CA-2024-001410 - [2025] EWCA Civ 1443

Expenses not wholly and exclusively for trade and unconnected losses

In calculating the profits of a trade, no deduction is allowed for—

expenses not incurred wholly and exclusively for the purposes of the trade, or

losses not connected with or arising out of the trade.

If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.”

By way of summary of my conclusions, I agree with the UT that the FTT made no error of law. The FTT relied on Scotts Atlantic for its uncontroversial summary of the principles derived from the leading cases and correctly applied those principles to the facts of the case. It did not compare those facts to those of Scotts Atlantic, but nor should it have done. The question of the correctness or otherwise of the actual decision reached in Scotts Atlantic on the wholly and exclusively issue simply does not arise.

Scotts Atlantic concerned a scheme under which value was injected into an EBT via the creation of a company in which the employer subscribed a trivial number of shares at a very significant premium and then permitted the EBT to access the funds through the exercise of an option to subscribe additional shares at par, following which the company was liquidated and the funds were used by the EBT to make loans or distributions to the beneficiaries. The FTT’s decision to disallow the employer’s claim to a deduction was upheld by the UT on the basis that Schedule 24 to the Finance Act 2003, the precursor to s.1290 CTA 2009, applied. The UT’s consideration of HMRC’s alternative argument that the expenditure was not incurred wholly and exclusively for the purposes of the trade was therefore unnecessary to its decision (see at [43] and [44]).

Nevertheless (and conscious that it was a logically anterior question to the application of Schedule 24) the UT considered the point in some detail. HMRC’s case on that issue was that there was a duality of purpose, namely both to provide benefits to employees and to secure a tax deduction. It was common ground that securing a tax advantage was a purpose of the scheme.

The UT’s summary of the relevant principles at [50]-[55] of Scotts Atlantic is as follows:

First, ‘[a]s the taxpayer’s “object” in making the expenditure has to be found, it inevitably follows that (save in obvious cases which speak for themselves) the [FTT needs] to look into the taxpayer’s mind at the moment when the expenditure is made’ (Lord Brightman in Mallalieu v Drummond (Inspector of Taxes) [1983] STC 665 at 669, [1983] 2 AC 861 at 870).

Secondly, in so doing, the object of the expenditure must be distinguished from its effect. If the sole object of the expenditure was the promotion of the business, the expenditure is deductible, even though it necessarily involves other consequences. Thus the existence of for example a private advantage does not necessarily mean that the expenditure is disallowable. As Millett LJ said in Vodafone CellularLtd v Shaw (Inspector of Taxes) [1997] STC 734 at 742, 69 TC 376 at 437:

‘The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.’

Another way of phrasing this is that a merely incidental effect of expenditure is not necessarily an object of a taxpayer in making it. However, as Lord Brightman’s well-known example in Mallalieu (see [1983] STC 665 at 669, [1983] 2 AC 861 at 870) of the medical consultant going to the South of France to treat a friend shows, it may be the case that in fact what would be an incidental effect in some circumstances could be an independent object in others. What the FTT must not do is to conclude that merely because there was an effect, that effect was an object.

Thirdly, ‘[s]ome results are so inevitably and inextricably involved in particular activities they cannot but be said to be a purpose of the activity’ (Lord Oliver in MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1989] STC 898 at 905, [1990] 2 AC 239 at 255) and as a result the conscious motive of the taxpayer is not decisive: ‘it is of vital significance but is not the only object which the fact finding tribunal is entitled to find to exist’ (Lord Brightman in Mallalieu). Another way of putting that is that the FTT must take a robust approach to ascertaining the purposes of the taxpayer.

There is one point to add: neither the statutory provision nor any of the cases indicate that the way in which an expense is incurred will determine whether the expense is deductible. The question is what is the object of the expense, not what was the object of the means of incurring it. But that is not to say that the means by which the expenditure is made cannot be one of the circumstances to be taken into account in determining its purpose.

