HM Inspector of Taxes v Dextra Accessories Ltd & Ors [2004] EWCA Civ 22

Case No C3 2003 1077 CHRVF

[2004] EWCA Civ 22

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM HIGH COURT

CHANCERY DIVISION (Mr Justice Neuberger)

Venue Royal Courts of Justice

Date Wednesday 28 January 2004

Strand,

London, WC2A 2LL

Before

LORD JUSTICE POTTER

LORD JUSTICE JONATHAN PARKER

MR JUSTICE CHARLES

Between

Macdonald (HM Inspector of Taxes)Appellant

Dextra Accessories Ltd & OrsRespondents

(Transcript of the Handed Down Judgment of

Smith Bernal Wordwave Limited, 190 Fleet Street

London EC4A 2AG

Tel No: 020 7421 4040, Fax No: 020 7831 8838

Official Shorthand Writers to the Court)

Mr Timothy Brennan QC and Mr Hugh McKay (instructed by the Solicitor of Inland Revenue) for Appellant

Mr Andrew Thornhill QC (instructed by Messrs Levy Watters) for Respondents

Judgment

INTRODUCTION

[1]This is an appeal by the Revenue from an order made by Neuberger J on 15 April 2003 dismissing its appeal from a decision of the Special Commissioners (Dr John Avery-Jones CBE and Mr A. Edward Sadler) dated 3 September 2002. Although additional issues were raised before the Special Commissioners, the only issue before the judge was as to the application to the facts of the instant case of section 43 of the Finance Act 1989, and in particular the definition of the expression ‘potential emoluments’ in section 43(11)(a).

[2]In broad terms, section 43 is concerned with the time at which an employer, in computing its liability for corporation tax, may make a deduction in respect of emoluments provided or to be provided to his employees. Again in broad terms, the effect of section 43(1) and (2) is that where an emolument is not paid within nine months after the end of the period of account in which it was ‘allocated’, no deduction in respect of that emolument may be made by the employer in computing its liability for corporation tax until the end of the period of account in which the emolument is actually paid. Thus the broad effect of section 43(1) and (2), where those subsections apply, is to postpone a deduction in respect of an emolument until there is a matching taxable receipt of the emolument by the employee. Section 43(11) extends the operation of section 43 to ‘potential emoluments’ as there defined.

[3]The respondents to the appeal are six members of a group of companies known as the Caudwell Group. The Caudwell Group carries on the business of selling mobile telephones and mobile airtime: a business which was started in about 1989 and which has since been developed and expanded with very considerable commercial success.

[4]By a Settlement dated 18 December 1998 and made between Caudwell Holdings Ltd (the holding company of the Group) as settlor and Regent Capital Trust Corporation Ltd, a Jersey trust corporation (defined as ‘the Original Trustee’), as trustee, Caudwell Holdings Ltd set up an employee benefit trust (an EBT). I will refer to this Settlement hereafter as “the EBT”.

[5]Each of the respondents is and has at all material times been a ‘Participating Company’, as defined in the EBT. The class of beneficiaries under the EBT includes present and future employees of Participating Companies, their spouses, co-habitees, children and dependants.

[6]In December 1998 the respondents made substantial payments into the EBT. They sought to deduct such payments in computing their corporation tax liability for the accounting period in which the payments were made (the calendar year 1998). The Inspector accepted that the payments represented ‘money wholly and exclusively laid out or expended for the purposes of [the respondents’] trade’ within the meaning of section 74(1)(a) of the Income and Corporation Taxes Act 1988 (“the 1988 Act”), but he concluded they were ‘potential emoluments’ within section 43(11) and he accordingly disallowed the deductions. The respondents appealed to the Special Commissioners.

[7]Before the Special Commissioners, the Revenue put forward alternative arguments for disallowing the deductions, including an argument based on the Ramsay principle (as explained by the House of Lords in MacNiven v. Westmoreland Investments Ltd

[2001] STC 273

[8]The Special Commissioners allowed the respondents’ appeals. They held that the contributions to the EBT were not ‘potential emoluments’, as defined in section 43(11)(a). They also rejected the Revenue’s alternative arguments, including its argument based on the Ramsay principle. They found the EBT to be a genuine trust, with an independent trustee exercising an unfettered discretion.

[9]The Revenue appealed to the High Court on the section 43 issue only.

[10]Neuberger J dismissed the Revenue’s appeal, albeit he differed from the Special Commissioners as to the true construction of the definition of ‘potential emoluments’ in section 43(11)(a). The judge’s judgment is now reported at

[2003] STC 749

[11]The Revenue appeals to this court. Permission for a second appeal was granted by Chadwick LJ on the papers on 28 May 2003.

SECTION 43

[12]Section 43 is in the following terms (so far as material):

“ 43. (1) Subsection (2) below applies where – (a) a calculation is made of profits or gains which are to be charged under Schedule D and are for a period of account ending after 5th April 1989, (b) relevant emoluments would (apart from that subsection) be deducted in making the calculation, and (c) the emoluments are not paid before the end of the period of nine months beginning with the end of that period of account. (2) The emoluments – (a) shall not be deducted in making the calculation mentioned in subsection (1)(a) above, but (b) shall be deducted in calculating profits or gains which are to be charged under Schedule D and are for the period of account in which the emoluments are paid. .... (10) For the purposes of this section “relevant emoluments” are emoluments for a period after 5th April 1989 allocated either – (a) in respect of particular offices or employments (or both), or (b) generally in respect of offices or employments (or both). (11) This section applies in relation to potential emoluments as it applies in relation to relevant emoluments, and for this purpose – (a) potential emoluments are amounts or benefits reserved in the accounts of an employer, or held by an intermediary, with a view to their becoming relevant emoluments; (b) potential emoluments are paid when they become relevant emoluments which are paid. (12) In deciding for the purposes of this section whether emoluments are paid at any time after 5th April 1989, section 202B of [the 1988 Act] (time when emoluments are treated as received) shall apply as it applies for the purposes of section 202A(1)(a) of that Act, but reading “paid” for “received” throughout. ….”

