Pension contribution not wholly and exclusively for trade

In A D Bly Groundworks and Civil Engineering Limited and CHR Travel Ltd v HMRC [2021] TC08329, the First Tier Tribunal (FTT) concluded that substantial pension payments made on behalf of key employees as part of a tax scheme were not incurred wholly and exclusively for the purposes of the trade. No corporate tax deduction was available as a result.

• A D Bly Groundworks and Civil Engineering Ltd and CHR Travel Ltd (the Appellants) were profitable businesses.
• The appellants entered into an Unfunded Unapproved Retirement Benefit Scheme (UURBS), provided by a promoter and registered under DOTAS.
• Under the UURBS they promised to provide key employees with Pension Payments in the future.
• The contributions to the UURBS were calculated by a third party remuneration consultant with reference to the estimated pre-tax profits of the businesses for the year. The contributions were set at between 80% and 100% of those profits.
• The appellants each claimed a Corporation Tax deduction in respect of the contributions which totalled approximately £5m.
• HMRC raised enquiries and disallowed the pension contributions on the basis that either:
  • They were not incurred Wholly and Exclusively for the purposes of the trade.
  • Or as the contribution was unpaid and no benefits were provided from it, it was disallowed.
• The appellants lodged an appeal to the FTT, as the schemes were provided by the same promoter the appeals were joined.

The FTT dismissed the appeal finding that:

• The payments were not made wholly and exclusively for the purposes of the trade:
  • The primary purpose of the payment was to reduce the appellants’ tax liability without incurring any actual expenditure.
  • The striking similarity between the appellants’ witness statements lead to the conclusion that they were largely driven by the scheme promoters. That cast doubt on the stated reasoning for implementing the UURBS.
  • The scheme was brought to the taxpayers as a tax planning scheme by Charterhouse. This suggested its implementation was not driven by remunerating employees as claimed but by the claimed tax saving.
  • No advice was sought from pensions advisors (the advisors engaged specifically excluded pensions' advice) which undermined the idea that the UURBS was the provision of a pension scheme.
  • No advice was sought to benchmark the competitiveness of the appellants' remuneration packages which cast doubt on whether they needed to better incentivise employees in the first place.
  • The engagement letters with the promoter stated the scheme could be viewed as aggressive tax planning. This implied that the tax saving was at the forefront of the appellants' minds in implementing the scheme.
  • The provision of pensions was, at best, an incidental aim of the use of the UURBS.
  • The size of the contribution was made with reference to the profits of the business rather than with reference to any future pensions benefits key employees may need.
  • The UURBS was not a commercial arrangement, no third party annuities matching its terms were available in the market.
  • The contributions committed the appellants to paying significant amounts out in the future which would reduce the distributable profits of the business.
• While it didn't need to, the FTT went on to consider that non-payment of the contribution would not preclude a tax deduction as:
  • The benefit received by the employee was a right to be paid an amount in the future.
  • At the point that right was created, there was no payment or a transfer from the company from which benefits could be provided. The right was not therefore an employee benefit contribution for the purposes of Corporation Taxes Act 2009.
  • As the right was not an employee benefit contribution there could be no deduction for Corporation Tax purposes of any amounts unpaid.

Useful guides on this topic

Pension contributions: Personal or company?
Is it more tax efficient to pay pension contributions personally or via your own company?

Wholly and exclusively… toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

DOTAS: Disclosure of Tax Avoidance Schemes
What are the Disclosure of tax avoidance schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?

External links

A D Bly Groundworks and Civil Engineering Limited and CHR Travel Ltd v HMRC [2021] TC08329