Mark Northwood v The Commissioners for HMRC [2023] UKFTT 351 (TC)

“Remuneration Trust Arrangements ("the Arrangements”) Thank you very much for instructing this Firm to act for you in this matter. In the interests of best client relations, we are writing to you at the beginning of this matter to advise you of certain professional issues. Money Laundering and Know Your Client Requirements In order to satisfy the requirements of the Money Laundering Regulation: 2007, we have to be satisfied as to the identity of our clients before we can start acting for you. In this case, we are required to obtain the information specified in the Appendix to this letter. So far as offshore trustee services may be required, the relevant money laundering due diligence requirements will also need to be met. They are substantially met by our own due diligence requirements. Please help us by providing this information as soon as you can. Responsibility for conduct of the matter One of our Case Managers will be allocated to assume direct responsibility for dealing with this case. Other fee earners within the Firm may be called upon to assist from time to time. The relevant Case Manager will contact you directly. Complaints If you have any queries or concerns regarding our work for you, you should raise these, in the first instance, with the Case Manager dealing with your matter. He or she will be keen to resolve your concerns as soon as possible. Work to be performed We have been instructed by you to perform the following work: 1 to advise in relation to the implementation of the Arrangements; 2 to take your detailed instructions, including: 2.1 reviewing all relevant documents; 2.2 researching any matters of taxation, company, trusts, employment, or pension law which are relevant to the circumstances; 3 to prepare a detailed Memorandum of Advice for you on these matters; 4 to assist with the all legal documentation relevant to the arrangements; 5 (if appropriate) to recommend and liaise with Channel Island Trustees to facilitate the relevant transactions. We do not provide investment advice and are not liable for any loss arising from any client or trustee or other investment MINERVA The Arrangements in relation to which we are instructed to advise will be based upon the relevant Plan issued by MINERVA. The relationship between us and MINERVA is set out in an Appendix to this letter, as is our Professional Liability Statement Please read these carefully. In order to progress your case efficiently we will need to liaise with MINERVA and its Business Introducers. By signing and returning this letter, you authorise us to disclose to such persons such information about these matters as we consider necessary from time to time. Fees Baxendale Walker LLP fees are £10,000.00 plus VAT, MINERVA fees are 10% for each and every contribution made to the Trust. Separate fees are, as stated payable to this Firm and to MINERVA. All fees should be paid direct to this Firm and we will account to MINERVA for the appropriate monies. Our banking details are set out below. The fees of this Firm are subject to VAT. MINERVA fees are not subject to VAT. On Account: £10,000.00 plus VAT ls payable on account and may be billed by us immediately upon receipt. Introducer Expenses: I confirm expenses to Foy Wealth will be £3,500.00. The Balance and MINERVA Fees: The balance of fees and disbursements due to this Firm will be billed to you on completion of the work detailed above and must be paid prior to the execution of the relevant completion documents. Our fees are otherwise payable within 7 days of issue of a pro-forma invoice. After 30 days interest will be due at the rate of 8% . The Minerva Fees are also payable upon completion, unless you are utilising the Minerva Bond. In such case, payment of the Minerva Fee will occur in consequence of completion of such Bond financing. A Minerva fee of 10% is due upon each and every contribution of new value to a Minerva Trust (but not any growth In settled value). Further Work: Any further work which you require will be invoiced to you at our respective hourly rates on a monthly basis. Paul Baxendale-Walker's fees are charged on an hourly basis of £1,000 plus disbursements and VAT. The fees of other Case Managers are charged on an hourly basis of £600 plus disbursements and VAT. Exclusive Terms: By signing this document you confirm that the terms of your agreement with Baxendale Walker LLP are limited to the matters stated herein. You confirm that your contract for services, including but not limited to the provision of information and advice is exclusively with Baxendale Walker LLP and not with any member, employee, consultant or representative of Baxendale Walker LLP. In consideration of Baxendale Walker LLP agreeing to provide you with any advice or assistance, you hereby covenant with Baxendale Walker LLP not to seek by litigation or otherwise to impose legal liability in tort or otherwise on any person save Baxendale Walker LLP in respect of any conduct or matter arising out of any acts or omissions (whether actual or alleged) undertaken by any person or persons other than Baxendale Walker LLP. Engagement You are requested to sign and return your counterpart of this letter. Whether or not you do so, you will be liable to pay our fees on the above stated terms for any work which is actually performed by us upon your request in relation to this matter. Any counter offer by you of the terms upon which the agreement for the provision of our services to you is to be concluded must be provided in writing by you to us prior to the commencement of any such work.”

“MINERVA is a separate business of BW LLP, which sells and markets wealth protection strategies devised by us. MINERVA is owned by a Jersey purpose trust, the purposes of which are to facilitate and advance the businesses of MINERVA and BW LLP. MINERVA does not provide investment advice. BW LLP takes full responsibility for ensuring that any MINERVA Plan is technically correct at the time of use and that it is implemented correctly. In the event of error in the Plan or our implementation advice all fees up to £2 million for each case are repayable under our professional indemnity insurance policy. BW LLP is authorised to engage clients for MINERVA by reference to their standard Plan sale terms. BW LLP is also authorised to pay commissions to Business Introducers on behalf of MINERVA. BW LLP takes a 10% fee for the sale of a MINERVA Plan. BW LLP charges our professional fees for advising upon the detailed implementation of these Plans. Our unrivalled expertise, experience and separate business relationship with MINERVA allows us to provide a unique Total Fee Package. The Package depends upon precise circumstances Pricing is simply a percentage of the Tax Value from which our advice, together with the appropriate Plan provides liberation. Your BW LLP engagement letter is issued under standard terms and conditions, and guarantees the fixed advisory fee and Plan fee quoted, together with repayment thereof in the event of failure.”

