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

The FTT and UT decisions

Wholly and exclusively

The FTT recorded at [80] that the parties agreed that the test for determining whether an expense was incurred wholly and exclusively for the purposes of the trade was as set out in the UT’s decision in Scotts Atlantic Management Ltd and another v Revenue and Customs Comrs [2015] UKUT 66 (TCC), [2015] STC 1321 (“Scotts Atlantic”) at [50]-[55] (see [28] below). The FTT directed itself at [81] with reference to the principles set out in that summary and then considered the parties’ arguments.

The FTT’s reasoning on the wholly and exclusively issues is set out at [88]-[99]. It is a fairly lengthy passage but it warrants being set out in full:

There was not really any dispute that the Appellants had two purposes in mind when they decided to establish the UURBS and enter into the Unfunded Pension Agreements with the directors. Mr McSkimming and Mr Galpin maintained that the primary reason for the arrangements was to provide future pensions for key individuals in a way that did not involve any immediate reduction in working capital and, at the same time, the creation of a tax deduction which reduced the amount of tax payable by the company. The issue is whether the companies were doing so wholly and exclusively for the purposes of their businesses or whether there was a non-business purpose.

Our conclusion in [20] that the witness statements were largely a product of Charterhouse and the striking similarities between them cast doubt on those passages which purport to describe the Appellants’ reasons for setting up the UURBS. Both Mr McSkimming and Mr Galpin said that the boards subsequently met with Charterhouse to discuss remuneration or pension issues. The explanation given by Mr McSkimming in cross-examination for the similarities in the language used in the witness statements was that both companies were implementing the same pension planning arrangements but that cannot explain how two boards of directors formed exactly the same view before, on their evidence, any pension planning was suggested by Charterhouse.

It seems to us to be inherently unlikely that two separate companies with very different businesses would independently decide to do the same thing for the same reasons and in exactly the same way. We are not satisfied that both companies separately came to the conclusion that they needed to discuss the remuneration packages of key members of the business to incentivise and motivate them while maintaining working capital (see [27] and [55]). Neither Appellant produced any documentary evidence of such board meetings or discussions despite Mr McSkimming confirming that all board meetings were minuted. We do not accept that the Appellants’ boards of directors met to discuss the need to motivate and incentivise certain directors by offering enhanced remuneration packages while not using any working capital before being approached by Charterhouse with the idea for an UURBS.

Both witnesses said the proposal put forward by Charterhouse was primarily a pension scheme although tax was also discussed at the meeting. It seems to us to be unlikely, if not completely illogical, that the Appellants would seek advice on remuneration and pensions from Charterhouse which did not purport to advise on either of those things. Charterhouse’s letters of engagement stated that it could not advise on the suitability of an UURBS as a mechanism for providing pensions. In the letters, Charterhouse offered to liaise with a remuneration consultant who would produce an estimate of the overall level of remuneration, including the UURBS, for certain directors. In our view, if the Appellants had genuinely been concerned about the level of remuneration and pensions provision which they made for their directors, they would have sought advice from an executive remuneration consultancy firm and a pensions adviser rather than a firm of accountants. We are not satisfied that the Appellants sought advice about directors’ remuneration from Charterhouse which then suggested that they should set up an UURBS. We find that the proposal to enter into the UURBS was brought to the Appellants as a tax planning scheme by Charterhouse.

In his witness statement, Mr Galpin said that the UURBS was first and foremost a pension scheme although the directors were aware of the tax benefit. If that was true then we cannot understand why the directors of CHR Ltd did not seek any pensions advice. At no point did either Appellant take advice on the most appropriate way to provide pensions for the directors. Both Appellants were advised by Charterhouse to instruct a remuneration consultant but the remuneration consultants specifically did not give pensions advice. In their reports, both Synergis and FLB stated that they did not offer financial, pension or investment advice.

If the Appellants had wanted to incentivise, motivate and retain key employees then we would have expected the Appellants to seek advice on the competitiveness of their remuneration packages but they did not do so. Although they are described in the papers as remuneration consultants, we were not provided with any evidence to show that Synergis and FLB had any expertise in the area and their reports clearly only addressed the “commercial suitability” of the provisions. We were struck by the fact that the only comparative evidence of remuneration levels referred to in the reports is a reference in FLB’s reports to the indication of senior salaries in the accounts of companies conducting broadly similar activities. We would have expected any remuneration consultant to carry out a much more detailed exercise and to explore comparators in depth if the true purpose was to ascertain appropriate levels of remuneration to retain, incentivise and motivate senior personnel. Accordingly, we do not accept that this was the reason for establishing the UURBS.

Charterhouse’s engagement letters show that tax was at the forefront of the Appellants’ minds when they were considering establishing the UURBS. In our view, there is no other rational explanation for paragraph 1 of both letters being headed “Warning Regarding Tax Planning” and stating that “[a]ny tax planning covered by this engagement letter may be considered to be aggressive tax planning by [HMRC] and as such they are very likely to raise enquiries into any transactions effected as part of the planning ….”. Mr Mullan said that the paragraph was no more than a standard warning but we disagree. The wording and prominence of the warning demonstrate that it is much more than a standard clause such as are included in Charterhouse’s Standard Terms of Business attached to the engagement letters.

We have concluded that the provision of pensions to directors was, at best, only an incidental aim of the Appellants when they established an UURBS and entered into the Unfunded Pension Agreements. This is shown by the fact that the size of the pension provision was determined as a percentage of the profits before tax regardless of the level of those profits and without discussion of or reference to any future pensions benefit to the directors.

