Companies lose case to deduct corporation tax on EBT payments

An appeal made by three companies to deduct corporation tax on contributions made to employee benefits trusts (EBTs) has been dismissed at a First Tier Tribunal (FTT), despite the on-going Rangers EBT case being introduced in favour of the defendants

In Alway Sheet Metal Limited & Othrs [2017] TC 05686, the decision in the ongoing case of Advocate General for Scotland v Murray Group holding Ltd and Othrs [2015] BTC 36 (otherwise known as the Rangers case) was used to apply that the payments the companies made to the EBTs were simply ‘indirect remuneration’.

The three companies appeals were joined because they raised similar issues regarding the deductibility of corporation tax from payments made to EBTs that they had each set up.

JCM Limited (JCM) established its EBT in 1997, funding it with £2m. ASM Limited (ASM) established its EBT in 1998, funding it in the period May 1998 – February 1999 with £490,000 and PC Limited (PC) established its EBT in 1998, funding it in the period December 1999 – October 2001 with £2.6m.

Whether the payments were indirect remuneration was the one of the six issues raised in the FTT along with:

  • as a result of what the companies considered to be HMRC’s excessive delay, HMRC were precluded from making the assessments by principles of estoppel, abuse of process or legitimate expectation;
  • in the case of ASM only, HMRC were entitled to increase the assessment;
  • payments made to the EBTs were expended wholly and exclusively for the purposes of the companies’ respective trades;
  • certain amendments that the companies made to their EBTs, by means of Deeds of Amendment and Rectification, took effect retrospectively from the date of execution of the original Trust deeds;
  • the provisions of Finance Act 2003, s. 43 and Finance Act 2003, Sch. 24 applied.

The companies argued that if the payments contributed to the EBTs were remuneration when they were paid and these were subject to corporation tax deductions then the finance Acts could not prevent the deduction from being made.

However the judge said: ‘he was not satisfied the sums paid to the JCM and PC EBTs were necessarily derived from an employee’s services qua employee.’

The judge said: ‘The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee’s services qua employee, it is an emolument or earnings and thus assessable to income tax even if the employee requests or agrees that it be redirected to a third party.’

He continued: ‘It was at least possible that the payments derived from their shareholdings, rather than from their status as employee or director. In order to establish that the “redirection of earnings” principle could apply, JCM would have had to lead evidence to establish that the source of each payment was the directorship, and not the shareholding.’

The judge therefore did not consider the ‘redirection of earnings’ issue was relevant to the deductibility of payments to the EBTs and that the payments to the EBTs were not ‘indirect remuneration’ of the kind set out in the Rangers case.

Mark Cawthron, Wolters Kluwer tax expert said: ‘A lengthy judgment dealing with a number of issues – perhaps the most interesting are the discussion of why the EBT contributions were not “wholly and exclusively” incurred for the purposes of the trade; the inapplicability of Murray Group (which the taxpayers had sought to bring in aid), on the facts; and the acceptance that part of the contributions by one company did not represent “potential emoluments” for the purposes of the statutory prohibition on deductions.’

Alway Sheet Metal Limited & Othrs [2017] TC 05686 is available here

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