“(1) Chapter 2 applies if– (a) a person (“A”) is an employee, or a former or prospective employee, of another person (“B”), (b) there is an arrangement (“the relevant arrangement”) to which A is a party or which otherwise (wholly or partly) covers or relates to A, (c) it is reasonable to suppose that, in essence– (i) the relevant arrangement, or (ii) the relevant arrangement so far as it covers or relates to A, is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A’s employment, or former or prospective employment, with B, (d) a relevant step is taken by a relevant third person, and (e) it is reasonable to suppose that, in essence– (i) the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or (ii) there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.” (Emphasis added)
“A person (“P”) takes a step within this section if P– (a) pays a sum of money to a relevant person, (b) transfers an asset to a relevant person, (c) takes a step by virtue of which a relevant person acquires an asset within subsection (4), (d) makes available a sum of money or asset for use, or makes it available under an arrangement which permits its use– (i) as security for a loan made or to be made to a relevant person, or (ii) otherwise as security for the meeting of any liability, or the performance of any undertaking, which a relevant person has or will have …” (Emphasis added)
“Chapter 2 does not apply by reason of a relevant step which is the payment of a sum of money by way of a loan if– (a) the loan is a loan on ordinary commercial terms within the meaning of section 176 (ignoring conditions B and C in that section), and (b) there is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement.”
“We agree with MDPL’s view that, reading s 554A(1)(c) in context, for there to be a ‘connection’ of the required kind with Dr Thomas’ employment, the employment must be part of the reason for the reward, recognition or loan. On that basis, an assessment of whether [it] is reasonable to suppose that, in essence the RT arrangement so far as it relates to Dr Thomas is (wholly or partly) a means of providing or, is otherwise concerned (wholly or partly) with, the provision of, rewards or recognition or loans in connection with Dr Thomas’ employment requires essentially the same analysis as that set out in relation to whether the relevant sums constitute earnings. Accordingly, we have concluded that this test is not met as regards the connection test for all the same reasons as are set out above.” (Emphasis added)
“(1) The phrase ‘in connection with’ must be construed by looking closely at the surrounding words and the context of the legislative scheme (Barclays Bank [18] and [19]) and at the context and policy of the provision (London Luton [69]). (2) A connection can be both direct or indirect, and this is likely to be the case whenever the phrase ‘in connection with’ is used (Barclays Bank [19] to [20]). (3) There can be a connection with more than one other thing, in which case it is necessary to see if the connections can co-exist or whether one will actually exclude the other (Barclays Bank [20] and [25]). (4) A connection once established is unlikely to be displaced by other factors or connections (Barclays Bank [22] to [23]). (5) A payment made to every member of a class of people is likely to be made in connection with that class (Barclays Bank [22] and [26])”
“148. In our judgment, however, the FTT erred in law in stating the test as being that the employment had to be part of the reason for the reward. That is not the statutory test. The words used by Parliament involve a test of connection not one of causation. As we have said, we consider that there must be a strong or direct connection between the employment/ directorship and the loan. Section 554A(12) ITEPA provides ‘all relevant circumstances are to be taken into account in order to get to the essence of the matter’. We consider that this reinforces the need to identify which (if any) of the various facts found by the FTT constitute the sufficiently close connection required by section 554A(1)(c) ITEPA. 149. In the present case, Dr Thomas, acting as the director of MDPL resolved to make contributions to the RT. Shortly thereafter, Dr Thomas would write to BTIL on MDPL headed paper asking it to consider advancing a loan to him. A loan would subsequently be made by the RT, via MTL as nominee for the Trustees, to Dr Thomas. In our view, that, of itself, is an insufficient degree of connection to Dr Thomas’ directorship for the loans to be regarded as made in connection with that office. A company can only act through the agency of its directors and employees, unless it acts in general meeting. We consider that resolving to make the contribution and requesting the loan were not sufficiently closely connected with Dr Thomas’ directorship to cause section 554A(1)(c) ITEPA to be engaged. 150. The profits of MDPL, paid as contributions to the RT and then on-lent to Dr Thomas, reflected the profits of the dental practice carried on by MDPL. Dr Thomas was actively engaged in the practice as a dentist and was assisted by a hygienist and an associate dentist (see [52]). At all material times, Dr Thomas was the sole director of MDPL and, therefore, the guiding mind of the company solely responsible for the conduct and direction of its business from which the profits were derived. In our view, this is a sufficiently direct and close connection with Dr Thomas’ directorship (treated by section 5 ITEPA as an employment) to ensure that section 554A(1)(c) applied. We are satisfied that treating the profits of MDPL contributed to the RT and on lent to Dr Thomas as connected with his directorship accurately reflects the essence of the overall arrangement.”