“3.1 The Sole Trader has instructed us to advise on the legal implications of the establishment by the Business of a cash funded Remuneration Trust. 3.2 For the purpose of this Report, we have reviewed the concept of a cash funded Remuneration Trust and its applicability to the circumstances of the Business. 3.3 The Sole Trader wishes to pay or provide benefits to its present suppliers and customers and future Employees, together with other classes of potential beneficiary. 3.4 The Sole Trader's sole purpose in so doing is the discharge of its commercial liabilities to make payments to or for the benefit of contractors or customers and others with whom he has a commercial relationship. The Sole Trader has no legal liability to such persons in respect of such contributions, i.e. under a contract or otherwise. The Sole Trader does not wish to do anything which might have the effect of evidencing that legal liability to make such payments has arisen. 3.5 In our Opinion, a Remuneration Trust (modified in accordance with the following recommendations) provides the appropriate type of trust vehicle for the achievement of the Business' commercial objectives. 3.6 The Sole Trader derives no tax advantage from the Trust or any other means of payment or provision, of such benefits, since direct payments would themselves be fully deductible in computing the Sole Trader's taxable profits. The taxation liability arising from any particular Investment or distribution of Trust funds depends upon all the relevant circumstances, none of which the Business has any power to prescribe or procure. 3.7 Therefore, the establishment and funding of the Trust cannot in our Opinion properly be characterised as constituting ''tax avoidance". The High Court of Justice has ruled that the use of remuneration Trusts does not constitute tax avoidance: MacDonald (Inspector of Taxes) v Dextra Accessories Ltd and Others (2003). HM Revenue & Customs accepts and in any event is bound by this ruling.”

“5.1 The Sole Trader will need to quantify the commercial liabilities incurred by reason of the Business' trade during the relevant accounting period. The Sole Trader will then need to consider whether a trust of the kind discussed in this Report will provide a satisfactory commercial vehicle for the discharge of those liabilities. The Sole Trader is entitled to rely on this Report, together with any appropriate consultancy or professional advice, in reaching his conclusions on these matters. 5.2 The Sole Trader will need to determine how the Trust will be used to implement the incentive program. The Business must then pass appropriate Written Resolutions. 5.3 The appropriate Deed of Trust is executed by the Sole Trader and the Trustees: the Sole Trader will need to choose the trustees that he wants. 5.4 The Sole Trader then begins paying cash contributions to the Remuneration Trust trustees. 5.5 The Sole Trader should then inform appropriate classes of discretionary beneficiary of the existence of the Remuneration Trust, in the usual manner that the Sole Trader conveys information of importance to such persons. 5.6 The Sole Trader may from time to time indicate to the trustees how he would like them to utilise the trust funds: for example, by paying a bonus to certain providers. The trustees must always however exercise their own discretion in these matters. 5.7 The Sole Trader is entitled to provide other information to the Trustees. The Trustees are assisted in the performance of their fiduciary duties by being made aware of the Sole Trader's commercial expectations for the incentive program.”

“2.1 Subject as aforesaid and subject to Clause 10 hereof the Trustees shall during the Trust Period hold the Trust Fund UPON TRUST to apply the income and capital thereof to or for the benefit of all or any one or more exclusively of the others or other of the Beneficiaries in such shares and in such manner generally as the Trustees shall In their absolute discretion think fit PROVIDED THAT the Trustees may if they in their absolute discretion think fit accumulate the whole or any part of the income of the Trust Fund by investing the same and the resulting income thereof in any investments hereby authorised and adding the accumulations to the capital of the Trust Fund.”

“from time to time the wives husbands widows widowers children step-children and remoter issue of past and present Providers and the spouses and former spouses (whether or not remarried) of such children and remoter issue and also means from time to time future Providers and the wives husbands widows widowers children step-children and remoter issue off future Providers and the spouses and former spouses (whether or not remarried) of such children and remoter issue and "Beneficiary” has a corresponding meaning PROVIDED THAT no Excluded Person shall be a Beneficiary AND FURTHER PROVIDED THAT the Trustee shall not have power under the trusts hereunder to provide and shall not (whether directly or indirectly) provide any benefit to or for any Excluded Person and nor Shall the Trustee participate in any bust, scheme or arrangement which is an 'employee benefits scheme' for the purposes of Schedule 24 Finance Act 2003, or which participation would have the consequence that the provisions of Schedule 24 Finance Act 2003 apply so as to restrict the deductibility for corporation tax purposes of Founder contributions to the trusts hereof AND FURTHER PROVIDED THAT the Trusts hereunder shall not have effect so as to constitute an arrangement such that the Trust Fund from time to time falls to be accounted for as an asset of the Founder.”

“(i) a person who provides or has provided or may in future provide to the Founder service or services or custom or products or finance (save for items of a capital nature); and (ii) a person who provides or has provided or may in future provide finance to the Trustees or any manager from time to time of the Trust Fund.”

“... any of the persons named in Schedule 2 to this Deed”

“The Firm shall have the exclusive power (which shall be a fiduciary power) to authorise, instruct and oblige the Trustees from time to time to discharge any invoice in respect of any Service Fee and such power shall be exercisable by notice in writing by fax or post from a Partner or Principal in the Firm to the Trustees and the opinion of such Partner or Principal as to whether a fee constitutes a Service Fee shall be conclusive.”