A trader may have a choice of the way in which it achieves an end which is exclusively for the benefit of the trade. The choice may be influenced, or indeed wholly determined, by the tax consequences of each choice. A taxpayer is perfectly entitled to order its affairs in a way which incurs the least tax liability. The mere fact that a choice is influenced or dictated by the tax consequences does not necessarily mean that the choice involves a duality of purpose as regards the expense. The words of Millett LJ are just as relevant and applicable where there is a choice as where there is not: in each case, the question is whether the payment is made exclusively for the purposes of the trade, and that is a question of fact for the FTT.”

No serious objection can be taken to this summary, which was of course agreed by the parties in the FTT. The principles are well-settled. As discussed below, they were recently considered by this court in Marlborough DP Ltd v Revenue and Customs Comrs [2025] EWCA Civ 796, [2025] STC 1235 (“Marlborough”). Although our attention was not drawn to it, I should add that the leading cases have also recently been considered in detail by this court in the different context of the “unallowable purpose” rule in s.441 CTA 2009: see BlackRock Holdco 5, LLC vRevenue and Customs Comrs [2024] EWCA Civ 330, [2024] STC 740 (“BlackRock”) at [110]-[124]; the summary at [124] was also cited in JTI Acquisition Co (2011) Ltd vRevenue and Customs Comrs [2024] EWCA Civ 652, [2024] STC 1179 and Kwik-Fit Group Ltd vRevenue and Customs Comrs [2024] EWCA Civ 434, [2024] STC 897.

In Scotts Atlantic the UT held that the correct question to consider was the purpose of the expense rather than the purpose of the scheme (the scheme admittedly had a tax purpose). On the factual findings of the FTT in that case one of the purposes of the expenditure was to implement a pre-arranged scheme to obtain a tax deduction, and the FTT had been entitled to conclude that it was non-deductible.

In this case the UT correctly observed at [29] that the FTT did not compare or even refer to the factual matrix in Scotts Atlantic. Further, as it noted at [31], the reference in Scotts Atlantic at [67] to an “all-pervading object” of achieving a corporation tax deduction, on which the Appellants rely, was a reference to a finding by the FTT in that case which was subject to some criticism by the UT, rather than a correct description of the legal test to be applied.

The critical point in this case is the FTT’s conclusions on the facts, which I have already set out in detail. In short, they are fatal to the Appellants’ case. The FTT found that the UURBS was adopted as a tax saving scheme and the provision of pensions was “at best” an incidental aim. The FTT’s conclusion to that effect is unimpeachable. It was based among other things on the fact that there was no consideration of the provision of additional benefits before the UURBS proposal was presented by Charterhouse (the witness evidence on that issue having been rejected), the use of a percentage of profits irrespective of what those profits were, and the lack of genuine concern about the level of remuneration and pensions provision, such that there was no proper consideration of the appropriateness of the nature or level of benefit for the individuals (see [18] above). Mr Andrew Thornhill KC (for the Appellants) criticised the FTT for not considering whether the pensions provided for were needed or were reasonable in amount, but the FTT made its findings on the evidence that the Appellants put forward. It was up to the Appellants to establish their case, and they failed to do so.

It makes no difference that the UURBS was simple in concept and did not involve the level of artificiality that many tax avoidance schemes have, or that UURBS can be used as a perfectly legitimate method of making pension provision. What matters is the facts of this case. It is also irrelevant that (by the time the matter was litigated) some of the A D Bly pensions were in payment. No one is suggesting that the arrangements were a sham or that the provisions in the Appellants’ accounts were otherwise improperly made.

Although he did not purport to resile from the summary of the principles in Scotts Atlantic on which the FTT relied, Mr Thornhill in substance sought to do so by arguing that, at least in the context of employee remuneration and/or pensions provision, a tax avoidance purpose (as opposed to another non-trade purpose) could not prevent a deduction for any sum that was not shown to be excessive, at least unless it is found that the company’s object was an all-pervading one to reduce its corporation tax liability by any means that it could. Rather, he submitted that the tax deduction should be treated as no more than the natural consequence or effect of the expense. However, neither s.54 nor the authorities provide any authority for such a principle.

