Corporation tax- avoidance - contributions by employer to 'employee benefit trust' not deductible

Macdonald (Inspector of Taxes) v Dextra Accessories Ltd and others: CA (Lords Justices Potter and Jonathan Parker, and Mr Justice Charles): 28 January 2004

The taxpayers set up a trust for the benefit of their employees, the non-resident trustee being given wide discretionary powers.

In December 1998, the taxpayers paid over substantial sums that were held by the trustee as part of the trust fund.

The taxpayers' claim to deduct the amount of their contributions for corporation tax purposes was rejected by a tax inspector on the ground that they were 'potential' emoluments to which the anti-avoidance provisions in section 43 of the Finance Act 1989 applied.

An appeal by the taxpayers was allowed by the special commissioners.

Mr Justice Neuberger ([2003] EWHC 872 (Ch); (see [2003] Gazette, 26 June; [2003] STC 749) dismissed the Inland Revenue's appeal.

The Revenue appealed.

Timothy Brennan QC and Hugh McKay (instructed by solicitor of Inland Revenue) for the Revenue; Andrew Thornhill QC (instructed by Levy Watters) for the taxpayers.

Held, allowing the appeal, that section 43 of the Finance Act 1989 applied to monies set aside to reward employees in a period of account but not used for that purpose within nine months of the end of such period; that the taxpayers' contributions came within the definition in section 43(11) as 'potential' emoluments, being 'held by an intermediary with a view to their becoming relevant emoluments' of the employees; and that, accordingly, the judge had erred in holding that the anti-avoidance provisions did not apply and the inspector had been correct in refusing to allow any deduction in respect of the contributions.