“169. We have no doubt that Mr Woodman’s view, that the contributions were non-deductible, was correct. On Dr Thomas’ own evidence the contributions were made in such amounts as were necessary to reduce the taxable profits of MDPL to nil. The twin objectives of the BW scheme adopted by MDPL and pursued by Dr Thomas were to empty MDPL of profit and to advance that profit via the RT to Dr Thomas by way of non-taxable loans; see also the Decision at [3], [41] [54(2)] and [129] second sentence. There was no intention or purpose to benefit the trade of MDPL. 170. Judge Morgan’s analysis appears to proceed on the assumption that the contributions were to reward Dr Thomas for his services as director (see [159(2)]) or MDPL’s purpose in making the contributions ‘must be taken to be to provide Dr Thomas with earnings…’ (see [159(1)(a)]). However, that is language indicative of the charge to tax in respect of general earnings under section 62 ITEPA. In fact, as we have decided, the loans were caught by the anti-avoidance provisions of Part 7A ITEPA as being loans connected with Dr Thomas’ employment/directorship. A deduction for those sums cannot, therefore, using the words of Scotts Atlantic at [67], simply be regarded as an ‘ordinary, intended or realistically expected outcome of making salary, bonus or equivalent payments’ and Judge Morgan’s holding otherwise, in our view, constitutes an error of law. A charge to income tax under Part 7A ITEPA was neither intended nor desired and making a payment which was taxable under those provisions was certainly not the purpose of MDPL. 171. Instead, disregarding the untrue reasons given in the resolutions for the contributions, the intention of MDPL in making the contributions was to empty the company of profit in order to fund a tax-free benefit (i.e. the loans) to Dr Thomas. There was no trading purpose and no benefit to MDPL’s trade. It is impossible, we think, to conclude that, simply because these payments were caught by the anti-avoidance provisions of Part 7A ITEPA, the sums were expended wholly and exclusively for the purposes of the trade of MDPL – that is simply unrealistic. We agree with Mr Woodman that the purpose of MDPL in making these payments was to achieve a tax avoidance purpose for the benefit of Dr Thomas and MDPL and was an end in itself.”
“The June 2010 Budget announced that legislation would be introduced from April 2011 to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce tax liabilities.” (Emphasis added)
“All I need say at this point is that the use of ‘from’ in the idea expressed in the statutory expression ‘earnings from an employment’ and ‘earnings derived from an employment’ in a fiscal context indicates, as a matter of plain English usage, that there must, in actual fact, be a relevant connection or a link between the payments to the employees and their employment.”
“(i) income tax is only one tax, and the different schedules do no more than to provide the method of computation charge and assessment peculiar to the schedule to which the income is allocated; (ii) the Schedules are mutually exclusive, each schedule is dominant over its own subject matter and provides a complete code for the class of income which falls within that schedule; and (iii) the same source of income cannot be taxed twice.”
“The majority in the Court of Appeal held that it was a sufficient answer to the appellant's argument to construe the words ‘in connection with’ as meaning ‘having to do with’. This explanation of the meaning of the phrase was given by McFarlane J in Re Nanaimo Community Hotel Ltd[1944] 4 DLR 638 . It was adopted by Somervell LJ in Johnson v Johnson[1952] P 47 at 50-51. It may be that in some contexts the substitution of the words ‘having to do with’ will solve the entire problem which is created by the use of the words ‘in connection with.’ But I am not, with respect, satisfied that it does so in this case, and Mr Holgate did not rely on this solution to the difficulty. As he said, the phrase is a protean one which tends to draw its meaning from the words which surround it. In this case it is the surrounding words, when taken together with the words used in the Amending Order of 1991 and its wider context, which provide the best guide to a sensible solution of the problem which has been created by the ambiguity.”