“1. It is resolved that the Business make contributions to a scheme established under irrevocable trust ("the Scheme") for the purpose off funding the provision of discretionary benefits to providers of service, services, products and custom to the business and their respective wives, widows and dependents. It is also resolved that providers of finance to the Trust and their respective wives, widows and dependents be included as discretionary beneficiaries. It is resolved that the initial establishment cost of the Scheme and the amount required to place the Scheme in funds is £100. It is further noted that the establishment of the Scheme provides a means for the trade of the Business to thereby be benefited. 1.1 It is also noted that the Scheme is not a pension scheme and is prohibited from paying relevant benefits. 2. The detailed Responses which l have agreed to a Questionnaire provided by my professional advisers have been reviewed. The Questionnaire and Responses are attached to this Resolution. It is resolved that those Responses continue accurately to reflect the purpose of the Business in establishing the proposed Scheme. 3. It is concurred that contributions by the Business for the year ended 31st March 2010 and subsequent years may be made on a weekly, monthly, annual or other periodic basis as may be appropriate for the commercial cashflow circumstances of the Business. It is noted that such periodic contributions would reflect part of the economic cost to the Business of earning its profits for that period. It is noted that at the end of each fiscal year, the total contributions for that year will be summarised. I have compiled the list of persons who have provided service, services, products, custom or finance to the Business in the last accounting period, which is attached to this Resolution ("the Providers List'). 4. It is resolved that such amount of contribution for the year ended 31st March 2010 and subsequent years will be paid wholly or partly out of revenue income of the Business. 5. It is resolved that an appropriate form of trust deed for the Scheme ("the Deed") is held by Bay Trust International Limited, who are the proposed original trustees of the Scheme ("the Trustees"}. 6. After due and careful consideration it was resolved that: 6.1 the Deed be adopted as the definitive trust deed of the Scheme; 6.2 the persons named as the trustees in the Deed are suitable persons to be Trustees of the Scheme; 6.3 I should execute the said Deed for and on behalf of the Business; 6.4 in respect of-the fiscal year ended 31st March 2010, a contribution of £100,000 (being the first of a series of such contributions) be paid to the said Trustees of the Scheme to be held on the trusts of the Scheme; 6.5 The Trustees be provided with a copy of this Resolution and the attached Providers List.”

“1. Has the trade been conducted in such a way as to place a commercial obligation on the Business to provide benefits for consultants and other suppliers? Yes ... but the Business does not want to recognise any liability to pay or provide benefits to any particular person, because that could create an actual legal liability. 2. Has the trade been conducted in such a way as to place a commercial obligation on the Business to provide benefits for customers? Yes ... but the Business does not want to recognise any liability to pay or provide benefits to any particular person, because that could create an actual legal liability. 3. Is the Sole Trader taking independent professional advice on the creation of the incentive arrangement? Yes. 4. How will the Sole Trader choose the trustees? By recommendation/meeting them. 5. It is intended that the trust be discretionary. This means that no beneficiary can order the trustees to make a payment to him. Why does the Sole Trader think this is a good idea? Because the obligation to contribute funds arises from commercial, but not legal liability. If fixed benefits were provided, this could constitute an admission of a specific legal liability upon the Business to pay particular persons. By putting monies into a trust, the Business discharges its commercial liability and does not have to take any further action. It allows time for the trustees to consider the provision of specific benefits to specific persons. 6. Does the Sole Trader consider that it is possible to allocate any or all of the contribution to any particular beneficiary or beneficiaries or that it is desirable to do so? Why? The Business does not want to spend its expensive management time in determining which specific person should get what. The discretionary trust allows each potential beneficiary to make a case to the trustees for the receipt of a benefit and for the Trustees to determine what benefits should be paid out. 7. The discretionary trust will prohibit the refund of contributions to the Business. Why does the Sole Trader think this is a good idea? Because otherwise the Business could be said to have not in reality discharged its commercial liabilities. 8. Does the Sole Trader intend to use a fixed formula for calculating contributions (e.g. 1/3 of profits)? or does he intend to look at the performance of the Business and try to reflect that in the amount of contributions made? The Sole Trader will consider the performance of the Business. 9. How and when will potential beneficiaries be informed? That is the Trustees responsibility. The Business will provide them with a list of those who have provided service, services and custom to the Business.”

“As the Founder of the Trust, I am writing to you to request that you give your consideration to the following matters. I appreciate that you must exercise your own discretion in all such matters and I hope that you will find the following information of use in exercising such discretion. I would like the Trustees to give consideration to advancing a loan of £150,000 to Mark Northwood upon commercial terms to be agreed, for the purposes of general investment. I reaffirm my understanding that you are in no way bound to follow my wishes in this or in any other respect.”

“As the Founder of the Trust, l am writing to request that you give your consideration to the following matters. I appreciate that you must exercise your own discretion in such matters and I hope you find the following information of use. I would like the Trustee to give consideration to transfer the trust assets to be managed by the FIDCO, Marhel Management Limited, upon commercial terms to be agreed, for the purposes of general investment I reaffirm our understanding that you are in no way bound to follow our wishes in this or in any other respect. If you are in agreement, I should be grateful if you would forward the funds to the bank account as follows:”

“The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes.”

“In calculating the profits of a trade, no deduction is allowed for— (a) expenses not incurred wholly and exclusively for the purposes of the trade…”

“1. The contributions to the Remuneration Trust for the periods are in keeping with generally accepted accounting practice (GAAP). The accounting for the contributions is correct. The payments form a valid expense of the business and are deductible for tax purposes accordingly. 2. The expenditure was incurred wholly and exclusively for the purposes of the trade (see Section 34 Income Tax (Trading and Other Income) Act 2005 ("ITTOIA 2005"). 3. HMRC's contention that there was never any intention for beneficiaries to benefit from the contributions to the trust is incorrect. 4. The establishment and contributions to the trust are not part of a "tax scheme" and do not comprise tax avoidance. 5. HMRC does not offer any explanation on why it considers that Marhel Management Limited did not act as a genuine fiduciary. We appeal on the basis that we do not know HMRC's reasons for adopting this stance, it has reached a speculative conclusion on the basis of an imprecise rationale using terminology that would appear to have no practical or legal meaning. We confirm that Marhel Management Limited has acted entirely appropriately.”

