BK Dhaliwal v The Commissioners for HMRC [2025] UKFTT 659 (TC)

[2025] UKFTT 00659 (TC)Case No TC09542
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 10 October 2024Date Judgment date: 5 June 2025
Taylor House, London
Appeal reference: TC/2023/08062
PROCEDURE – application for the Tribunal to determine as a preliminary issue whether the ‘wholly and exclusively’ test of deductibility set out in section 34 of the Income Tax (Trading and Other Income) Act 2005 should be construed in accordance with European Union law – application refused
Between
B K DHALIWALAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent
Before
TRIBUNAL JUDGE KIM SUKULRepresentation:For the Appellant: Setu Kamal LLM (Tax) of counsel, instructed by Moor Green & CoFor the Respondents: Colm Kelly of counsel, instructed by the General Counsel and Solicitor to HM Revenue and CustomsDECISION

introduction

[1]The hearing was conducted by video using the Microsoft Teams platform. Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.[2]The documents to which I was referred were contained within the 634-page document bundle, 1,768-page authorities bundle, 30-page Appellant’s skeleton argument and 16-page skeleton argument from the Respondents (‘HMRC’).[3]The appeal relates to tax issues which concern whether the Appellant made contributions to a self-employed remuneration trust (‘SERT’) which were then returned to the Appellant as loans from a personal management company, which she controlled. The Appellant argues that the contributions made to the trust during the assessed years should be deductible. HMRC’s position is that the contributions were not deductible expenses of the Appellant’s trade as a dental surgeon because, amongst other things, the contributions were not expenses incurred wholly and exclusively for the purposes of the trade as required by section 34 of the Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA’).[4]During the hearing, I considered the Appellant’s application dated 13 March 2023 for the Tribunal to determine as a preliminary issue whether the ‘wholly and exclusively’ test of deductibility set out in section 34 ITTOIA should be construed in accordance with European Union (‘EU’) law fundamental freedoms such that the Appellant’s ‘Proposed Test’ should be applied, namely “an expense is deductible to the extent that it is made for the purposes of the trade and irrespective of whether it is for any other purpose”. I also considered HMRC’s objection dated 14 March 2024 to the Appellant’s application and HMRC’s application of the same date that the appeal be added to, and case managed with, the existing Tribunal grouping of SERT appeals.[5]The Tribunal’s decision, refusing the Appellant’s application and granting HMRC’s application, was given orally at the end of the hearing. The Appellant requested full reasons for that decision, which are set out below.

appellant’s application

[6]The main points set out in the Appellant’s detailed arguments are that:(1) Contributions made to trusts during the assessed years should be deductible because the 'wholly and exclusively' rule in section 34 ITTOIA should be interpreted in line with EU laws, specifically Articles 49, 56, and 63 of the Treaty on the Functioning of the European Union ('TFEU'), and the contributions should therefore be considered deductible for trade purposes.(2) The 'wholly and exclusively' test infringes on the Right to Establish, Freedom to Provide Services, and Free Movement of Capital under the TFEU, and this compatibility issue should be addressed as a preliminary point to save costs and resources.(3) Retained EU Laws (Reform and Revocation) Act 2023 impacts the recognition of EU laws in domestic law. Previous cases show the UK judiciary's stance on EU law post-Brexit and the principle of 'direct effect' requires courts to apply EU laws. EU law issues can therefore be raised in this Tribunal.(4) An infringement includes anything that dissuades the exercise of a freedom. Various cases illustrate the broad interpretation of 'dissuasion' and even minor restrictions can constitute an infringement. Administrative burdens and various national measures can be considered infringements. Discrimination is not necessary for an infringement; measures hindering the exercise of freedoms can also be infringements.(5) Justification for restrictions must be proportionate and necessary. The 'wholly and exclusively' test is disproportionate and not indispensable for achieving its objectives. An expense should be deductible to the extent it is made for trade purposes, regardless of other purposes. Legal fees incurred to ensure contributions are deductible should also be considered deductible.[7]In support of their application, the Appellant submits that the compatibility of the ‘wholly and exclusively’ test should be dealt with as a preliminary point as this would assist in avoiding the repetition of arguments, save costs and reduce the burden on the resources of the Tribunal.[8]The Appellant further submits that they ought to know the case they have to meet, referring to Re Allister and another [2019] NIQB 66 at [19]:
“The combined experience of the lawyers and the judge in this courtroom is probably 400 years plus. If we extract from that one simple, but vital, principle which we have all learned it is the right to know the case against oneself and the corresponding right to respond to it.”
[9]The Appellant argues that one advantage of knowing the case to answer is to have the opportunity to present the facts as they choose, to suit the case.[10]In addition, the Appellant further argues that it was held in Case C-432/05 Unibet v Justitiekanslern [2007] ECR I-2271 by the ECJ that the national court ought to be able to ensure that a preliminary issue may be determined in a free-standing application:
“65 Accordingly, the answer to the first question must be that the principle of effective judicial protection of an individual’s rights under Community law must be interpreted as meaning that it does not require the national legal order of a Member State to provide for a free-standing action for an examination of whether national provisions are compatible with Article 49 EC, provided that other effective legal remedies, which are no less favourable than those governing similar domestic actions, make it possible for such a question of compatibility to be determined as a preliminary issue, which is a matter for the national court to establish.”
[11]The Appellant submits that this EU decision has supremacy over any domestic authority on the question of whether compatibility should be determined as a preliminary issue.