It is of course the case that traders will incur expenditure in the knowledge and expectation that it will be deductible for tax purposes, and indeed might not otherwise be prepared to incur the expenditure. Parliament cannot be taken to have intended by what is now s.54 CTA 2009 to prevent that consequence arising merely because tax was considered. As I said in BlackRock at [150] in the context of the unallowable purpose rules, something more is needed. But that does not mean that Mr Thornhill’s argument is correct.

In my view it was this point that Sir Launcelot Henderson was making in the part of his judgment in Hoey which includes a passage that was heavily relied upon by Mr Thornhill. Hoey concerned income tax assessments in relation to benefits that Mr Hoey and others had received from an EBT, but one of the issues considered was whether the employers’ contributions to the EBT were properly deductible as expenses of the trade. The legal principles were considered from [170], where there is a citation from the decision of Millett LJ in Vodafone Cellular Ltd v Shaw [1997] STC 734 (“Vodafone”). After noting at [171] that remuneration would not necessarily satisfy the wholly and exclusively rule, Sir Launcelot said:

Nevertheless, where the remuneration paid to an employee is reasonable in amount, and the services in question were performed for the purposes of the employer’s trade, it is usually difficult to envisage circumstances in which deduction of the expenditure will not be allowable.”

Having referred to MacKinlay v Arthur Young McClelland Moores & Co [1990] 2 AC 239, [1989] STC 898 (“MacKinlay”) and considered the decisions below, Sir Launcelot explained that HMRC had relied on duality of purpose, namely remuneration and tax avoidance ([191]), to deny a deduction and had also raised broader arguments about the tax avoidance context in which the employers’ trading activities were carried on. He noted at [193] that HMRC had not sought to argue that tax considerations so infected the activities that the employers were not trading for tax purposes at all (Lupton v FA & AB Ltd [1972] AC 634, 647), before saying this:

Furthermore, once the existence of a trade is recognised, the mere fact that a transaction is entered into with a fiscal motive does not, in the normal way, denature it or mean that it is infected by a duality of purpose which makes expenditure on it non-deductible. At times, HMRC’s arguments seemed to come close to suggesting that the courts should recognise a general principle that the existence of a tax avoidance motive which is more than purely incidental must give rise to a duality of purpose which means that the wholly and exclusively rule cannot be satisfied. Any such principle, if it existed, would have very far-reaching implications, and would be contrary to many statements in the case law that the existence of a fiscal motive is generally irrelevant in answering the objective question whether there is a trade: see, for example, Ingenious Games [2022] 2All ER 338, para 64, where the court referred to ‘the general irrelevance of fiscal motive in answering the objective question whether the transaction viewed as a whole constitutes a trade’.”

It is this passage on which Mr Thornhill particularly relies.

Sir Launcelot proceeded to consider Interfish Ltd v Revenue and Customs Comrs [2014] EWCA Civ 876,[2015] STC 55 and MacKinlay, concluding that the amounts received from the EBT were part of Mr Hoey’s agreed remuneration package, and no distinction could be drawn between those amounts and his salary, which was admittedly deductible. The existence of an ulterior motive of helping Mr Hoey to engage in a tax avoidance scheme did not amount to a separate object. Rather, it was a “a consequential and incidental effect of the payment” as referred to by Millett LJ in Vodafone. As Lord Oliver had said in MacKinlay at p.254, anything paid by way of remuneration for acting as an employee “cannot easily fail to be deductible as an expenditure exclusively for the purpose of the firm’s business”. There was a “strong prima facie inference” that the payments to the EBTs in respect of Mr Hoey’s services were deductible, and HMRC had not discharged the evidential burden on them to displace that inference (see Hoey at [198]). In any event the FTT was entitled to have reached the conclusion that it did to that effect ([199]).