THE EBT

[13]The recital to the EBT is in the following terms:

“WHEREAS: the Settlor [Caudwell Holdings Ltd] being desirous of making such irrevocable Settlement as is hereinafter contained with a view to encouraging and motivating employees has had [sic] transferred or delivered to the Original Trustee .... the property specified in the Second Schedule hereto.”

[14]Clause 1(1) of the EBT contains a list of definitions. ‘Beneficiaries’ means all or any of the persons specified in the Third Schedule. ‘Employee’ means a person described in paragraph 1 of the Third Schedule. ‘Participating Company’ includes companies within the Caudwell Group. ‘The trustees’ means Regent Capital Trust Corporation Ltd and other the trustees or trustee for the time being of the EBT. ‘The Trust Period’ means, for present purposes, 100 years (a valid perpetuity period under Jersey law, which is the proper law of the EBT: see clause 2).

[15]Clause 4 of the EBT contains the trusts of income and capital. Clause 4(2) provides as follows (so far as material):

“The Trustees may pay or apply the whole or any part of the balance of such income [after defraying administrative costs and expenses] and such part (if any) of the capital of the Trust Fund as the Trustees .......... may think fit to or for the benefit of all or any one or more exclusively or the others or other of the Beneficiaries for the time being in existence ....”

[16]Clause 4(7) provides that at the end of the Trust Period the Trust Fund shall be held on trust for such of the beneficiaries as are then living in such shares and proportions and generally in such manner as the trustees shall determine, and in default in equal shares absolutely. Clause 4(8) contains an ultimate trust in favour of charity.

[17]Clause 5 contains very wide discretionary powers of appointment over capital and income exercisable during the Trust Period.

[18]The Revenue accepts that the trusts and powers in the EBT are not limited to the provision of ‘emoluments’ to employees, however widely the word ‘emoluments’ is to be construed. On the other hand, there is an issue between the parties as to the scope for applying trust funds otherwise than in the provision of emoluments: Mr Brennan QC (leading Mr Hugh McKay, for the Revenue) submits that the the scope for such application is in practice limited, whilst Mr Thornhill QC (for the respondents) submits that it is virtually limitless.

[19]Clause 11 of the EBT confers on the trustees very wide powers of investment, including (in paragraph 5 of the Regulations contained in the First Schedule to the EBT) power to make loans to beneficiaries.

[20]Clause 12(2) of the EBT provides that every discretion vested in the trustees shall be an absolute and uncontrolled discretion. Clause 16(7) contains a power to remove a trustee. Clause 20 excludes the settlor and participating companies from benefit. Clause 23 provides that the EBT is irrevocable.

[21]The Third Schedule to the EBT (which lists the classes of beneficiaries) is in the following terms (so far as material):

“1. All present officers and employees of the Settlor at the date of creation of this Settlement and all persons who become such officers and employees during the Trust Period including (in all cases) after they cease to be such officers and employees for any reason and all officers and employees of any Participating Company at the date when that company becomes a Participating Company .... and all persons who become such officers and employees while that company is a Participating Company (but not otherwise) including (in all cases) after they cease to be such officers and employees for any reason. 2. All spouses and co-habitees from time to time, widows, widowers and the children and remoter issue living from time to time of all persons described in 1. above. 3. Any person who has at any time been financially dependent upon any of the persons described in 1. above but who is not otherwise included within either 1. or 2. above.”

THE SPECIAL COMMISSIONERS’ DECISION

[22]After setting out the relevant provisions of section 43, the Special Commissioners say this (in paragraph 6 of their decision):

“6. Mr Brennan QC contends that contributions by the appellant companies to the EBT are “potential emoluments” within section 43(11) since they are held by the trustee of the EBT, who is conceded to be an intermediary, with a view to their becoming relevant emoluments, defined as emoluments for a period after 5 April 1989 in respect of a particular office or employment. This provides symmetry between deductibility by the companies and taxability of the employees which he says is the purpose of the section. Mr Thornhill QC contends that the section is irrelevant since the contributions to the EBT are neither relevant emoluments nor are they potential emoluments, since they are not held by the trustee with a view to becoming emoluments because benefits can be provided out of the EBT in other forms, in particular loans or other benefits. He says that the reference in section 43(11) to amounts reserved in the employer’s accounts gives a flavour of what is intended: an amount in relation to a prospective payment is only reserved or provided for in a set of accounts prepared under accounting standards if there is a present obligation, legal or constructive, to make that payment, so that, for example, the section postpones the deduction of provisions in the accounts on account of bonuses based on future events until the bonus is paid; to be “potential emoluments” amounts held by an intermediary must be invested with a similar degree of probability that they will become relevant emoluments. He points out that Mr Brennan’s interpretation means that sums may never become deductible if they are never paid as emoluments, notwithstanding that they are applied in some other way to provide employee benefits. He draws attention to the fact that his interpretation is the one adopted in the Revenue’s Manuals.”

[23]In paragraph 7 of their decision the Special Commissioners refer to an additional argument which had been advanced by Mr Brennan (but which is not advanced on this appeal) relating to the creation of sub-funds by the trustee under a power in the behalf in the EBT.

