The recent First-tier Tribunal decision in Scott Atlantic Management makes for interesting reading, and seems to introduce a novel principle to tax law.
The specific facts of the case are complicated and largely irrelevant to the decision. The nub of it is that a company made a contribution to an Employee Benefit Trust. Tax relief for a straightforward contribution would have been denied by what is now CTA 2009 s1290. But the company implemented a clever scheme which purported to exploit a loophole in the drafting of the legislation (a loophole which has since been closed, by the way). The decision of the Tribunal was that no tax relief was due. That decision was, perhaps, not particularly surprising. But what seems to be novel is the reasoning.
The Tribunal agreed that there was a loophole and that in principle the scheme did successfully exploit it. So why did the company fail to get its tax relief? Because of what the Tribunal itself described as “The Catch 22 Point”. Part of the purpose of the scheme (indeed the “deliberate and all-pervading objective” as the Tribunal put it) was to achieve a Corporation Tax deduction. Obtaining a Corporation Tax deduction “cannot be a legitimate ground for claiming a trading deduction”. So the existence of that non-trading purpose denies relief under the well-known “wholly and exclusively” rule.
OK – so by this logic why isn’t a company denied relief for ordinary payments of remuneration? Because, said the Tribunal, “In the case of ordinary payments of salary and bonus… the feature that [the company] expects to secure a trading deduction for the payments does not occasion any “duality of purpose” concern. In the ordinary way, salary and bonuses are obviously tax deductible, they are meant to be tax deductible, and the expectation that this will be so is not an objective of making the payments.” By contrast, contributions to EBTs are not “meant” to be tax deductible: consequently if you so arrange matters that they are tax-deductible, your very objective in securing tax relief is what denies you the tax relief.
The Tribunal Chairman, Howard M Nowlan, is a man of immense experience and authority but this reasoning (which was not even one of the grounds put forward by HMRC in the case) simply cannot be right. Of course, if I do something which has no commercial purpose simply in order to generate a trading deduction, the deduction is denied: I will not have incurred the expense “wholly and exclusively for the purposes of the trade”. But if I do something for a trading purpose, the fact that I do it in a way which gives me a tax deduction rather than in a way which doesn’t cannot possibly make the achieving of the tax deduction part of the “purpose” of what I have done as distinct from a consequence of the way I have done it. Thus in the Scott case the purpose of the transaction was surely to get value into the EBT. Either that was a trading purpose or it wasn’t. If it was, it remained a trading purpose regardless of whether the value was transferred by way of a straightforward payment caught by s1290 or by a more arcane arrangement outwith s1290.
Catch 22 has its place in classic American novels: we don’t think it belongs in an interpretation of UK tax law.