As Sir Launcelot explained, amounts paid to remunerate employees will in the ordinary course be deductible. I would add that the same must apply to the provision of pensions, subject to the application of special rules which can govern the timing of deduction (see further below). But the fundamental reason why expenses incurred to remunerate employees are deductible is that the object is indeed to remunerate them for their services. If that is the object, the mere fact that it is sought to be achieved in a way that avoids tax will not prevent a deduction being obtained. That may either be on the basis that it is not sufficient that the particular means chosen to achieve the object is driven by tax considerations (see Scotts Atlantic at [55]), or (as was the case in Hoey) because tax avoidance is not found to be an object or purpose of the taxpayers at all. In contrast, in this case the FTT made a clear finding that the real driver was not pension provision but tax saving, such that the provision of pension benefits was at most an incidental aim. This was not simply a choice of a tax-efficient method of making pension provision, and the strong prima facie inference referred to in Hoey was convincingly displaced on the facts. It was also not a case of confusing object with effect, as Mr Thornhill suggested the FTT had done. The FTT and UT had the distinction well in mind.

The Appellants are also not assisted by the comments of Lord Cross in Kilmorie, 50 TC 1, 100, on which Mr Thornhill relied. There Lord Cross gave an example of a retailer who is in the habit of buying articles from a wholesaler for £10 (a commercial price) but chooses to buy them instead from his son-in-law, who has also set up a wholesale business, at the same price. One of the purposes of transacting with the son-in-law is to assist him, but the expenditure is still deductible. The position would be different if an inflated price was paid.

The reason this does not help the Appellants is that the retailer requires the items for his business. That is his object in acquiring them. He is simply entitled to achieve that object by buying them from his son-in-law instead of the other wholesaler. The purpose of choosing the particular means of acquiring the goods was to help his son-in-law, but it was no more than that. It is not, in truth, duality of purpose as to the object of the expenditure at all.

The recent decision in Marlborough provides another example of the application of the well-established principles. That case concerned a dental practice operated by a Dr Thomas through a corporate entity. The company used a marketed tax scheme involving the contribution of its profits to a trust and the onward provision of loans to Dr Thomas. In that case the UT held that the FTT erred in its view that the contributions to the trust were deductible because on the facts found it was impossible to conclude that they were. The UT’s decision was upheld by this court.

Singh LJ referred to Mallalieu v Drummond, MacKinlay and also Scotts Atlantic (see at [98]-[106]) before considering the parties’ arguments. At [112] he noted a possible tension between Millett LJ’s statement in Vodafone that the question of whether expenditure is incurred wholly and exclusively for the purposes of the trade is one of fact and comments made by Rose LJ in Investec Asset Finance plc v Revenue and Customs Comrs [2020] EWCA Civ 579, [2020] STC 1293 at [42]-[46], but found it unnecessary to resolve that. As the UT had observed, Dr Thomas’s own evidence was that contributions were made in the amounts required to reduce the profits to nil. The twin objectives of the scheme were to empty the company of profit and to advance it to Dr Thomas by way of non-taxable loan. There was no purpose of benefiting the trade, rather the purpose was tax avoidance, which was an end in itself (see at [27] and [122]).

Similarly in this case, on the facts found by the FTT it was certainly entitled, if not bound, to conclude that the provisions made by A D Bly and CHR were not deductible, because at least the principal purpose of their creation was tax avoidance.

Finally, to the extent that Mr Thornhill relied on a deliberate policy choice of the legislature to incentivise pension provision through tax benefits, that also does not assist the Appellants. In fact, I do not understand any of the provisions relevant to the deduction of employer pension contributions to disapply the wholly and exclusively requirement when determining deductibility: see in particular s.196 FA 2004 in relation to contributions to registered pension schemes and s.246 FA 2004, considered below.