[2024] UKUT 00266 (TCC)

The FTT’s decision on the deductibility issue was at FTT[185]-[191], where it set out the relevant principles, and FTT[205]-[221]. The FTT identified two issues, namely whether the expense of £300,000 was correctly recognised in the Company’s accounts in accordance with GAAP, as required by section 46(1) Corporation Tax Act 2009 (“CTA 2009”), and whether the expense was incurred wholly and exclusively for the purposes of the Company’s trade, as required by section 54 CTA 2009. Both requirements needed to be satisfied.

The FTT recorded that although the expert witnesses for each party disagreed, they agreed that if in fact there was no intention that the Directors should satisfy the obligation to pay sums into the Trust, the expenses would be correctly recognised for GAAP: FTT[207]. The FTT decided that because it had concluded that in fact it was most likely that the moneys would be recycled to the Directors, there was in substance no intention to this effect, so that no asset should be recognised under GAAP in the Company’s accounts in relation to the Trust. As a result, the deduction was made in accordance with GAAP.

In relation to the “wholly and exclusively” requirement, The FTT identified the issue as whether, in incurring the relevant expenses, there was a duality of purpose which meant that the test was not met: FTT[211]. The burden of proof was on the Appellants. The FTT found that the scheme transactions were “highly contrived in order to seek to achieve the combination of tax free income for the Directors and a tax deduction for the Company” (FTT[214]) and that “the transactions were designed with the aim of circumventing [the disguised remuneration legislation] by, amongst other things, the very unusual step of the Directors ostensibly undertaking to fund the Trust themselves” (FTT[216]). The FTT concluded as follows:

Ground 4 seeks permission to appeal the FTT’s decision on the “wholly and exclusively” issue on the basis of two arguments. First, it is said that “either Scotts Atlantic (Footnote: ¹) has been misinterpreted or it was wrongly decided”. Second, it is said that the decision was wrong in the light of the decision of the Court of Appeal in Hoey v HMRC [2022] EWCA Civ 656 (“Hoey”).

Similar versions of both of these arguments were recently considered and rejected in AD Bly Groundworks and Civil EngineeringLimited v HMRC [2024] UKUT 00104 (TCC) (“AD Bly”), by an Upper Tribunal of which I was part. Permission to appeal that decision to the Court of Appeal was refused by this Tribunal on 22 May 2024. Mr Thornhill suggested that a reason for “keeping these arguments alive” was that permission to appeal had been sought the Applicants from the Court of Appeal. The Court of Appeal Case Tracker was last updated on 22 July 2024 and does not contain any reference to such an application, but, in any event, I do not accept that any such application would provide a good reason to grant permission in this case. Mr Tolley pointed out that an application for postponement of the application for permission on this ground could have been made, but was not, and Mr Thornhill clarified in the hearing no such application was sought. Ground 4 falls to be considered by reference to the facts of this case (not those in AD Bly), and by reference to the law as it currently stands.

Dealing first with Scotts Atlantic, the FTT set out Mr Thornhill’s submissions to the FTT on that authority at FTT[149] and [189]. As was explained in AD Bly, the argument that Scotts Atlantic established that the “wholly and exclusively” test is only failed by reference to a tax deduction purpose where that purpose is “all-pervading object” wrongly relies on the FTT’s approach to that issue in Scotts Atlantic, which was criticised by the Upper Tribunal in the passage set out in the Decision at FTT[190]. The assertion that, alternatively, “ScottsAtlantic was wrongly decided” is not arguable insofar as it relates to the summary in that case of the well-established authorities on duality of purpose. Whether or not it was wrongly decided on the facts is nothing to the point in relation to the Application.

The decision in Hoey was released two months before the FTT hearing in this case, but it does not appear to have been referred to or relied on by Mr Thornhill: paragraph 18 of the PTA Decision. Assuming for the purposes of the Application that the new argument is admitted, I do not consider it is arguable that, by failing to take Hoey into account, the FTT erred in law in reaching its decision on deductibility.

The relevance and effect of Hoey as a matter of law on the deductibility issue is set out in AD Bly at [39]-[51]. It is not arguable that a decision that earnings arose for tax purposes mandates a decision that the payment was deductible; it all depends on the facts. Mr Thornhill suggested that there was nothing artificial or excessive about the remuneration in this case, but I do not accept that: the scheme was, as the FTT found, highly contrived and could scarcely have been more artificial, and did not cease to be so because it did not work. Nor do I accept Mr Thornhill’s suggestion that, because the scheme did not work, one should effectively ignore the contrived steps of the scheme and treat the payment as “normal” remuneration. The issue in relation to the “wholly and exclusivity” test was not contrivance per se but duality of purpose. It is not arguable that because a purpose of tax reduction was found to exist it should be ignored because in the event that purpose was not achieved.

I do not consider Ground 4 to be arguable and refuse permission for it.