“There is no doubt that the court should, when interpreting a statutory provision, examine not just that provision but also the context in which it appears in the legislation in question. It may then be able to form a view as to the purpose of the provision in question and that knowledge may inform its thinking as to the choice of meaning to be offered where choices are available. The context of the provision in question, however, will not of itself justify the court in limiting the provision to that context, and thus reducing its apparent scope, unless there is some indication in the legislation that this is what Parliament intended. The effect of Mr Peacock's submission, is that the court should read down the definition of ‘relevant benefits’ to conform with the concept of a conventional ‘retirement benefits scheme’. In my judgment, there is nothing in the legislation to justify this course. Indeed, the indications are the other way. Parliament has used a broad expression, namely the expression ‘in connection with’. Having cast the net widely, Parliament has drawn it in particularly by imposing a limit that there should be a connection with service. The limitations prescribed by Parliament are the limitations that the court should apply. The context of occupational pension schemes cannot be used to narrow the phrase ‘in connection with past service’ yet further.”
“Coventry Waste therefore stands for the proposition that the words will usually take their meaning from those which surround it and the wider context, and that courts and tribunals may have to determine whether the words have a broad or a narrow meaning, understood in context. In literal terms, both meanings are possible.”
“In Revenue and Customs Comrs v Barclays Bank plc[2008] STC 476 (‘Barclays’), Arden LJ observed that the words ‘in connection with past service’, which appeared insection 612(1) of the Income and Corporation Taxes Act 1988 , could describe a ‘range of links’ (see para 18). This fits with Coventry Waste (to which Arden LJ referred) in suggesting that different meanings are possible. Arden LJ also referred at para 19 to the need to examine the function or purpose of the legislation, and at para 30 to the purpose of the legislation potentially informing the court’s thinking where there is a choice of meaning.”
“These cases show that the meaning of ‘on, or in connection with’ is heavily dependent both on context and policy. The phrase might require what Robert Walker LJ referred to in Coventry Waste [1998] RA 427 as ‘a strong and close nexus’ or it might require ‘a weak and loose one’. Bem-Odeco Ltd v Powlson introduces the concept of remoteness, which is another way of considering the same question.”
“(a) The first task is to construe the relevant legislation in order to determine the nature of the transaction to which that legislation was intended to apply … . (b) The answer to that first task, in this case, is that the words ‘in connection with’ as they appear in section 360B(1) are to be given a relatively narrow meaning. The expenditure incurred must, on a realistic assessment, have a strong and close nexus with the physical work on the building to qualify for BPRA. (c) The second task is to decide whether the actual transaction, viewed realistically, answers to that statutory description … .”
“HMRC have appealed against the decision of the Upper Tribunal on two grounds. First, it is contended that the payment of monies by the relevant employer to the Principal Trust, or alternatively the appointment of monies by the Principal Trust to a sub-trust set up for the benefit of an employee, constituted a payment of taxable earnings, taxable in the hands of the employees whose services were so rewarded. On this basis, it is said that the scheme amounted to a mere redirection of earnings which did not remove the employee's liability to income tax. Of the two alternatives, it is submitted that the first should be preferred: the payment of monies by the relevant employer to the trustees of the Principal Trust triggered liability to tax. Secondly, HMRC contend that when monies were appointed by the trustee of the Principal Trust to the relevant sub-trust, that appointment was made in such a way that those monies were at the unreserved disposal of the employee, who was appointed protector of the sub-trust, and hence constituted a payment of taxable earnings, taxable in the hands of the employee. In advancing that contention, they relied on the Ramsay principle (Ramsay (WT) Ltd v IRC, supra) as explained in Garforth v Newsmith Stainless Ltd,[1979] 1 WLR 409 , and Aberdeen Asset Management PLC v HMRC, 2014 SC 271. The argument as presented to the court was that each of the employees was appointed protector of the sub-trust set up for the benefit of his family. Powers were conferred on the protectors under the deeds constituting the sub-trusts, including a power to alter the trust purposes. That power could be used in such a way that the only beneficiary was the employee. In that way the funds were at the employee's unreserved disposal.”
