Commissioners for Her Majesty's Revenue and Customs v NCL Investments Ltd and another

Trading profits must be calculated in accordance with generally accepted accounting practice, subject only to adjustments required or authorised by law. An accounting debit is an expense for that calculation even though no amount has been paid. The word “incurred” in section 54(1)(a) of the Corporation Tax Act 2009 adds no freestanding requirement that the taxpayer bear an economic cost.

The revenue or capital character of a debit depends on the debit itself, not the character of its matching accounting credit. A share option granted outright as remuneration is not an employee benefit contribution where the employee immediately receives the benefit and does not thereafter hold the option under an intermediary scheme.

The respondent companies supplied their employees’ services to other group companies for a marked-up fee. Employees received options over shares in the group’s ultimate holding company from an employee benefit trust. IFRS2 required the companies to recognise debits representing the consumption of employee services and matching balance-sheet credits representing capital contributions.

The First-tier Tribunal allowed the deductions: [2017] UKFTT 495 (TC). The Upper Tribunal upheld that decision: [2019] UKUT 111 (TCC). The Court of Appeal dismissed HMRC’s appeal: [2020] EWCA Civ 663.

The Supreme Court considered whether the debits were deductible under the Corporation Tax Act 2009, particularly sections 46, 48, 53, 54, 1290 and 1291.

1. Appeal dismissed unanimously. Lord Hamblen and Lady Rose gave the joint judgment, with which Lord Reed, Lord Briggs and Lord Sales agreed. The IFRS2 debits were deductible in calculating the companies’ trading profits.

2. Sections 46 and 48 of the Corporation Tax Act 2009 establish the starting point. Profits must be calculated in accordance with generally accepted accounting practice. A debit properly brought into account is an expense whether or not money has been paid, unless an express provision provides otherwise. A judge-made adjustment remains possible, but the rule must clearly apply despite the statutory primacy given to generally accepted accounting practice. Lowry v Consolidated African Selection Trust Ltd [1940] AC 648 established no such rule.

3. Section 54(1)(a) did not impose a freestanding requirement that an accounting expense must involve an economic burden before it could be “incurred”. The word “incurred” took its meaning from “expenses”. Section 54 restricts deductions by reference to their purposes; it does not redefine the expenses recognised under sections 46 and 48. The First-tier Tribunal was entitled to find that the debits were incurred wholly and exclusively for the trades. They represented employee services consumed in earning the companies’ marked-up fees, and no ulterior purpose existed.

4. Section 53 did not disallow the deductions as capital items. The debits represented recurring employee remuneration and the consumption of services in earning income. Their matching credits were capital contributions, but the character of each debit, rather than that of its corresponding credit, determined whether it was revenue or capital.

5. Sections 1290 and 1291 did not defer or disallow the deductions. Once an option was granted as remuneration, the employee had received the benefit outright. The option was an actual emolument, not property thereafter held under an employee benefit scheme. Nor was there a sufficient causal link between individual grants and the trustee’s acquisition of shares. An option was not itself an “other arrangement”; that expression required something akin to a trust or scheme.

6. The court cautioned that a future case might require fuller consideration of when antecedent case law may be consulted in construing consolidation or Tax Law Rewrite legislation. That issue did not arise because “incurred” was unambiguous when read in its statutory context.

1. United Kingdom Supreme Court: HMRC’s appeal was dismissed unanimously: [2022] UKSC 9.
2. Court of Appeal: HMRC’s appeal was dismissed: [2020] EWCA Civ 663; [2020] 1 WLR 4452; [2020] STC 1201.
3. Upper Tribunal: The tribunal agreed for the most part with the First-tier Tribunal: [2019] UKUT 111 (TCC); [2019] STC 898; [2018] BTC 513.
4. First-tier Tribunal: The tribunal held that the accounting debits were deductible: [2017] UKFTT 495 (TC); [2018] SFTD 92.