[24]The Special Commissioners continue (in paragraph 8 of their decision):

“8. We prefer Mr Thornhill’s interpretation. We read “with a view to their becoming relevant emoluments” as meaning that for the subsection to apply the contributing company’s purpose in making the payments to the trustee, the intermediary, has to be that the funds should be used to provide emoluments. Here the companies have no such purpose. The funds are to be used as provided by the EBT, one of the possible results of which is that they become emoluments, but there are also many other possible results, particularly that loans are made, as actually happened, which are not themselves emoluments. It cannot therefore be said that the contributing company had a view that the payments would become emoluments and so the section is irrelevant. One is thrown back to the deduction of the payments on general principle, which is not disputed.”

[25]In rejecting the Revenue’s argument based on the Ramsay principle, the Special Commissioners made the following findings of fact (among others):• that the documents were to be accepted at face value (paragraph 16);

• that employees were not free to do what they liked with funds in the EBT, even funds which had been allocated to sub-funds in their individual names (paragraph 16);

• that loans from the EBT to employees were genuine loans and not disguised distributions (paragraph 16);

• that the highest the case could be put by the Revenue was that the trustee was likely to comply with any reasonable request that was for the benefit of the beneficiaries (paragraph 16);

• that the trustee was not a cipher which did what it was told (paragraph 16);

• that the controlling shareholder/directors had no control over the trustee (paragraph 18);

• that even the shareholders’ power to remove the trustee would not ensure that a successor trustee would carry out their wishes (paragraph 18);

• that if the controlling shareholders fell out, there was no reason to suppose that loans might not be called in by the trustee (paragraph 18); and

• that having a trustee which was independent of the group was an important feature of the EBT, establishing its credibility in the eyes of employees (paragraph 19).

[26]In paragraph 17 of his judgment,

the judge identifies the issue for decision, as follows:

“17 …. the question is whether the various contributions by each of the six respondents to the EBT in December 1998 constituted “potential emoluments” within section 43(11)(a). In this connection, there is no suggestion that they constituted “amounts or benefits reserved in the accounts of an employer”

. The question is whether they “were held by an intermediary, with a view to their becoming relevant emoluments”. [Mr Thornhill] accepts, in my view rightly, that the contributions were “held by an intermediary”, namely the Trustees. The question, however, is whether they were so held “with a view to their becoming relevant emoluments”.”

[27]In paragraph 21 of his judgment

the judge breaks that issue down into three sub-issues, as follows:

“21. The first, and central, issue is the meaning of the words “with a view”

. At one extreme, it could mean “for the sole and exclusive purpose”; at the other extreme, it could apply where the purpose is a possibility, even if it is highly improbable. The second issue is how the “view” is to be assessed: in particular, is the intention or desire of the company that makes the payment to the intermediary of significance, or, indeed, as the Commissioners appear to have thought, potentially crucially relevant. Thirdly, there is the date by reference to which the question is to be determined.”

[28]As to the third of those sub-issues, the judge concludes (in paragraphs 25 and 26 of his judgment) that the relevant date is the expiry of the nine-month period prescribed by section 43(1)(c).

[29]As to the second sub-issue,

the judge says this (in paragraphs 27 and 28 of his judgment):

“27. As to the other subsidiary question, in my view, the essential point to bear in mind is that, in order to decide whether the contributions in a case such as this are “potential emoluments”, the issue is not whether they were paid by the respondents “with a view to their becoming relevant emoluments”, but whether they were “held by an intermediary” with that view. In other words, the question which has to be primarily considered is not the purpose which the respondents had in mind when making the contributions to the EBT, but the basis upon which the contributions, having been paid, are “held” by the intermediary, that is the Trustees under the EBT. In those circumstances, it seems to me to follow that the primary – and often the only – relevant evidence, in a case such as this, when considering the question as to the basis upon which the contributions are “held”, is the terms of the Trust itself. 28. However, particularly given the potentially flexible nature and effect of the words “with a view to”, I consider that one is not necessarily limited to the terms of the Trust under which the contributions are held. One can also take into account, where appropriate, the intentions and aims of the Trustees, given that it is they who decide, albeit within the constraints of the terms of the Trust, how to deal with the assets of the Trust. Further, it is by no means inconceivable that they will be influenced in their decisions by requests from the companies which have funded the Trust, and may well provide further funds to the Trust in the future. To that extent, but only to that indirect limited extent, it appears to me that one can properly take into account the wishes and intentions of the respondents in the present case. In other words, I consider, contrary to the view of the Commissioners, that the intention and desires of the respondents when making the contributions were irrelevant for the purposes of determining the basis upon which the contributions are “held by an intermediary”

. Their views are only relevant in so far as they have been communicated to the intermediary, namely the Trustees, and to the extent that it can be shown that they have been taken into account by the Trustees. Even then, I consider that the intentions of the Trustees would normally be very much secondary to the terms of the Trust, when considering the issue.”

