Court of Appeal upholds decision that an UURBS was a tax avoidance scheme

The Court of Appeal dismissed an appeal by two taxpayers against a decision of the Upper Tribunal, upholding a First-tier Tribunal decision, rejecting challenges to HMRC closure notices denying deductions for provisions in the appellants' accounts for an unfunded unapproved retirement benefit scheme (UURBS).

The dispute concerned arrangements under which the appellants made unfunded promises to provide future pensions to directors and key employees. The appellants made provisions for these UURBS liabilities in their accounts and claimed tax deductions.

The First-tier Tribunal held that the amounts were liabilities incurred for tax avoidance rather than expenses incurred "wholly and exclusively" for trade purposes under section 54 of the Corporation Tax Act 2009. The UURBS had been presented to the appellants by their accountants as a tax planning scheme, with tax at the forefront of their considerations, and with the primary purpose being to reduce tax without incurring expenditure.

The Court of Appeal held that the First-tier Tribunal had correctly applied the principles in previous case law regarding the “wholly and exclusively” test. The Court considered the taxpayer’s intention at the moment the liability was created. If a tax benefit is incidental and a consequential effect of the trade, then it is permissible. However, if the tax advantage is a second, separate objective then duality of purpose taints the arrangement.

The Court rejected the appellants' argument that this was simply a choice of a tax-efficient method of pension provision and found that “the UURBS was adopted as a tax saving scheme and the provision of pensions was "at best" an incidental aim".

The Court separately rejected HMRC's alternative argument that section 1290 of the Corporation Tax Act 2009 (concerning employee benefit contributions) would prevent the deductions. It held that the UURBS did not fall within section 1290 on any natural interpretation, as that provision requires some form of identifiable property made available for the scheme, whereas the UURBS comprised only contractual promises.