Enter Your E-mail

TaxationWeb by Burges Salmon LLP

Burges Salmon LLP comments on the House of Lords Judgement in MacDonald v Dextra Accessories Ltd and OthersThe House of Lords has unanimously upheld the decision of the Court of Appeal in favour of HM Revenue & Customs (HMRC) in the case of MacDonald (HMIT) v Dextra Accessories Ltd. & Others [2005] UKHL 47. It is now settled that an employer company making contributions to an employee benefit trust (EBT) is not entitled to deduct those contributions for corporation tax purposes unless and until the contributions are used to provide taxable 'emoluments' – taxable income or benefits - to employees.

Potential emoluments

The case turned on the question of whether the contributions made by an employer company to an EBT were 'potential emoluments' within the meaning of section 43(11)(a) Finance Act 1989 (‘section 43’). Section 43 provides that where an employing company makes payments made to an intermediary (such as an EBT trustee) and those payments are 'potential emoluments', the employing company will not be entitled to claim a corporation tax deduction for its payments until the accounting period in which those amounts are actually received as 'emoluments' by employees. This is designed to prevent the 'tax mismatch' that would otherwise arise if the employing company were entitled to a corporation tax deduction in the period in which it made the payment to the intermediary, but the employee was not subject to income tax on such amounts until such time as the intermediary makes an onward payment.

'Potential emoluments' are defined in section 43 as payments made to an intermediary ‘with a view to’ those payments becoming 'emoluments'. In this case, it was clear that payments made by the employer company to the EBT might ultimately be distributed to employees in the form of taxable 'emoluments', but it was also possible that payments might be made to employees in a form that did not constitute 'emoluments' – the payments might be used, for example, to make loans to employees or distributed in some other, non-taxable, form. Could it be said that contributions made by an employer company to an EBT which, at the discretion of the trustee, might or might not be used to pay 'emoluments' to employees were contributions made "with a view to" their becoming 'emoluments'?

The House of Lords did not have much difficulty in finding that the employer company's contributions to the EBT were made ‘with a view to’ their becoming 'emoluments' and so were 'potential emoluments'. ‘With a view to’, in the opinion of the court, meant that there was a 'realistic possibility' that the payments would be used to pay 'emoluments' to employees, even if it was also possible that the payments might be used in other ways. ‘With a view to’ did not mean that it had to be a main purpose of making the contributions that they should be used to pay 'emoluments' or even that it had to be likely that the contributions would be so used. It was necessary simply that the payment of 'emoluments' should be a ‘realistic possibility’. In this case, there clearly was such a 'realistic possibility', notwithstanding that it was also possible that the contributions might be used (and, in some cases, were used) to provide other, non-taxable, benefits to employees.

Comment

The case is now of historic interest only, in that section 43 has now been replaced by more restrictive provisions in Schedule 24 Finance Act 2003 with effect for contributions made after 27 November 2002. Nevertheless, it does illustrate HMRC's willingness to challenge through the courts arrangements, particularly in the area of employee remuneration, which it perceives as abusive tax avoidance.

October 2005

Burges Salmon

Burges Salmon is one of the UK's leading commercial law firms. With some 550 partners and staff based in Bristol, and with a presence in London, the firm provides national and international organisations and individuals with a full service through the core practice areas of corporate, commercial, finance, litigation, property and tax.
Burges Salmon's Tax and Trusts department is one of the largest in the country. Its tax services are understood to be among the most comprehensive of any law firm in the UK.