The judge then turns to the first sub-issue, saying this (in paragraphs 29 and 30 of his judgment):

“29. I turn then to the central issue. In terms of language, it seems to me that the expression “with a view to” can have a wide range of meaning. In an appropriate case, it could refer to an exclusive purpose, but in another context it could equally mean one purpose among many. Neither party takes an extreme position in the present case, although the Inland Revenue’s construction is perhaps closer to the latter extreme than the interpretation favoured by the respondents is to the former. 30. I have reached the conclusion that the meaning of “with a view to” in the context of section 43(11)(a) has the meaning contended for by the respondents, namely it must be the principal or dominant intention. …… ”

[31]The judge gives three reasons for this conclusion. He expresses his first reason in paragraphs 30 and 31 of his judgment, as follows:

“30. …. First, that appears to me to be the natural meaning of the words when one reads them in section 43. In other words, that is the impression the words convey to me when reading section 43(11) in its context. To an extent, this first reason is, almost by definition, not capable of great elaboration. 31. However, it does appear to me that it is more natural to say that one is taking a certain course “with a view to” an end, where the end in question is one’s sole or main purpose, rather than a subsidiary or minor purpose. In so saying, I am not detracting from the point that the expression can have a meaning which could be within a relatively wide spectrum, and that where the particular meaning falls within that spectrum must depend on context. However, in the absence of a particular contextual reason to the contrary, I think that the more natural meaning of “with a view to” accords with the contention of the respondents.”

[32]As his second reason, the judge draws support from authorities (Peat v. Gresham Trust Ltd

[1934] AC 252

and Re Cutts

[1956] 1 WLR 728

) relating to the true construction of the expression ‘with a view to giving such creditor …. preference over other creditors’ in section 44(1) of the Bankruptcy Act 1914.

The judge expresses his third reason in paragraphs 34 to 40 of his judgment, as follows:

“34. Thirdly, I agree with Mr Thornhill that the Revenue’s construction involves giving to section 43(11) a wider effect than it should properly bear in the context of section 43 as a whole. As mentioned, certain payments or benefits to employees, former employees, their dependants or surviving former dependants, may or may not constitute emoluments. If they constitute emoluments, then section 43 will apply, with the consequential potential for delay in the company’s ability to take the emoluments into account. If the payments are not emoluments, then section 43 simply has no application: the concept of a delaying company being able to take into account the payments because of section 43 would simply not arise. Therefore, it would seem that section 43 was not intended to have any effect as to how a company could take into account benefits it accorded to employees and others which were not “emoluments”

. Accordingly, one would not expect the provisions of section 43 to have any effect on the treatment of payments which were not “emoluments”. For the same reason, one would not expect section 43(11), which deals with “potential emoluments”, to have an effect on the treatment of sums which were not held with the intention of becoming emoluments. 35.This point is reinforced by considering the consequences of the Revenue’s argument as to the effect of section 43(11) on the present case. Sums paid out to an intermediary, which are subsequently paid by the intermediary to employees and others, but which are not paid out as “emoluments”, cannot, on the Revenue’s construction of section 43(11), ever be taken into account by the company when assessing its liability to tax. The purpose of section 43 is not to prevent payments of benefits to employees and others being taken into account when assessing liability to tax, but merely to delay their being so taken into account until they are actually paid to the employees or others. Accordingly, it would be a somewhat Draconian and surprising consequence if section 43(11) not merely applied to payments which are not emoluments at all, but also prevented them from being taken into account at all by the company when assessing its liability for tax. 36. I appreciate that that is a point which cannot be taken too far. After all, even on the respondents’ case, there could be circumstances in which that occurred. That is because, if the meaning of “with a view to” is to be judged by the dominant purpose, there could still be circumstances (arising from a subsidiary purpose) where such a surprising and Draconian result could occur. However, it does appear to me that, viewed in the context of section 43 as a whole, and bearing in mind the purpose of section 43, a construction which gives section 43(11)(a) a relatively narrow compass, as opposed to the relatively wide compass favoured by the Revenue, is to be preferred. 37. Mr Brennan contends that the “dominant purpose” test should be rejected on the grounds that it is difficult, and might in many cases be almost impossible, to apply. While I accept that in some circumstances it may be difficult to decide whether sums of money are held for the dominant purpose of providing emoluments, rather than for any other purpose, I do not think that the difficulty is of such a nature as to call into question the respondents’ contention, if it is otherwise sound. It seems to me that the same point could have been made in relation to the construction of section 44 of the Bankruptcy Act 1914. Indeed, if anything, it is rather easier to imagine circumstances where the dominant purpose test could be difficult to apply in relation to a fraudulent preference than it is in relation to section 43(11)(a). 38. Mr Brennan also relies on the use of the indefinite article in the expression “with a view”, contending that this indicates that the legislature envisaged that it would not be the only view. I see the force of that point, but it appears to me to be linguistically questionable, in that it is not hard to imagine contexts where the expression “with a view” refers to the sole intention or purpose. In any event, given that the respondents’ case is that what is required is a dominant intention, which involves accepting that section 43(11)(a) can be satisfied if there are other, albeit subsidiary, views or intentions, I think the point is of very little assistance to the Inland Revenue’s case. 39. Mr Brennan also contends that the plain purpose of section 43(11) was to attain fiscal symmetry, as is made perhaps particularly clear by section 43(12). If the respondents are correct, argues Mr Brennan, sums that are paid out by the Trustees under the EBT by way of emoluments will only be taxable in the hands of the recipients when they are paid, and yet the respondents will have been able to take them into account when assessing their profits, by reference to the date upon which they were paid to the Trustees. There is undoubtedly force in that point. However, as I have already mentioned, it can be said (in my view with greater force) that the purpose of section 43 does not appear to have been to defer, let alone to prevent, payments, which are not even emoluments, whether delayed or otherwise, being taken into account when assessing a company’s liability to tax. Section 43 does not appear to have been intended to apply to non-emolument payments at all; nor does section 43 appear to have been intended to prevent, as opposed to defer, the right to take into account any payments made by the company. 40. I am far from suggesting that the Inland Revenue’s construction of section 43(11)(a) is either linguistically or logically indefensible. Indeed, it appears to me that this case shows that section 43(11)(a) is, in a material respect, somewhat unclear in its intended effect. However, for the reasons I have given, it seems to me that the respondents’ construction of that subsection is that which most satisfactorily accords with its meaning and purpose in the context of section 43 as a whole. ”