“The contributions are in keeping with both generally accepted accounting practise and were incurred wholly and exclusively for the purposes of the trade. FRS 12 is not applicable and therefore the definition does not come into application. The purpose of FRS 12 is “to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets”

“In the light of the Appellant’s evidence, as it emerged during cross-examination, HMRC advance a case on the basis of the sham doctrine, namely that the Appellant intended, by virtue of the scheme documentation, to make things appear other than they were”

“As set out by the UT in Ingenious Games v HMRC [2015] UKUT 0105 (“Ingenious Games”) at paras 62 to 65, HMRC are entitled to plead a case on sham if, in the light of the evidence that emerges in cross-examination, relevant oral evidence which indicates sham emerges (as it did in the present case).”

“IS IT NECESSARY FOR HMRC TO PLEAD DISHONESTY? [62] At the heart of the Appellants’ amended case is the proposition that it is not open to HMRC to put allegations of dishonesty (or other serious forms of misconduct) to their witnesses, or to invite the FTT to make adverse findings of fact on such a basis, unless the relevant allegations have been pleaded with full particularity and the Appellants have been given a proper opportunity to respond to them. [63] In cases where the burden of proof lies on HMRC to establish fraud or dishonesty, these principles undoubtedly apply in the same way as they would in ordinary civil litigation. Examples include cases where HMRC wished to make assessments to income tax outside normal time limits on the ground (before 1989) of fraud or wilful default under s 36 of the Taxes Management Act 1970, or (in the modern world) where, relying on principles developed by the Court of Justice of the European Union, they wish to deny a VAT-registered trader his otherwise incontrovertible right to deduct input tax because of his alleged participation in, or connection with, ‘missing trader’ (or MTIC) fraud. [64] The present case, however, is not of that nature. It is common ground that the burden of proof lies on the Appellants to displace the closure notices issued to them by HMRC within normal time limits, and (in particular) to establish that the businesses of the relevant LLPs were carried on with a view to profit. This issue, as I have explained, is properly pleaded in HMRC’s statement of case. No burden lies on HMRC to establish that the businesses were not carried on with a view to profit. It is for the Appellants to adduce such evidence as they think fit with a view to discharging the burden which throughout lies on them. [65] The IFP2 Information Memorandum is one of the pieces of documentary evidence relied upon by the Appellants as supporting their case on this issue. HMRC were under no obligation to accept it at face value, when it was disclosed to them, and they were fully entitled to cross-examine the witnesses for the Appellants who had been involved in its preparation in order to test its reliability and examine the assumptions on which it was based. HMRC were not obliged to give advance notice of the lines of questioning which they intended to pursue with the witnesses, and still less were they obliged to plead a positive case of dishonesty in preparation of the Memorandum before putting questions to the witnesses which, depending on how they were answered, might in due course provide a foundation for the FTT to draw such a conclusion. The obligations which lay on HMRC were in my judgment of a different nature. First, as a matter of professional duty, counsel may not put questions to a witness suggesting fraud or dishonesty unless they have clear instructions to do so, and have reasonably credible material to establish an arguable case of fraud. Secondly, as the FTT rightly recognised, it is not open to the tribunal to make a finding of dishonesty in relation to a witness unless (at least) the allegation has been put to him fairly and squarely in cross-examination, together with the evidence supporting the allegation, and the witness has been given a fair opportunity to respond to it. Important though these obligations are, they are quite different from, and do not entail, a prior requirement to plead the fraud or misconduct which is put to the witness. If it were otherwise, a party would be obliged to serve an amended statement of case before attempting to expose a witness as dishonest in cross-examination, and the element of surprise which can be a potent weapon in helping to expose the truth would no longer be available.”

“HMRC notes that Mr Northwood has adopted conflicting positions. Unless these are satisfactorily resolved HMRC will contend that the Remuneration Trust arrangements, or elements of the arrangements, were a sham”

“[66] In the light of these distinctions, it becomes clear, to my mind, that the requests made by the Appellants at various stages of the trial for HMRC to state whether they were alleging fraud, and the Appellants’ primary ground of appeal that the FTT ‘erred in permitting unpleaded allegations to be made’, are misconceived. The real questions, as it seems to me, are: (a) whether it is now too late for HMRC to put the relevant allegations to the three individuals; and (b) if it is not too late, whether it will in due course be open to the FTT to make findings of fraud or dishonesty in relation to the preparation and promulgation of the IFP2 Information Memorandum. [67] As to the second question, the FTT has said, and I see no reason to disagree, that on the evidence as it now stands they could not make any such findings. Apart from anything else, the allegations have not been put fairly and squarely to the witnesses, nor have they been given an opportunity to rebut them. It is therefore a legitimate criticism of HMRC’s Evidence Paper that it invites the FTT to draw inferences, and reach conclusions, which are not at present open to them. But the evidence is not yet complete, and when the Evidence Paper was prepared both Mr Clayton and Mr McKenna were due to give further evidence at the resumed hearing. If HMRC are permitted to put the relevant allegations to them, the position may yet be reached where the FTT can properly make findings of fact on them.”

“Because the burden is on the taxpayer it is entirely for the taxpayer to do the running on showing X is more likely than ‘not X’. That is not to say that HMRC might not still have to ‘exert’ themselves… if HMRC fear the taxpayer’s case was strong enough to get across the threshold of proof.”

