We commented in 2013 on the First-tier Tribunal decision in Scotts Atlantic Management v CIR. We rashly observed that the decision “simply cannot be right”. It now turns out (according to the Upper Tribunal) that it could be and indeed was.
The main point at issue was whether contributions which the company made to an EBT in a round-about sort of way managed to circumvent the terms of the relevant legislation (at Schedule 24) in such a way as to secure tax relief. The First Tier Tribunal held that the scheme succeeded in avoiding the terms of the specific legislation: but (despite the fact that the point was not explicitly raised by HMRC) that the contributions were nonetheless not tax-deductible because one of the purposes of making them was to secure tax relief. Such a purpose is a non-trading purpose so they were not incurred “wholly and exclusively” for the purposes of the trade. The Upper Tribunal has held that the scheme failed to circumvent Schedule 24 so that the “wholly and exclusively” point became irrelevant. It has nonetheless given a detailed analysis of the FTT decision on the “wholly and exclusively” point and concluded that it was right.
Helpfully, the UT has confirmed that expenditure the sole purpose of which is a trading purpose does not cease to be deductible merely because it is implemented in such a way as to secure tax relief. In other words, if your sole purpose is to achieve a legitimate trading objective, the fact that you choose to achieve that objective in a way that carries with it a tax advantage not normally associated with achieving that objective does not result in a denial of tax relief. However, the crucial point in the Scott case was the finding of fact made by the FTT that one of the purposes of the company in making the EBT contribution was that of expunging its tax liability for the year. Tax relief was therefore not merely a result of the way in which the contribution was arranged: it was “a deliberate and all-pervading objective” of the expenditure. That duality of purpose was inevitably fatal to a claim to tax relief.
Yet again, the case shows the critical importance of the FTT’s fact-finding role. It’s also worth observing that, just as some investigation may be required to elucidate motives and purposes of expenditure, so too may findings of fact need to be excavated from surrounding material: it’s perhaps worth noting that although the FTT had devoted just 4 out of nearly 200 paragraphs to the “wholly and exclusively” point, the Upper Tribunal devotes getting on for half of its published decision to unpacking those paragraphs and satisfying itself both that they did represent a finding of fact and that the finding could not be impugned. Nonetheless, once that had been established the decision was inevitable.