[34]The judge then turns to the application of section 43 to the facts of the instant case. In paragraphs 42 to 45 of his judgment, he says this:

“42. With those conclusions as to the effect of section 43(11)(a), I turn to the facts of the present case. A question which arises at once is whether I ought to remit the question of the applicability of section 43(11)(a) to the facts of this case, in light of the way in which the Commissioners directed themselves in paragraph 8 of their decision. In my view, they did go slightly wrong in their approach, although two points should be made. First, the way in which Mr Thornhill contends that section 43(11)(a) should be construed is slightly, albeit not very substantially, different from the way in which he put the respondents’ case before the Commissioners. Secondly, the penultimate sentence in the passage I quoted from the Commissioners is wide of the mark, but the immediately preceding sentences appear to me to be substantially in point. It could be said, nonetheless, that it would be safer, and indeed fairer to the Inland Revenue, if the issue were remitted to the Commissioners in light of my view as to the proper approach required under section 43(11)(a). 43. In my judgment, however, it is unnecessary to remit the case back to the Commissioners. Even assuming (which is by no means apparent to me) that it is not clear what conclusion the Commissioners would have reached, it seems to me that, on the facts of the present case, they could not have been satisfied that the dominant purpose for which the contributions were held by the Trustees under the EBT was the provision of emoluments. 44. The most important factor when determining this issue, as will almost certainly be the case in the great majority of instances when the contributions are made to an intermediary who is a trustee, is the terms of the Trust, i.e. in the present case, the terms of the EBT. It is those terms which primarily govern the basis upon which the contributions are “held”

. Those terms are, as the Commissioners observed, very general in their nature. Given that payments to any of the people within the class of “beneficiaries” might or might not be emoluments, it appears to me that it cannot be said that the contributions were held under the EBT for the dominant intention or purpose of “their becoming relevant emoluments”. Confining oneself simply to the terms of the EBT, they were at least as likely to become benefits which were outside the concept of relevant emoluments as they were to become relevant emoluments. The dominant purpose test is therefore not satisfied. 45. The point is reinforced, albeit to a marginal extent, if one is entitled to cast ones eyes a little wider. It is clear that a substantial amount of the contributions have been paid over by the Trustees by way of interest free loans to some of the beneficiaries, and they do not constitute “relevant emoluments”. However, it seems to me that, in reality, that point takes matters very little further.”

The judge accordingly dismissed the Revenue’s appeal.

THE GROUNDS OF APPEAL

[36]By its grounds of appeal, the Revenue contends that the judge ought to have held that the effect of the definition of ‘potential emoluments’ in section 43(11)(a) is to postpone the deductibility of the payments until such time as emoluments are paid, on the footing that the funds subject to the EBT are held by the trustee ‘with a view to any of the realistic potential outcomes which were within the terms of [the EBT] and the payment of emoluments was one such outcome’; and that the judge was wrong to construe the expression ‘with a view to….’ as meaning ‘held with the dominant intention of ….’. In this connection it is contended that decisions as to the true construction of section 44 of the Bankruptcy Act 1914 are of no assistance in construing section 43. It is further contended that the judge failed to have regard to the likelihood that the funds subject to the EBT would, in all probability, be paid out as emoluments, and that in this context the word ‘emoluments’ should be given a wide meaning.

THE ARGUMENTS ON THIS APPEAL

[37]For the Revenue, Mr Brennan repeats the submission as to ‘fiscal symmetry’ which he made to the Special Commissioners and to the judge. He points out that if (as the respondents contend) section 43(2) does not apply to the payments into the EBT, a corporation tax deduction will be available to a contributing company at a time when there is no matching taxable receipt of an emolument by the employee; whereas if (as the Revenue contends) the contributions fall within section 43(2), there will be a matching taxable receipt of an emolument and ‘fiscal symmetry’ will thus be achieved.

[38]Mr Brennan submits that the clear purpose of section 43 is to prevent a Schedule D taxpayer (including a company within the charge to corporation tax) from achieving a deduction for tax purposes of moneys which are set aside for the purpose of providing emoluments for employees but which are not so applied within nine months of the end of the current period of account; and that that purpose is achieved by postponing the deduction until (in effect) the emoluments are paid or treated as paid.

[39]As to the meaning of the word ‘emolument’ he cites EMI Group Electronics v. Coldicott

[2000] 1 WLR 540

CA at 543F-544H (per Chadwick LJ), where the relevant authorities are discussed. He points out that section 43 does not require an emolument to be a taxable emolument, so that even if the payment is made at a time when the recipient employee is outside the charge to income tax, the payment will still retain its character as an emolument.

[40]Turning to section 43(11)(a), he submits (as he submitted below) that the payments in question are ‘potential emoluments’, in that they are ‘amounts .... held by an intermediary, with a view to their becoming relevant emoluments’. ‘Relevant emoluments’, he points out, may be allocated to specific offices or employments (subs. (10)(a)) or ‘generally in respect of offices or employments’ (subs. (10)(b)). He criticises the Special Commissioners for failing to take account of subsection (10)(b).

[41]The critical question, he submits, is whether the sums in the hands of the trustee are ‘amounts … held… with a view to their becoming relevant emoluments’ within section 43(11)(a).