“The law operates a binary system in which the only values are zero and one. The fact either happened or it did not. If the tribunal is left in doubt, the doubt is resolved by a rule that one party or the other carries the burden of proof. If the party who bears the burden of proof fails to discharge it, a value of zero is returned and the fact is treated as not having happened. If he does discharge it, a value of one is returned and the fact is treated as having happened.”

“I can’t recall 11 years down the line exactly my degree of understanding. I must have asked enough questions, I must have had enough information that I was happy that the answers there reflected the true situation. I rely on professional advisers. If my accountant or my independent financial adviser had looked at those answers and said, “These are not appropriate for your situation; they’re incorrect,” then I wouldn’t have signed them. It’s-- I-- this isn’t-- any of this documentation isn’t really something I have experience of on a day-to day basis, so I have to take professional advice on it.”

“I’d be grateful if you could let me know how I proceed for payments in/out from now on. I’ve arranged for the practice drawings for January to be paid into the Marhel Management account direct.”

“For the last 3 year, I have paid the greatest part of the business profits into a remuneration trust whose funds myself and my wife have control of through a fiduciary, Marhel Management Ltd. These payments are visible in the business and personal accounts.”

“I consider whether I am able to give an honest and free from bias opinion, and I believe that I am. I’m under no pressure to give any particular opinion.”

“In producing this report I have relied on the following: 1.2.1 All relevant parts of the taxation code for the United Kingdom including, but without restriction to, s.25 ITTOIA 2005, s.997 ITA 2007, s.1127 CTA 2010 and to all relevant elements of the rules and principles applying to the preparation of accounts including, but without restriction to, The Statement of Principles for Financial Reporting and the Financial Reporting Standard 5.”

“if I hadn't argued with it, then presumably it would have to be accepted by the Tribunal. It was crucial that the mistakes, the misunderstandings that in my opinion were in the statement of case were corrected.”

“Financial Reporting Standard 5 ‘Reporting the Substance of Transactions’ (FRS5) 4.4. FRS5 has the stated objective to “ensure that the substance of an entity’s transactions is reported in its financial statements. The commercial effect of the entity’s transactions, and any resulting assets, liabilities, gains or losses, should be faithfully represented in its financial statements” (FRS5.1). 4.5. FRS5 contains the following requirements: “A reporting entity’s financial statements should report the substance of the transactions into which it has entered. In determining the substance of the transaction, all its aspects and implications should be identified and greater weight given to those more likely to have a commercial effect in practice. A group or series of transactions that achieves or is designed to achieve an overall commercial effect should be viewed as a whole.” (FRS5.14) “To determine the substance of a transaction it is necessary to identify whether the transaction has given rise to new assets or liabilities for the reporting entity and whether it has changed the entity’s existing assets or liabilities.” (FRS5.16) “Evidence that an entity has an obligation to transfer benefits (and hence has a liability) is given if there is some circumstance in which the entity is unable to avoid, legally or commercially, an outflow of benefits.” (FRS5.18) “Where a transaction results in an item that meets the definition of an asset or liability, that item should be recognised in the balance sheet if- (a) There is sufficient evidence of the existence of the item (including, where appropriate, evidence that a future inflow or outflow of benefit will occur), and (b) The item can be measured at a monetary amount with sufficient reliability.” (FRS5.20) “Where a transaction involving a previously recognised asset transfers to others- (a) All significant rights or other access to benefits relating to that asset, and (b) All significant exposure to the risks inherent in those benefits, the entire asset should cease to be recognised.” (FRS5.22) “Paragraph 14 of the FRS sets out general principles for reporting the substance of a transaction. Particularly for more complex transactions, it will not be sufficient merely to record the transaction’s legal form, as to do so may not adequately express the commercial effect of the arrangements. Notwithstanding this caveat, the FRS is not intended to affect the legal characterisation of a transaction, or to change the situation at law achieved by the parties to it.” (FRS5.46) “Whatever the substance of a transaction, it will normally have commercial logic for each of the parties to it. If a transaction appears to lack such logic from the point of view of one or more parties, this may indicate that not all related parts of the transaction have been identified or that the commercial effect of some element of the transaction has been incorrectly assessed.” (FRS5.51) 4.6. FRS5 contains the following definitions: Assets: “Rights or other access to future economic benefits controlled by an entity as a result of past transactions or events.” (FRS5.2) Control in the context of an asset: “The ability to obtain the future economic benefits relating to an asset and to restrict the access of others to those benefits.” (FRS5.3) Liabilities: “An entity’s obligations to transfer economic benefits as a result of past transactions or events.” (FRS5.4) Financial Reporting Standard 12 ‘Provisions, Contingent Liabilities and Contingent Assets’ (FRS12) 4.7. FRS12 sets out the principles of accounting for specific types of liability: provisions and contingent liabilities. It therefore contains some useful definitions concerning the concept of liabilities (FRS2.2): Liabilities: “Obligations of an entity to transfer economic benefits as a result of past transactions or events.”

“An event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.”

“An obligation that derives from: (a) A contract (through its explicit or implicit terms); (b) Legislation; or (c) Other operation of law.”