The amount of estimated profits used as a basis for making pension provisions by A D Bly in November 2012 was £1,300,000 which was significantly greater than the amount of £1,040,000 used by Synergis in making its recommendation that 100% of the profits could be used. Notwithstanding the increase in estimated profits, there does not appear to have been any discussion by the directors about whether the increase should lead to a reduction in the percentage of profits allocated to Unfunded Pension Agreements. The following year, the estimated profits of A D Bly were in the region of £3,000,000 but the FLB report and the board minutes do not record any discussion of whether the directors needed or why the company should make a pensions provision for its directors that was more than twice as large as the one made the year before. This disregard for the actual amounts of the pension provision made in relation to the individuals was shown even more clearly by the fact that the accounts for the period ended 30 November 2013 eventually included a provision of £4,435,180 for directors’ pensions, being 80% of profits before tax of £5,543,975, despite that sum not being considered by FLB in its report or discussed in the directors’ meetings.

In 2014, the directors of CHR Ltd seemed to disregard FLB’s advice that the provision should be 80% of the estimated profits and decided to allocate all of the profits for the year to the Unfunded Pensions Agreements. There was no discussion or explanation for the decision to make greater provision for pensions than that recommended by FLB.

We are also unconvinced by the commerciality of the arrangements. Putting aside the uncertainty inherent in the scheme, it commits the Appellants to paying significant amounts in the future that must reduce the future distributable profits of their businesses (although we note that in both cases the businesses have been transferred to associated entities). The Unfunded Pension Agreements provide that the Executive may by written notice require the Appellant to use the adjusted (ie increased) amount of the provision to purchase an annuity to provide the same benefits as under the agreement. The Appellants accepted that, in fact, no annuity providing such benefits was currently available on the market. If it were than [sic] it is clear that if, as here, provisions for the Unfunded Pensions Agreements are made at rates of 80% and 100% of profits over several years then the Appellants are accepting a potential liability to pay an amount equal to several year’s annual profits adjusted for inflation as a lump sum in a single year. The witnesses had two responses to that. First, they stated that they were confident that the businesses were expanding and would be able to meet the future obligations and, secondly, that, as potential recipients of the pensions, they recognised that there was a risk that they would not be paid but believed the arrangements were in the best interest of the businesses. We do not accept that those points demonstrate that the UURBS was a commercial arrangement. In the case of A D Bly, the estimated profits figures show there is considerable volatility while the estimated profits of CHR Limited used in the relevant years remained broadly the same. In both cases, the future business risk remains substantial.

On the basis of the facts found and for the reasons given above, we have concluded that the Appellants’ primary purpose in entering into the Unfunded Pension Agreements was to reduce their liability to pay tax without incurring any actual expenditure. It follows that the liability to pay pensions under the Unfunded Pension Agreements was not incurred wholly and exclusively for the purposes of the Appellants’ trades. The fact that A D Bly is paying four pensions does not change our view that the pension provisions were not made wholly and exclusively for the purposes of the Appellants’ trades.”

I draw the following key elements from the FTT’s assessment:

Contrary to the witness evidence, A D Bly and CHR were both approached by Charterhouse before they had developed any idea of enhancing their remuneration packages without immediately using working capital.

The FTT was sceptical that either company would seek advice from Charterhouse on remuneration or pensions, and it did not provide it.

A D Bly and CHR were also not genuinely concerned about the level of remuneration and pensions provision. They at no stage sought or obtained pensions advice, and obtained no advice (or at least no advice at the level of detail that would be expected) from a remuneration consultant about the competitiveness of remuneration packages.

Rather, the UURBS was brought to them as a tax planning scheme, and tax was at the forefront of their minds. The provision of pensions was “at best” an incidental aim and the primary purpose was to reduce tax without incurring expenditure. The primacy of tax considerations was demonstrated by the fact that the size of the provision was determined as a percentage of profits regardless of the level of those profits, and without reference to the level of future benefit.

The FTT also expressed a concern as to the commerciality of the arrangements and was not deterred from its conclusions by the fact that four of the A D Bly pensions are now in payment.

The UT granted permission to appeal the FTT’s decision on grounds broadly corresponding to those before this court (see below). It refused permission on four other grounds comprising Edwards v Bairstow (Footnote: ¹) challenges to finding of fact. In summary, the UT’s decision ([2024] UKUT 00104 (TCC), Judge Thomas Scott and Judge Ashley Greenbank) concluded that the FTT had relied on Scotts Atlantic at [50]-[55] as a helpful summary of the leading authorities, had not “fact matched” to that case and had made no error of law. The UT also observed that some of the arguments effectively sought to reintroduce the Edwards v Bairstow challenges for which permission had been refused, but considered and rejected those arguments in any event, noting that the weight to be given to factors such as the failure to take pensions advice was a matter for the FTT.

Section 1290 CTA 2009

As to s.1290 CTA 2009, the FTT rejected HMRC’s argument that it applied by reference to this court’s decision in NCL Investments Ltd and another v Revenue and Customs Comrs [2020] EWCA Civ 663, [2020] 1 WLR 4452 (“NCL CA”) at [77] and [78]. By the date of the UT’s decision NCL CA had been upheld in the Supreme Court ([2022] UKSC 9, [2022] 1 WLR 1829: “NCL SC”). The UT agreed with the FTT, concluding that the Supreme Court had effectively endorsed the Court of Appeal’s reasoning and that the wording of the legislation was in any event inapt to cover the present case.

NCL is considered further below, but in outline it concerned the deductibility of an accounting provision for the cost of funding an employee benefit trust (“EBT”) to acquire shares to satisfy employee share options granted by the EBT. HMRC relied, among other arguments, on s.1290 to deny a deduction for the provision.