[42]Mr Brennan submits that the Special Commissioners erred in law in concluding that, on the true construction of section 43(11)(a) and on the facts of the instant case, the relevant ‘view’ is that of the contributing company. He submits that in the instant case the relevant ‘view’ is to be ascertained by a consideration of the terms of the EBT, by which the trustee is bound. He accepts that during the trust period (100 years from the date of the EBT) the trust fund subject to the EBT may be dealt with in a way which does not give rise to emoluments, but he points out that under the default trusts declared in clause 4(7) of the EBT the trust fund (or what remains of it) is held on trust for the beneficiaries then living. He submits that in the instant case the funds in question were held by the trustee with a view that they would be allocated generally, or (subject to discretion) specifically, in respect of emoluments: hence they were ‘potential emoluments’ within section 43(11)(a).

[43]It is nothing to the point, he submits, that (if the Revenue is right) to the extent that funds are applied by the trustee in a manner which does not constitute the provision of emoluments to employees, no Schedule E deduction will ever be available to the contributing company. That, he says, is no more than the inevitable consequence of the contributing company’s decision to part with its money on terms that such money may be applied entirely at the discretion of the trustee in accordance with the EBT. He submits that the fact that the EBT is drawn so widely as to give rise to a possibility that contributions may be applied otherwise than in the provision of emoluments to employees does not take the contributions outside the definition of ‘potential emoluments’ in section 43(11)(a).

[44]Alternatively, he submits that even if the Special Commissioners were correct in concluding that ‘held by an intermediary with a view to …’ means (in effect) ‘paid by the contributing company for the purpose of....’, there was no warrant for the Special Commissioners’ implicit assumption that such purpose must be the sole or exclusive purpose of the contributing company. He submits that it is enough to satisfy the ‘purpose’ test (if that be the correct test) that it was expressly within the contemplation of contributing companies that funds in the EBT might be applied in the provision of emoluments. So long as that was a realistic potential outcome, the conclusion must follow that the funds were ‘held … with a view to’ that outcome.

[45]In any event, Mr Brennan submits, on the facts it was quite plainly the intention and purpose of the Caudwell Group in setting up the EBT that contributions to the EBT would be applied, largely if not entirely, in providing emoluments to employees. In support of this submission, he referred us to a number of contemporary documents relating to the setting up of the EBT which contain references to employees being rewarded for their performance by the provision of bonuses or other benefits.

[46]Turning to the judge’s judgment, Mr Brennan submits that the test of ‘principal or dominant intention’ formulated by the judge, besides being difficult to apply, imports an unwarranted restriction on the natural meaning of the statutory words.

[47]He further submits that no assistance is to be gained from decisions on the true construction of section 44 of the Bankruptcy Act 1914. He points out that that section required an examination of a transaction which had already occurred, in circumstances where third party rights might be adversely affected. In contrast, he submits, the question whether funds are held by the trustee ‘with a view to’ payment of emoluments does not require that any particular transaction be scrutinised, for none has yet taken place. The statutory phrase, he submits, is descriptive of a state of affairs: in the particular circumstances of the instant case, it requires only scrutiny of the framework of legal obligation and discretion pursuant to which the funds in question are held. A decision (yet to be made by the trustee) may or may not give rise to a particular outcome; but the funds paid by the respondents are, he submits, held by the trustee ‘with a view to’ all or any of the realistically possible outcomes.

[48]However, should this court uphold the ‘principal or dominant intention’ test applied by the judge, Mr Brennan submits that the judge erred in concluding that that test was not satisfied in the instant case. He submits that the judge should either have concluded on the basis of the documentary material before him that the overwhelming likelihood was that funds in the EBT would be applied in the provision of emoluments; or he should have remitted the matter to the Special Commissioners to determine what was the principal or dominant purpose for which the funds were held.

[49]Finally, Mr Brennan submits that if (contrary to his earlier submissions) section 43(11)(a) is ambiguous, recourse may be had to Hansard. In this connection he relies on a report of a debate in House of Commons Standing Committee G on 23 May 1989, in the course of which the Minister (Mr Norman Lamont), when moving an amendment introducing what became section 43(11)(a), stated that the purpose of the amendment was to ensure that the new rules applied: “…. to all the types of earnings that the employer will or may pay”. (Emphasis supplied)

[50]Mr Thornhill submits that judge’s ‘principal or dominant intention’ test is the correct test, and that the judge was right to conclude that on the facts of the instant case that test is not satisfied.

[51]He reminds us that liability to tax under Schedule E was not limited to emoluments: he refers us to a number of provisions in the 1988 Act creating a liability to tax under Schedule E on receipts not constituting emoluments from employment.

[52]He submits that the judge’s test is no more difficult to apply than the ‘main purpose’ test which appears time and again in taxing statutes. Reference to Hansard is inappropriate, he submits, since there is no ambiguity in section 43(11)(a).

[53]He points out that there are two limbs to section 43(11)(a). The first limb relates to ‘amounts or benefits reserved in the accounts of an employer’; the second to ‘amounts or benefits …. held by an intermediary’. Each of those limbs is governed by the words ‘…. with a view to their becoming relevant emoluments’. He submits that the first limb covers a case in which there is a potential liability to pay emoluments which may not arise, but where the amount of the liability (if it arises) can be accurately determined. He gives the example of a bonus which is dependent on a profit target being met. He submits that this indicates that the words ‘with a view to their becoming relevant emoluments’ carry a high probability of emoluments resulting.

[54]As to the second of the two limbs, Mr Thornhill submits that this limb broadly covers the case where a third party is entrusted with payment of emoluments. He submits that in the instant case it is necessary, in order to determine whether the payments in question were ‘potential emoluments’, to consider not only the terms of the trust instrument but also the purposes of the settlor in making the contribution in question (since the trustee is entitled to have regard to the settlor’s expressed wishes) and the purposes in the mind of the trustee. It is also legitimate and necessary, he submits, to have regard to the manner in which the trustee has carried out its functions in the period between the making of the payments and the expiry of the nine-month period of grace allowed by section 43(1)(c).