“An obligation that derives from an entity’s actions where: (a) By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.” 4.8. Further guidance is given on the concepts of past events and constructive obligations. Whilst the specific context of the guidance is in respect of provisions (being a liability of uncertain timing or amount), the principles apply equally to the wider the context of liabilities more generally: “Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s balance sheet are those that exist at the balance sheet date.” (FRS12.18) “It is only those obligations arising from past events existing independently of an entity’s future actions (ie the future conduct of its business) that are recognised as provisions.” (FRS12.19) “An obligation always involves another party to whom the obligation is owed. […] Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the balance sheet date unless the decision has been communicated before the balance sheet date to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will discharge its responsibilities.” (FRS12.20) Statement of Principles for Financial Reporting (SoP) 4.9. Whilst not an accounting standard, the SoP sets out various fundamental principles which the Accounting Standards Board considered should underpin the financial statements of profit-oriented entities. 4.10. The concepts of assets and liabilities described in the SoP are consistent with those set out in FRS5 and FRS12, as described above. 4.11. Definitions are given in the SoP for ‘gains’ (incorporating all forms of income and revenue) and ‘losses’ (incorporating all forms of expenses), which are referred to in the objective of FRS5 (see paragraph 4.4 above): “Gains are increases in ownership interest not resulting from contributions from owners” (SoP4.39) “Losses are decreases in ownership interest not resulting from distributions to owners.” (SoP4.39) “Ownership interest is the residual amount found by deducting all of the entity’s liabilities from all of the entity’s assets.” (SoP4.37) “Distributions to owners are decreases in ownership interest resulting from transfers to owners in their capacity as owners.” (SoP4.42) 4.12. It follows that losses would be included in the profit and loss account, as expenses, whereas distributions to owners in their capacity as owners would not (because they are not losses). In the context of sole traders, drawings are equivalent to distributions because they represent the use of assets in a personal rather than business capacity. Urgent Issues Task Force Abstract 32 ‘Employee benefit trusts and other intermediate payment arrangements (UITF32) 4.13. UITF32 considers the application of general accounting principles, in particular those in FRS5 as set out above, to the specific situation of intermediate payment arrangements. Whilst typically such arrangements involve the use of trusts for the payment of an entity’s employees, the scope of UITF32 includes other arrangements, for example those which are used to compensate suppliers of goods and services (UITF32.3(b)). 4.14. Two questions are considered in UITF32: (i) Does the sponsoring entity’s payment to the intermediary represent an immediate expense? “A payment made to an intermediary will represent an immediate expense of the sponsoring entity only if the payment neither results in the acquisition of another asset (for example, restricted cash or a prepayment) nor settles a liability. Whether a payment involves the full or partial settlement of a liability is a matter of fact and is not considered in this Abstract. The Abstract focuses instead on whether the payment involves the acquisition of another asset.” (UITF32.7) “An asset is defined in the Statement of Principles for Financial Reporting as a right or other access to future economic benefits that is controlled by the entity as a result of a past transaction or event. The attributes of an asset are therefore access to future economic benefits and the control of that access. (a) Future economic benefit can be obtained in a variety of forms. In the context of intermediate payment arrangements, probably the most common form the benefit takes is meeting some or all of the cost of goods or services provided to the sponsoring entity. That benefit can be the basis for an asset even though it is not capable of being turned into cash or of being distributed in a liquidation. (b) Control comprises two abilities, the ability to direct and the ability to benefit from that direction. Although control is probably most visible when it is exerted through intervention and instruction on an ongoing day-to-day basis, it can be present in a variety of other guises. For example, even though a sponsoring entity of an intermediate payment arrangement involving a trust does not have the right to dictate to trustees how they should exercise their responsibilities under a trust, it may still […] have de facto control of that trust’s assets and liabilities […]”. (UITF 32.8) “FRS 5 requires that, when determining whether an entity has an asset, one should look beyond the structure of the transaction to consider its substance; in other words, consideration should be given to the commercial effect of the transaction in practice. Recognising that it is highly unusual for an entity to pay a significant amount to a third party without receiving something in return, the UITF takes the view that, when an entity transfers funds to an intermediary, there should be a rebuttable presumption that the sponsoring entity will obtain future economic benefit from the amounts transferred and that it has control of the rights or other access to those future economic benefits.” (UITF 32.9) “To rebut this presumption at the time the payment is made to the intermediary, it will be necessary to demonstrate that either: (a) The sponsoring entity will not obtain future economic benefit from the amounts transferred. For example, it may be that the only beneficiaries of the intermediary are registered charities or a benevolent fund that is in no way linked to amounts otherwise due from the entity; or (b) The sponsoring entity does not have control of the rights or other access to the future economic benefits it is expected to receive. This will involve evidence that the payments made by the intermediary are not habitually made in a way that is in accordance with the sponsoring entity’s wishes.” (UITF 32.10)”

“8.12.1 The contributions are accounted for in the year in which they were made; 8.12.2. In accordance with FRS5, the profits of the Appellant’s profession have been calculated in such a way that they represent the substance of the transactions entered into, particularly in relation to the contributions. This is because the contributions removed the money from the Appellant’s personal control so – while he remained in a position to direct the investment and management of the assets subject to his contributions – he did so in a fiduciary capacity and could not benefit from it himself. He could not, in fact, use those funds in any way that was not for the benefit of the beneficiaries of the trust (i.e. all significant rights or other access to benefits relating to the assets contributed were transferred to others – FRS5, paragraph 5.22); 8.12.3. Upon transfer to the trust, the assets were no longer available to the business or claimants of the business and as such in accordance with UK GAAP are properly deductible; 8.12.4. the Appellant did not obtain or retain future economic benefit from the assets transferred to the trust and because his only involvement with them thereafter was by reference to interest-bearing loans, or in their management in his capacity as director of a fiduciary appointed to manage the assets, he did not retain, or have access to the future economic benefit from the assets transferred (UITF32); and 8.12.5. While the Appellant could “draw” (used in a non-technical, non-accounting sense) on the assets in the trust he could only do so if an interest-bearing loan was granted and as such he did not have access to the trusts assets, rather on occasion the trust provided funding to him on terms that altered the nature of the assets in the trust from cash to be a chose in action to recover amounts owed. As such, he could not obtain future economic benefit.”

