AD Bly Groundworks and Civil Engineering Limited & Anor v The Commissioners for HMRC

For the wholly and exclusively test, the court must identify the taxpayer’s objects in incurring the expense or liability. A tax-efficient method of achieving a trading purpose does not, by itself, create a separate non-trading purpose. However, obtaining a tax advantage may itself be an object, including where the advantage consists of reducing taxable profits without corresponding expenditure. The question is fact-sensitive and requires the tribunal to distinguish object from effect and the purpose of expenditure from the means used. A provision for future pension payments is deductible only if incurred wholly and exclusively for the trade. Where that test is satisfied, Corporation Tax Act 2009, section 1290 does not apply to contractual promises of future pension payments where no qualifying employee benefit contribution is made.

The appellants, a civil engineering company and a wholesale travel agency, appealed against the First-tier Tribunal’s dismissal of their corporation tax appeals. They had entered into unfunded unapproved retirement benefit arrangements for directors and key employees and claimed deductions for accounting provisions relating to future pension liabilities.

The First-tier Tribunal found that the primary purpose of the arrangements was to reduce tax without incurring actual expenditure. It therefore held that the liabilities were not incurred wholly and exclusively for the purposes of the appellants’ trades. It also held, in the alternative, that Corporation Tax Act 2009, section 1290 would not disallow the deductions. The Upper Tribunal considered the section 54 appeal and HMRC’s permitted challenge concerning section 1290.

1. Section 54. The appeal was dismissed. The applicable test was whether the appellants’ objects in entering into the unfunded pension agreements included a non-trading purpose. The tribunal had to distinguish an object from an incidental effect, and the object of the expenditure from the means by which it was incurred. A taxpayer may choose a method because it produces the least tax liability without thereby having a duality of purpose.
2. That principle did not mean that a tax purpose was irrelevant. A purpose of reducing taxable profits without incurring actual expenditure may be a separate non-trading object. The First-tier Tribunal was entitled to find that this was the appellants’ primary purpose. Its conclusion was supported by the evidence, including the profit-based scale of the provisions, the limited remuneration advice and the tax-planning context.
3. The Upper Tribunal rejected the submission that Hoey v HMRC [2022] EWCA Civ 656 created a general rule that a fiscal motive could not produce duality of purpose. Properly understood, Hoey confirmed that remuneration will usually be deductible, but not where it is deliberately inflated or intended artificially to reduce taxable profits.
4. The proposed argument under section 54(2), seeking deduction of an identifiable part or proportion, was a new factual point not raised below. It was not permitted on appeal because the relevant evidence should have been considered by the First-tier Tribunal.
5. Section 1290. Although unnecessary to the disposition, the Upper Tribunal stated that it would have rejected HMRC’s challenge. Reading sections 1290 and 1291 together, the contractual promises did not constitute employee benefit contributions. The promises were not property held by the directors under an employee benefit scheme, and the arrangements were not of the kind contemplated by the statutory provisions. HMRC’s challenge would therefore have been dismissed.

• Upper Tribunal (Tax and Chancery Chamber): the appellants’ appeals against the First-tier Tribunal’s decision were dismissed. The Tribunal also stated that, if necessary, it would have dismissed HMRC’s challenge concerning section 1290 of the Corporation Tax Act 2009.
• First-tier Tribunal (Tax Chamber): appeals against closure notices were dismissed on the basis that the pension liabilities were not incurred wholly and exclusively for the purposes of the trades. The Tribunal additionally held that section 1290 would not have applied.