satisfy exercised options constitute the relevant benefit. The option itself was the benefit; the later transfer of shares merely fulfilled an existing contractual entitlement. The grant of the options was consequently not an employee benefit contribution within the statutory scheme.

• Court of Appeal (Civil Division): HMRC’s appeal was dismissed by [2020] EWCA Civ 663.
• Upper Tribunal (Tax and Chancery Chamber): Mann J and Judge Timothy Herrington dismissed HMRC’s appeal from the First-tier Tribunal.
• First-tier Tribunal: Judge Jonathan Richards allowed the taxpayers’ appeals against closure notices which had disallowed the deductions.