“CONCLUSION 9.1 In conclusion, where funds have been paid away to RTs during the course of an accounting period, it is my conclusion that these amounts should be shown as a deduction in arriving at the profits under GAAP. However, were it to be found as a matter of law that the documents gave rise to the application of the sham transaction doctrine then my conclusion would be that, depending on how that doctrine would cause the transactions to be re-analysed, it might well be that it had the effect that the amounts should not be shown as a deduction in arriving at the profits under GAAP. 9.2 In particular, I have considered whether the contributions to the RT should be recognised as an expense in the profit and loss account of Mr. Mark Northwood and have reached the conclusion that, absent the sham transaction doctrine, they should because they represent funds paid away by that entity to the RT and are no longer available to the entity. I have specifically considered whether the fact that funds were lent by the Trustees to Mr. Mark Northwood to make contributions means that those contributions were, either not an expense of Mr. Mark Northwood or, if they were, were not "incurred" by Mr. Mark Northwood. My opinion is very clear; I can see nothing in the way in which Mr. Mark Northwood obtained part of the monies contributed to the RT which could make any difference to the question as to whether they were an expense or whether that expense was incurred by Mr. Mark Northwood. It is common commercial practice for businesses to borrow money from, most commonly but not solely, banks to deal with expenses of their trade and I have never seen an argument that that means that those expenses are not incurred by the business nor do I consider in my opinion that any such argument could stand up. However, I would accept that if there was evidence that these loans were never to be repaid and were, effectively, gifts from the trust to Mr. Mark Northwood, with the purpose of them being recontributed back to the trust, then further payments by Mr. Mark Northwood would not constitute an expense incurred by Mr. Mark Northwood's business. 9.3 The question as to whether the expenses so incurred were wholly and exclusively for the purposes of the trade depends on the motivation of Mr. Mark Northwood in making those payments. I have not had the opportunity to speak to Mr. Mark Northwood about his motivation and my conclusion is that it is a matter for the Tribunal, based on the evidence put before it, to determine his motivation. If that motivation was to benefit his trade then the expenses would satisfy the wholly and exclusively test; if they were for some non-business reason, then they would not. 9.4 In respect of the fees paid by Mr. Mark Northwood, they would follow, in my considered opinion, the question as to the deductibility under the wholly and exclusively rule. If Mr. Mark Northwood took advice with a view to developing a strategy which would benefit his business, then the expenses incurred in taking that advice would clearly be, in my opinion, allowable. 9.5 In considering whether transactions should be recorded within the Appellants business accounts, I cannot accept, as such, the way in which that has been put to me which is that private items cannot be referred to in business accounts; it is my practical experience that personal expenditure of proprietors of sole trades can be included in business accounts but it is normally the case that they will not meet the wholly and exclusively test and so their mere entry in those accounts does not mean that they will be deductible in arriving at profits for tax purposes. I have, however, said that the pre-existence of a liability does not, in my opinion, affect the question as to whether or not an item is deductible. Purely by way of example, a business may choose to make a voluntary payment to a retiring employee with the good commercial purpose that that will incentivise other employees to stay with the business. There is no pre-existing liability; however, there is a benefit of a commercial nature and so there is deductibility. 9.6 I have explained in para 5.1 that I do not believe that the question of constructive obligation is relevant to this case. It might be helpful to explain what a constructive obligation is and the difference between that and a commercial obligation. To give a simple example, if I order goods from a supplier, agree terms and they are then delivered, I will have a commercial obligation to meet his invoice. A constructive obligation is one that arises out of a course of conduct. However, this is not relevant because, in my understanding, that question arises only where contributions are not made during the course of an accounting period. If they are to be included in the accounts for a year, in my understanding there must either be an actual payment during the year or it must be established that there was a constructive obligation to make such a payment. For example, if an employer tells his staff during the course of the year that he intends to pay them a bonus of 10% of the profits but that he cannot calculate that number until the annual accounts are prepared which will determine the quantum of profits, then that is, in my understanding, an example of a constructive obligation and such a bonus could be read back into the accounts for the year to which the bonus relates. However, if no arrangements are discussed at all in the course of an accounting period and subsequently the company or employer decides that a bonus by reference to those profits would be a good idea, that cannot be read back into the accounts for the period to which it relates. I would accept that, absent any evidence to the contrary, constructive obligation did not exist in this case but that is not relevant because Mr. Mark Northwood actually paid the contributions during the year. 9.7 I simply do not understand the argument that funds borrowed from the trust and then contributed to the trust as described in para 3.9 above are in some way excluded from the normal rules that say that monies laid out for the purposes of the business cannot be wholly and exclusively for the purposes of that business. If Mr. Mark Northwood gradually increased his indebtedness to the trust, that would be a real obligation.”

“a. The RT arrangement falls within the scope of UITF 32, because it is represented as an intermediate payment arrangement between the Appellant (as sponsoring entity) and his suppliers and/or their relatives (as beneficiaries). b. The Appellant can access future economic benefit for his business from the contributions made to the RT and it has not been demonstrated that his business will not obtain future economic benefit. c. The Appellant has control of that future economic benefit. d. Therefore the presumption in UITF 32 that the Appellant’s business could obtain future economic benefit from the amounts contributed to the RT, and that the Appellant was able to control access to those benefits, has not been rebutted. e. It was not in accordance with GAAP to account for the contributions as an immediate expense, and the Appellant’s expenses are overstated by the following amounts: Year to 31 March 2010 £570,000 Year to 31 March 2011 £498,787 Year to 31 March 2012 £500,000 Year to 31 March 2013 £555,000 f. The Appellant should have initially recognised assets in respect of the contributions held by the RT, in the amounts set out above. g. Thereafter he should have accounted for the RT as an extension of his own business, recognising assets, liabilities, income, expenditure, capital contributions and drawings in accordance with the substance of the underlying transactions.”