[55]He submits that common sense indicates that the expression ‘with a view to ….’ requires a high degree of likelihood of a particular outcome and not merely the existence of a number of possible outcomes; and that no such high degree of likelihood existed on the facts of the instant case. In support of this submission he gives a number of examples of payments which were within the power of the trustee to make which would not constitute ‘emoluments’. As noted earlier, he submits that the scope for the trustee to make distributions otherwise than by way of ‘emoluments’ is in practice virtually limitless.

[56]He also relies on the meaning of the expression ‘with a view to ...’ in section 595(1) of the 1988 Act (charge to tax in respect of sums paid by an employer under a retirement benefits scheme). In that context, he submits, the expression ‘with a view to ....’ is effectively synonymous with ‘for the purpose of ....’.

[57]Mr Thornhill stresses that if the Revenue is right as to the application of section 43 in the instant case, funds in the EBT which are applied by the trustee otherwise than in the provision of emoluments will never be deductible for Schedule D purposes. He endorses the judge’s description of such a result as “somewhat Draconian” (see paragraph 35 of the judgment, quoted earlier).

[58]In sum, Mr Thornhill submits that the Revenue is seeking to erect an edifice on section 43(11) which the subsection cannot bear.

CONCLUSIONS

[59]Given that funds subject to the EBT funds may be applied otherwise than in the provision of emoluments, it is not necessary for the purposes of this appeal to assign a precise meaning to the word ‘emoluments’ in section 43. In my judgment it suffices to quote the general guidance given by Lord Radcliffe in Hochstrasser v. Mayes

[1960] AC 376

at pp.391-392 where he said this, with reference to a charge to tax under Schedule E imposed by section 156(2) of the Income Tax Act 1952 on profits or gains from employment:

“For my part, I think that [the meaning of the statutory words] is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it is paid to him in return for acting as or being an employee.”

[60]Section 43 was introduced at the same time as the change in the basis of taxation under Schedule E to a receipts basis. As noted earlier, the effect of section 43(1) and (2) is to postpone deductions by employers in respect of emoluments to which section 43 relates until such emoluments are paid – i.e. until they are received (see section 43(12) and section 202B of the 1988 Act). The inference must be that in enacting section 43 Parliament was concerned that, in relation to emoluments falling within the section, and subject only to the nine-month ‘period of grace’ provided for by section 43(1)(c), no deduction for tax purposes should be available to an employer in respect of such an emolument until a matching liability to tax had accrued on receipt of that emolument by the employee. To that extent, Parliament was plainly concerned to achieve the ‘fiscal symmetry’ to which Mr Brennan referred in argument.

[61]The issue which falls for determination on this appeal, however, is whether the contributions made by the respondents to the EBT in December 1998 fell within section 43. That in turn depends on whether those contributions, when received by the trustee, constituted ‘potential emoluments’ as defined in section 43(11)(a), as being ‘amounts …. held by an intermediary with a view to their becoming relevant emoluments’.

[62]It is rightly accepted that the trustee of the EBT is an ‘intermediary’ for this purpose, so that the issue boils down to whether the contributions were held by the trustee ‘with a view to their becoming relevant emoluments’.

[63]Whilst the placing of a gloss on statutory words may be useful as illustrating the idea which the words express (see per Lord Radcliffe at Hochstrasser v. Mayes (above) at p.391), care must in my judgment be taken not to fall into the trap of substituting the gloss for the statutory words and thereby attempting in effect to rewrite the statute. With respect to the Special Commissioners and the judge, it seems to me that that is what they have done in the instant case. The expression which Parliament has used in subsection 43(11)(a) is ‘with a view to ...’. Had Parliament intended to say ‘for the sole purpose of ...’ (as the Special Commissioners held) or ‘with the principal or dominant intention of ....’ (as the judge held), no doubt it would have done so. Further, the judge’s test of a ‘principal or dominant intention’ seems to me to be unworkable when applied to a discretionary trust such as the EBT, since the trustees of such a trust will not in the normal course have any settled intention, let alone any dominant intention, as to how or in whose favour they will exercise their discretionary powers in the future. I would therefore respectfully reject the differing approaches of the Special Commissioners and of the judge.

[64]It seems to me that three general points may be made about the expression ‘with a view to ....’. In the first place, it is a less specific expression than ‘for the sole purpose of ....’ or ‘with the principal or dominant intention of ....’; and (as the judge rightly acknowledged in paragraph 28 of his judgment) it suggests a degree of flexibility of meaning and application. That said, the word ‘view’ plainly connotes some element (albeit undefined) of purpose, intention or contemplation. Secondly, in the particular context of section 43(11)(a) (and in contrast to the similar expression in section 44(1) of the Bankruptcy Act 1914) it is looking to the future: the relevant ‘view’ is a view as to a particular future event, viz. ‘potential emoluments’ becoming ‘relevant emoluments’. Thirdly, the expression ‘with a view to’, when coupled with the word ‘potential’, indicates to me that the future event in question is one which may or may not occur: it is enough that it should have the potential to occur.

[65]The general flexibility of the expression ‘with a view to ...’ is confirmed, in my judgment, by the fact that it applies to each of the two quite different situations described in section 43(11)(a): that is to say the situation in which an employer creates a reserve in its accounts, and the situation in which funds are held by an intermediary. (The comma after the word ‘intermediary’ makes it clear that it applies to each of these two situations.)