Grounds of appeal

[12]The grounds of the Appellant’s appeal are extensive. They can be summarised as follows. General Grounds of Appeal (1). Review Process: The review officer accepted facts without comprehensive analysis, indicating the review process was inadequate. (2). Delays: Significant delays in issuing Discovery Assessments and Closure Notices are unacceptable, making it difficult for the Tribunal to make an equitable decision. Specific Grounds of Appeal Discovery Assessments (Years ended 5 April 2012, 2013, 2014) (3). Incorrect Decision: HMRC's decision on tax liability is incorrect; deductions claimed are appropriate. (4). Remuneration Trust Contributions: Contributions were in line with generally accepted accounting practice (‘GAAP’) and incurred wholly for the Appellant's trade. (5). Disclosure and Time Limits: Proper disclosures were made, invalidating the discovery provisions due to time limits. (6). No Careless or Deliberate Conduct: There was no incomplete disclosure or negligent behaviour by the Appellant. Closure Notices (Years ended 5 April 2015, 2016, 2017, 2018) (7). Incorrect Decision: HMRC's decision on tax liability is incorrect; deductions claimed are appropriate. (8). Remuneration Trust Contributions: Contributions were in line with GAAP and incurred wholly for the Appellant's trade. (9). Commercial Incentives Fund: Contributions were made to a commercial incentives fund, not disguised remuneration. (10). Trust Purpose: The trust was established for the benefit of the business, not for personal gain. (11). Review Officer's Misunderstanding: The review officer misunderstood the purpose of the trust and the nature of the contributions. (12). Long-term Nature of Trust: The trust is long-term, and the lack of immediate benefits does not invalidate the contributions.

HMRC’s response

[13]HMRC’s position is that contributions were not deductible expenses as they were not incurred wholly and exclusively for trade purposes, as required by section 34 ITTOIA. Closure notices and discovery assessments were issued for various tax years, charging significant amounts of tax.[14]HMRC contend that the point raised by the Appellant’s application is not appropriate for a preliminary hearing. They argue that tribunals have been repeatedly cautioned against listing preliminary hearings and should do so only where the point to be determined would be a “succinct, knockout point” which would dispose of the entire case following Wrottesley v Revenue & Customs [2015] UKUT 637 (TCC) (‘Wrottesley’), and even if the Tribunal adopts the Appellant’s Proposed Test, it would still need to determine if the contributions were made for trade purposes. They further submit that the Appellant has not pleaded or evidenced any facts capable of establishing a restriction of her EU rights and that the wholly and exclusively test is not the only hurdle; contributions must also be deductible in accordance with GAAP.[15]Regarding the points raised by the Appellant in relation to EU law and discrimination, HMRC submit that the Appellant has not identified relevant cross-border movement or discrimination. Section 34 ITTOIA treats UK nationals and foreign nationals alike, thus not amounting to a restriction on EU freedoms.[16]Regarding the points raised by the Appellant in relation to justification and proportionality, HMRC submit that if section 34 ITTOIA is a restriction, it is justified for reasons such as ensuring fiscal supervision, preventing abuse of rights, and safeguarding the balanced allocation of tax powers. The Appellant has not sustained an actual economic loss; the loss is the opportunity to avoid tax.