“[56] The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee's services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. That accords with common sense. If the law were otherwise, an employee could readily avoid tax by redirecting income to members of his family to meet outgoings that he would normally pay: for example to a trust for his wife, as in Hadlee, or to trustees to pay for his children’s education or the outgoings on the family home. It follows that, if the principle applies, it is irrelevant that the redirection is through the medium of trust arrangements. It is equally irrelevant that the trustees who receive the payment, at whatever remove, exercise a genuine discretion as to what happens to the funds. The funds are ultimately derived as consideration for the employee's services, and on that basis they are properly to be considered emoluments or earnings. Indeed, in Brumby v Milner, the existence of a discretion in the trustees as to the benefits taken by employees was taken as a factor pointing towards the conclusion that the payments were derived from employment. [57] This principle is ultimately simple and straightforward – indeed, so straightforward that in cases where elaborate trust or analogous relationships are set up it can easily be overlooked. That, it seems to us, is what happened before the First-tier and Upper Tribunals in this case.”
“(1) Section 554Z11C applies if the conditions in subsections (2) and (3) are met. (2) The first condition is that there is overlap between – (a) the sum of money or asset (‘sum or asset P’) which is the subject of the relevant step, and (b) a sum of money or asset (‘sum or asset Q’) by reference to which, on an occasion that occurred before the relevant step is taken, A became subject to a liability for income tax (‘the earlier tax liability’). (3) The second condition is that at the time the relevant step is taken – (a) an amount is payable by a person (the ‘liable person’) in respect of the earlier tax liability, but the whole or part of that amount is unpaid and not otherwise accounted for, and (b) the liable person has not agreed any terms with an officer of Revenue and Customs for the discharge of the earlier tax liability.” (a) the sum of money or asset (‘sum or asset P’) which is the subject of the relevant step, and (b) a sum of money or asset (‘sum or asset Q’) by reference to which, on an occasion that occurred before the relevant step is taken, A became subject to a liability for income tax (‘the earlier tax liability’). (a) an amount is payable by a person (the ‘liable person’) in respect of the earlier tax liability, but the whole or part of that amount is unpaid and not otherwise accounted for, and (b) the liable person has not agreed any terms with an officer of Revenue and Customs for the discharge of the earlier tax liability.”
“(1) In this section – (a) ‘the earlier charge’ means so much of the earlier tax liability as relates to the overlap between sum or asset P and sum or asset Q, and (b) ‘the Chapter 2 overlap charge’ means so much of the Chapter 2 tax liability as relates to the overlap between sum or asset P and sum or asset Q. (2) The amount of a tax liability that relates to the overlap between sum or asset P and sum or asset Q is to be determined on a just and reasonable basis. (3) Subsection (4) applies where, after the relevant step is taken, an amount (the ‘earlier charge paid amount’) is paid in respect of all or part of – (a) the earlier charge, or (b) any late payment interest in respect of the charge. (4) An amount equal to the earlier charge paid amount is treated as a payment on account of – (a) the Chapter 2 overlap charge, or (b) if that charge has been paid in full, any late payment interest payable in respect of the charge. (5) Except where subsection (10) applies, subsection (6) applies where an amount (the ‘Chapter 2 paid amount’) is paid in respect of all or part of – (a) the Chapter 2 overlap charge, or (b) any late payment interest in respect of the charge. (6) An amount equal to the Chapter 2 paid amount is treated as a payment on account of – (a) the earlier charge, or (b) if the earlier charge has been paid in full, any late payment interest payable in respect of the charge.” (a) ‘the earlier charge’ means so much of the earlier tax liability as relates to the overlap between sum or asset P and sum or asset Q, and (b) ‘the Chapter 2 overlap charge’ means so much of the Chapter 2 tax liability as relates to the overlap between sum or asset P and sum or asset Q. (a) the earlier charge, or (b) any late payment interest in respect of the charge. (a) the Chapter 2 overlap charge, or (b) if that charge has been paid in full, any late payment interest payable in respect of the charge. (a) the Chapter 2 overlap charge, or (b) any late payment interest in respect of the charge. (a) the earlier charge, or (b) if the earlier charge has been paid in full, any late payment interest payable in respect of the charge.”