[66]In the first of the two situations, the only party concerned is the employer, who has decided to create the reserve in its accounts. So to the extent that ‘view’ includes an element of purpose, intention or contemplation, it can only refer to the employer’s ‘view’. On the other hand, in the second situation that may not be the case. Where the intermediary is a mere agent or bare trustee, then once again it will be the employer’s ‘view’ which counts. On the other hand, where, as in the instant case, the employer has disposed of the funds in question to the trustee of a discretionary settlement (being a genuine discretionary settlement, as the Special Commissioners have found the EBT to be), the question whether those funds are ‘potential emoluments’ can only be answered, in my judgment, by a consideration of the terms on which the funds are held. In so far as the employer has any ‘view’ relevant to this question, it can only be that the funds would be applied by the trustee, in its absolute discretion, in accordance with those terms.

[67]This also illustrates that it is not possible to lay down any hard and fast rule, applicable in all cases, as to how the expression ‘with a view to ....’ is intended to apply to any given set of facts. Each case will turn on its own facts in this respect.

[68]Returning to the facts of the instant case, it seems to me that the purposes or intentions of the trustee (to the extent that it has any) as to how and in whose favour it will or may exercise its discretionary powers in the future cannot be a relevant consideration in determining whether the funds in question are held ‘with a view to .... their becoming potential emoluments’. In the instant case, having regard to the findings of fact made by the Special Commissioners the sole criteria in making that determination, as it seems to me, are the terms on which the funds are held by the trustee; that is to say, in the first instance at least, the EBT itself.

[69]It follows that whilst I do not disagree with the judge’s conclusion (in paragraph 25 of his judgment) that the relevant date for applying the statutory test for ‘potential emoluments’, at least where the employer’s accounts for the accounting period in question have not been drawn up by the end of the nine-month ‘period of grace’, is the end of that period (the contrary has not been argued on this appeal), I do not fully accept Mr Thornhill’s submission that the manner in which the trustee has exercised its powers in the period since the contribution in question was made is a relevant consideration. It seems to me that it will only be a relevant consideration to the extent that, by the exercise of its fiduciary powers, the trustee has effectively altered the terms on which the funds in question are held.

[70]On that footing, I turn to the crucial question whether the fact (accepted by the Revenue) that the EBT empowers the trustee to apply funds subject to the EBT otherwise than in the provision of emoluments has the effect of taking contributions to the EBT outside the definition of ‘potential emoluments’ in section 43(11)(a).

[71]In my judgment, to reach that conclusion would be to place an unwarranted restriction on the unspecific and flexible expression which Parliament has chosen to use. I accept Mr Brennan’s submission that, on the facts of the instant case, the expression ‘with a view to ....’ is apt to embrace the whole range of realistic possibilities available to the trustee, acting in accordance with the EBT.

[72]I fully recognise that this conclusion means that if and to the extent that the trustee applies funds otherwise than in the provision of emoluments no Schedule E deduction in respect of such application will ever be available to the contributing company. But, as Mr Brennan submitted, that is the inevitable result of the arrangement which the respondents have, for their own proper purposes and on expert advice, elected to set up. Moreoever it has also to be borne in mind that if the respondents were right the result would be that Schedule E deductions in respect of applications by the trustee in the provision of emoluments would not be postponed, and Parliament’s intention in that respect frustrated.

[73]In reaching my conclusion I derive no significant assistance from a consideration of the expression ‘with a view to ....’ in section 595 of the 1988 Act, or of the similar expression in section 44(1) of the Bankruptcy Act 1914. Apart from the fact that the contexts in which those expressions are used differ from that of section 43(11)(a), each of those sections is concerned with transactions which have already taken place, whereas, as pointed out earlier, section 43(11)(a) is looking to future transactions which may or may not take place.

[74]Nor, in reaching my conclusion, have I found it necessary to have recourse to Hansard. I do not regard section 43(11)(a) as being sufficiently ambiguous to justify taking such a course.

[75]I would allow this appeal.

[76]I agree and only add that:(a) during my consideration of this case my view has fluctuated between the competing arguments,

(b) I do not place great weight on the third general point set out in paragraph 64 of the judgment of Lord Justice Jonathan Parker because the statutory expression or shorthand “potential emoluments” is defined and both sides accept that the future event in question may or may not occur,

(d) in argument Mr Thornhill, by way of example, submitted that if a company made contributions which, subject to them being “potential emoluments”, would be deductible for Schedule D purposes in the year of payment to trustees on trusts that they were to apply the trust fund firstly by making payments that were not emoluments (and which if they had been made by the company would be deductible) and only secondly and in default by paying emoluments, the realistic chance of emoluments being paid under the default trusts should not be held to mean that the contributions by the company were “potential emoluments” with the result that payments under the primary trust would never be deductible, and

(e) on the assumption that the points made by Mr Thornhill referred to in sub paragraph (d) above and in paragraph 56 of the judgment of Lord Justice Jonathan Parker are correct, they do not in my view found a conclusion that in this case the unspecific and flexible words “with a view to” should be construed and applied in the manner decided by the judge and contended for by the respondents. This is because I consider that the general flexibility of the words “with a view to” in the definition of “potential emoluments” means that those words should be applied to the facts of each relevant situation and thus that for the purposes of that definition no generally applicable limit or level within their wide range of meaning should be placed on them by description or otherwise.

[77]I agree with the judgment of Jonathan Parker LJ.

Order

Appeal allowed with the costs here and below. Permission to appeal refused. (Order does not form part of the approved judgment)