discussion

[17]Having considered the Appellant’s submissions, I accept that it is possible for such a question of compatibility to be determined as a preliminary issue. However, I do not accept their submission that the question of compatibility should be determined as a preliminary issue to enable the Appellant to present the facts as they choose, to suit the case. Aside from this being a highly questionable approach, I do not consider this to be a relevant factor in determining the Appellant’s application for a preliminary hearing. Instead, I adopt the approach taken in Wrottesley at [28], namely to consider the following key principles; “(1) The matter should be approached on the basis that the power to deal with matters separately at a preliminary hearing should be exercised with caution and used sparingly. (2) The power should only be exercised where there was a ‘succinct, knockout point’ which would dispose of the case or an aspect of the case. In this context an aspect of the case would normally mean a separate issue rather than a point which was a step in the analysis in arriving at a conclusion on a single issue. In addition, if there was a risk that determination of the preliminary issue might prove to be irrelevant then the point was unlikely to be a ‘knockout’ one. (3) An aspect of the requirement that the point must be a succinct one is that it must be capable of being decided after a relatively short hearing (as compared to the rest of the case) and without significant delay. This was unlikely if(a) the issue could not be entirely divorced from the evidence and submissions relevant to the rest of the case, or(b) if a substantial body of evidence was required to be considered. This explained why preliminary questions would usually be points of law. The tribunal should be particularly cautious on matters of mixed fact and law. (4) Regard should be had to whether there was any risk that determination of the preliminary issue could hinder the tribunal in arriving at a just result at a subsequent hearing of the remainder of the case. (5) Account should be taken of any potential for overall delay, making allowance for the possibility of a separate appeal on the preliminary issue. (6) The possibility that determination of the preliminary issue might result in there being no need for a further hearing should be considered. (7) Consideration should be given to whether determination of the preliminary issue would significantly cut down the cost and time required for pre-trial preparation or for the trial itself, or whether it could in fact increase costs overall. (8) The tribunal should at all times have in mind the overall objective of the tribunal rules to enable the tribunal to deal with cases fairly and justly.”[18]The factors in favour of granting the order concern the possibility of reduced time and costs, although I consider settlement of the entire appeal following the outcome of the preliminary hearing to be unlikely. These factors must be balanced against the likely overlap of the legal and factual issues preventing the matter from being discrete in evidential terms and in terms of submissions, risking overall delay and additional costs in having those matters heard at two separate hearings.[19]On balance, having regard for the relevant principles and the close connection between the grounds of the appeal and the issues likely to be raised in the preliminary hearing, I do not consider it to be appropriate or in the interest of fairness and justice to allow the Appellant’s application for the question of compatibility to be determined as a preliminary issue. The application for a preliminary hearing is therefore refused.[20]I consider it to be in the interests of fairness and justice to both parties, and therefore consistent with the Tribunal’s overriding objective, that the case management of this appeal is included within the existing Tribunal grouping of SERT appeals and I therefore grant HMRC’s application.[21]In these circumstances, I consider it to be appropriate to direct that these proceedings are stayed pursuant to Rule 5 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 pending the outcome of case management hearings in respect of potential ‘lead’ cases within the group.

conclusion

[22]For the reasons set out above, I refuse the Appellant’s application and grant HMRC’s application.

Right to apply for permission to appeal

[23]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. KIM SUKUL TRIBUNAL JUDGE Release date: 05th JUNE 2025