“A connection once established is unlikely to be displaced by other factors or connections.”
“… once recipients have been chosen by the employer or trustee of the scheme for their connection with the scheme, the presence of that link is unlikely to be lost and the court must give that factor, that is the criterion for selection of those entitled to receive the one-off payments, great weight.”
“(1) … In computing the amount of the profits to be charged to corporation tax under case I or case II of schedule D, no sum shall be deducted in respect of – (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession; …” (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession; …”
“The effect of the statutory provisions is well known. Expenditure is deductible only if it is incurred wholly and exclusively for the purposes of the trade. The word ‘exclusively’ means that if the expense was also incurred for some other purpose, it is not deductible. The ‘wholly and exclusively’ issue is to be determined by the object of the taxpayer in incurring the expense.”
“The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.”
“The question for the UT and now for us is whether, given those facts, the Capital Contributions were, as a matter of law, wholly and exclusively incurred for the purposes of the solo financial trades. In my judgment they clearly were not. …” (Emphasis added)
“Whether a payment is made exclusively for the purpose of the taxpayer company’s trade or partly for that purpose and partly for another is a question of fact for the commissioners. The court can interfere only if the commissioners have made an error of law in reaching their conclusion. The principles on which the court acts are to be found in the speech of Lord Radcliffe in Edwards (Inspector of Taxes) v Bairstow[1956] AC 14 , 36 TC 207 and are too well known to repeat. It is sufficient to say that the court will interfere where the true and only reasonable conclusion from the facts found by the commissioners contradicts the determination.” (Emphasis added)
“The leading modern cases on the application of the exclusively test are Mallalieu v Drummond (Inspector of Taxes)[1983] STC 665 ,[1983] 2 AC 861 and MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co[1989] STC 898 ,[1990] 2 AC 239 . From these cases the following propositions may be derived. (1) The words for the purposes of the trade mean to serve the purposes of the trade. They do not mean for the purposes of the taxpayer but for the purposes of the trade, which is a different concept. A fortiori they do not mean for the benefit of the taxpayer. (2) To ascertain whether the payment was made for the purposes of the taxpayer's trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer’s subjective intentions at the time of the payment. (3) The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment. (4) Although the taxpayer’s subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.”
“An appeal to this tribunal lies only on a point of law:s 11(1) of the Tribunals, Courts and Enforcement Act 2007 . While there cannot be an appeal on a pure question of fact which is decided by the FTT, the FTT may arrive at a finding of fact in a way which discloses an error of law. That is clear from Edwards v Bairstow, in which Viscount Simonds referred to making a finding without any evidence or upon a view of the facts which could not be reasonably entertained, and Lord Radcliffe described as errors of law cases where there was no evidence to support a finding, or where the evidence contradicted the finding or where the only reasonable conclusion contradicted the finding. Lord Diplock has described this ground of challenge as ‘irrationality’. In the well-known words of Evans LJ in Georgiou v Customs and Excise Commissioners[1996] STC 463 at 476: … for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to that finding; and fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make. What is not permitted, in my view, is a roving selection of evidence coupled with a general assertion that the tribunal’s conclusion was against the weight of the evidence and was therefore wrong. A failure to appreciate what is the correct approach accounts for much of the time and expense that was occasioned by this appeal to the High Court.” … for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to that finding; and fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make. What is not permitted, in my view, is a roving selection of evidence coupled with a general assertion that the tribunal’s conclusion was against the weight of the evidence and was therefore wrong. A failure to appreciate what is the correct approach accounts for much of the time and expense that was occasioned by this appeal to the High Court.”