“36. As to whether the Debits were expenses “incurred”, Mr Ghosh points out that neither section 48, nor any other provision in CTA 2009, deems the Debits to have been “incurred” by the Companies. He submits that given that the Companies suffered no cost in relation to the Debits, the Debits cannot be said to have been “incurred” by the Companies. 37. In this connection, Mr Ghosh again seeks to rely on Lowry and the majority’s approach in that case to what was required for expenses to be “laid out or expended”, the predecessor wording to “incurred” in section 54(1)(a). Reliance is also placed on an obiter passage in the Upper Tribunal’s decision in in Ingenious Games LLP v Revenue and Customs Comrs [2019] STC 1851, in which it was stated that the term “incurred” in section 54(1)(a) CTA 2009 is “concerned with whether the taxpayer bore the economic burden of an expense” (para 434) and that that approach “makes sense given the context of the statutory test, namely the determination of profit” (para 457). 38. We reject HMRC’s case that section 54 imports a further requirement as to what constitutes an “expense”, namely that it has to be shown to be “incurred”

“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. To these propositions I would add one more. The question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment. The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment. Once that is ascertained, its characterisation as a trade or private purpose is in my opinion a matter for the commissioners, not for the taxpayer.”

“155. In Scotts Atlantic, in obiter consideration of the question of wholly and exclusively and whether there was duality of purpose (but based on authorities which are binding on this Tribunal), the Upper Tribunal reiterated that: (1) The word “exclusively” means that if the expense was also incurred for some other purpose, it is not deductible (at [47]). (2) Citing Millett LJ in Vodafone at [742] (and as set out more fully above), the object of the expenditure must be distinguished from its effect. If the sole object of the expenditure was the promotion of the business, the expenditure is deductible, even though it necessarily involves other consequences. Thus, the existence of a private advantage does not necessarily mean that the expenditure is disallowable. A merely incidental effect of expenditure is not necessarily an object of a taxpayer in making it. What the FTT must not do is to conclude that merely because there was an effect, that effect was an object (at [51] and [52]) (3) In addition, at [53], some results are so inevitably and inextricably involved in particular activities they cannot but be said to be a purpose of the activity and as a result the conscious motive of the taxpayer is not decisive. (4) Neither the statutory provision nor any of the cases indicate that the way in which an expense is incurred will determine whether the expense is deductible. The question is what is the object of the expense, not what was the object of the means of incurring it. A trader may have a choice of the way in which it achieves an end which is exclusively for the benefit of the trade. The mere fact that a choice is influenced or dictated by the tax consequences does not necessarily mean that the choice involves a duality of purpose as regards the expense (at [54] and [55]). (5) Expenditure is not disqualified because the nature of the activity necessarily involved some other result, in other words that the mere existence or knowledge of that result is not enough to give a dual purpose. But if the fact-finding tribunal concludes that its inquiry into the mind of the taxpayer revealed that the taxpayer actually had that other purpose as an object of the expenditure, then the fact that that result is a natural consequence of the expenditure will not cause that finding to be perverse (at [74]). 156. On the facts in Scotts Atlantic the Upper Tribunal concluded that a deduction was not available because “one purpose was to implement a pre-arranged scheme in order to obtain a tax deduction; the purpose was not simply to benefit employees and directors through the medium of an employment benefit scheme” (at [81]).”

“162. The expenses for which Strategic Branding claims a deduction are the contributions which were made to the RT (and these were the gross amounts of the contribution as resolved to be made by that company, out of which the fees were subsequently paid). I must therefore consider the principles established by the authorities, in particular: (1) whether the contributions were for the purpose of enabling Strategic Branding to carry on and earn profits in the trade; (2) this assessment must be based on the subjective intentions of Mr Wilson at the time of making the payments – these are not limited to his conscious motives, as some consequences are so inevitably and inextricably involved that (unless merely incidental) they must be taken to be a purpose for which the contributions were made; (3) if the expense was also incurred for some other (non-trade) purpose, it is not deductible; (4) the object must be distinguished from its effect - payments may be exclusively for the purposes of the trade even though they also secure a private benefit, if the securing of the private benefit was not the object but merely a consequential and incidental effect of the contributions; and (5) the question is not what was the object of the means of incurring the expense. The mere fact that a choice is influenced or dictated by the tax consequences does not necessarily mean that the choice involves a duality of purpose as regards the expense.”

“the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.”

“24. We agree with Mr Prosser that the FTT's finding of sham is a finding of fact and that we may interfere with it only on Edwards v Bairstow grounds (see Edwards v Bairstow [1956] AC 14 itself and the long line of authority following it). We are, however, conscious that a finding of sham, even if it does not imply dishonesty in the ordinary sense, necessarily requires the fact-finding tribunal to be satisfied of an intention to deceive or, at least, to make things appear other than as they are. This is a point to which we shall need to return; for the moment we merely observe that, because of this consideration, we have examined the detail of the FTT's findings with particular care. … 29. Mr Bremner is correct to say that the FTT did not make any finding of dishonesty; on the contrary, it described Mr Hardy, at [34], as "basically honest". We do not, however, and despite the note of caution we have sounded, consider that a finding of sham necessarily implies dishonesty. The pretence here was that 96 or 99 might have been spent on research, but the parties did not go further by pretending that it had in fact been spent on research. This was a tax avoidance, or deferral, scheme, and not evasion, and there was no attempt, as there would be in the case of evasion, to conceal what actually happened, however the parties chose to dress it up. One might disapprove of what was done; but we do not consider it could be said to have crossed the threshold into dishonesty.”