New Judgment: Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another [2022] UKSC 9

On appeal from 2020 EWCA Civ 663

The Respondent Companies were subsidiaries of a holding company, Smith & Williamson Holdings Limited (“SWHL”). The Debits arose as a result of the grant to the Companies’ employees of options to acquire shares in SWHL. These option grants (“the Options”) were made via an employee benefit trust (“EBT”) set up by SWHL.

The Companies were required to recognise an expense on their income statements in respect of the grant of the Options by the EBT (“the Debits”). Although the grant of the Options did not require the Companies to part with any cash or other assets, it did require that the consumption of services provided by the Companies’ employees in exchange for the Options to be recognised as an expense. As it was impossible to value precisely how much of the employees’ services were to be treated as the result of the incentivisation arising from the grant of the Options, IFRS2 set the value of those services at the fair value of the Options.

The Debits on the Companies’ income statement had to be matched by a corresponding credit on their balance sheets. As the share options came originally from SWHL, the Companies were required to treat the corresponding credit as a capital contribution from a parent company (“the Capital Contribution”).

In computing their liability to corporation tax, the Companies therefore claimed to be entitled to deduct an amount equal to the Debits from their profits. The Appellants contend that the Debits should not be taken into account in this way. The First–tier Tribunal, the Upper Tribunal and the Court of Appeal rejected these arguments.

 

Held – Appeal unanimously dismissed.

 

Issue 1: Whether disregarding the Debits is an “adjustment required or authorised by law” within the meaning of section 46(1) of the Corporation Tax Act 2009 (“CTA 2009”)

The Supreme Court concluded that there is no law requiring an adjustment to the Companies’ financial accounts so as to exclude the Debits from the computation of profits. Odeon Associated Theatres Ltd v Jones [1971] 1 WLR 442 and cases following it have established that the profit of a taxpayer’s trade is to be determined in accordance with “ordinary principles of commercial accountancy”. In the corporation tax context, this is now reflected in section 46(1) CTA 2009 which requires that profits must be calculated in accordance with generally accepted accounting practice “subject to any adjustment required or authorised by law”.

Tax is the creature of statute, and while it is possible for a judge-made rule to authorise an adjustment, that rule would have to be clearly applicable.

The Appellant argued further that generally accepted accounting practices which are directed at preserving the integrity of the taxpayer’s balance sheet (such as IFRS2) were less relevant to corporation tax than other accounting practices, because corporation tax was concerned primarily with a company’s profit and loss account. The Supreme Court holds that there is no basis for such a distinction. A company’s balance sheet and profit and loss account are not separate and severable as HMRC suggest because entries on one may affect entries on the other in order that overall they give a true and fair view of the financial state of the company.

 

Issue 2: Whether the deduction is disallowed by section 54(1)(a) CTA 2009

Section 54(1)(a) CTA 2009 states that no deduction should be made for “expenses not incurred wholly and exclusively for the purposes of the trade”. HMRC contend that the Debits were not “incurred” because the Companies suffered no loss in relation to them, and / or the Debits were not for the purposes of trade.

The Supreme Court rejected the Appellant’s case that section 54 imports a further requirement for an “expense” to be deductible. The requirements for what constitutes a deductible expense are set out in sections 46 and 48 CTA 2009. The FTT had made a finding of fact that the Debits were incurred for the purposes of the Companies’ trades and there are no grounds for challenging that finding.

 

Issue 3: Whether the deduction is disallowed by section 53 CTA 2009

Section 53 CTA 2009 provides that “no deduction is allowed for items of a capital nature”. The Appellants argued that the Debits are of a capital nature because they are simply the corresponding entry required to match the Capital Contribution from SWHL. The Supreme Court rejected this argument, agreeing with the FTT that the Debits had a revenue, rather than capital, nature. The fact that the matching credit entry was a capital contribution does not change this; what matters is the character of the Debits themselves.

 

Issue 4: Whether the deduction is disallowed (or deferred) by section 1290 CTA 2009

Section 1290 CTA 2009 places restrictions on deductions that would otherwise be allowable when calculating a company’s profits, if that deduction is a deduction in respect of “employee benefit contributions”. This is defined in section 1291 CTA 2009, the critical part of which requires property to be “held… under an employee benefit scheme”.

The Supreme Court analysed the definition of an employee benefit contribution and decides that what happens in this case does not involve any property being so held.

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