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References below in the form FTT[x] are to paragraphs of the Decision.
A D Bly is a provider of civil engineering and groundwork contracting services. At the relevant times, it had seven directors and around 220 employees. CHR is engaged in the wholesale travel agency business. It had two directors and around 20 employees.
The Appellants entered into contractual arrangements with directors and other key employees relating to an Unfunded Unapproved Retirement Benefit Scheme (“UURBS”) under which the Appellants promised to provide those employees with a pension in the future. In the case of each Appellant, the pensions were calculated by reference to the estimated profits for the relevant year. In each case, the aggregate amount of the pensions was set at 80% or 100% of the estimated profits before tax. Each company made a provision in its accounts in respect of its liability to make these future pension payments to employees, and claimed a deduction in calculating its profits for corporation tax purposes to reflect that provision.
HMRC disallowed the deductions and issued closure notices. Notices were issued to A D Bly for the accounting periods ended 30 November 2012 and 30 November 2013, and to CHR for the accounting periods ended 31 March 2013 and 31 March 2014.
The UURBS had been proposed to the Appellants by their accountants, Charterhouse (Accountants) Limited (“Charterhouse”). The UURBS had been notified to HMRC in accordance with the Disclosure of Tax Avoidance legislation in section 304 of the Finance Act 2004 and allocated a scheme reference number. Charterhouse had marketed the UURBS to other companies, whose claims for corporation tax deductions had also been disallowed, and there were a number of other appeals to the FTT. The appeals by the Appellants had been designated as lead cases under Rule 18 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.
At FTT[77], the FTT summarised the agreements entered into by the Appellants (the “Unfunded Pension Agreements”) as follows:
All the Unfunded Pension Agreements were in identical terms, save as to names, amounts and dates, and signed as deeds…In summary, the agreements provided in each case that:
As part of the director’s reward for services for the relevant year, the company agreed to provide a pension in accordance with the terms of the agreement.
The company agreed to pay a pension from the ‘Payment Date’ which is the director’s 77th birthday or such earlier or later date as provided for in the agreement.
The Payment Date is the date notified by the director to the company with at least six months’ notice but cannot be earlier than the later of the director’s 55th birthday and the date of the director’s retirement unless the director has died before that time. There are further provisions for cases where the director has died or is still employed at the age of 77.
The amount of the pension is calculated as the amount which would have been payable under an annuity contract on the assumption that the company has purchased an annuity contract from a commercial provider of annuities for a consideration equal to the Payment Sum. The company and director may agree additional actuarial assumptions to be made by an agreed actuary.
The Payment Sum is said to be the Base Sum (being the proportion of the projected profits for the relevant year allocated to the director in the relevant minutes) adjusted to account for the movement of the consumer prices index, plus that adjusted sum multiplied by the total percentage rate, being the relevant rate (the higher of 2.5% and the interest rate on the most recently issued UK Government Index Linked Securities) multiplied by the number of complete 12 month periods ending prior to two months before the Payment Date.
The pension is to be paid for life and increases in line with the consumer prices index.
Either party may by written notice vary the company’s obligations to permit/require the company to purchase an annuity or annuities at a cost of the Payment Sum as an alternative to paying the pension directly.