CheckLists.Tax (beta)
F3. Providing employment income
INCOME TAX: TRADING DEDUCTION
Wholly and exclusively
- Employee remuneration normally deductible, even if tax considered
General position: deductible
- Employee remuneration is ordinarily deductible because the fundamental reason is to remunerate the employee for their services (A D Bly, §39).
- Same applies to pensions (A D Bly, §39).
- This is a "strong prima facie inference" and HMRC have the evidential burden of displacing the inference (A D Bly, §38, 39; Hoey §198).
Remunerating in a way that avoids tax does not usually lead to additional purpose
- "If [remunerating for services] is the object, the mere fact that it is sought to be achieved in a way that avoids tax will not prevent a deduction being obtained. That may either be on the basis that it is not sufficient that the particular means chosen to achieve the object is driven by tax considerations (see Scotts Atlantic at [55]), or (as was the case in Hoey) because tax avoidance is not found to be an object or purpose of the taxpayers at all." (A D Bly, §39).
- "the mere fact that a transaction is entered into with a fiscal motive does not, in the normal way, denature it or mean that it is infected by a duality of purpose which makes expenditure on it non-deductible" (Hoey, §194).
- "The fact that the Employers may also have had the ulterior motive of helping Mr Hoey to engage in a tax avoidance scheme cannot, in our view, amount to a separate object of the Employers in making the payments." (Hoey, §198).
No deduction where tax avoidance, rather than remunerating services, is the real aim
- In A D Bly, the finding was that the "real driver" was a tax saving and providing remuneration/pension was "at most an incidental aim" (§39).
Legislation:
Cases:
Hoey v. HMRC [2022] EWCA Civ 656;
A D Bly Groundworks and Civil Engineering Limited v. HMRC [2025] EWCA Civ 1443, Falk LJ;
HMRC manuals:
Commentary:
See also:
Revenue or capital
- Bringing into existence an enduring advantage
- If the payment brings into existence an enduring advantage for the benefit of the trade it is likely to be capital.
- Set up costs of an employee pension scheme were capital in Helsby Cables.
- Removal of a single undesirable director was revenue in BW Noble Ltd.
Legislation:
Cases:
British Insulated and Helsby Cables, Limited v Atherton (1925) 10 TC 155 (HoL);
BW Noble Ltd v. Mitchell (1927) 11 TC 372 (CoA);
HMRC manuals:
Commentary:
See also:
- Lump sum to remove ongoing revenue expense
- Capitalising a pension entitlement and paying it one lump sum was deductible in Hancock.
Legislation:
Cases: Hancock v. General Reversionary and Investment Co [1919] 1 KB 25;
HMRC manuals:
Commentary:
See also:
Examples
- Removal of onerous employee - deductible (even if purpose includes avoiding negative publicity)
- BW Noble Ltd v. Mitchell - T might have been justified in dismissing director, but to avoid publicity injurious to T's reputation, entered into negotiations for the director to retire. Director claimed compensation and compromise was reached in satisfaction of all claims.
- Held: the payment was (i) for the benefit of the trade; (ii) wholly and exclusively so; (iii) revenue rather than capital.
- "It seems to me that the directors had to handle a situation of both delicacy and gravity, and, their bona fides not being questioned, it is clear that they took a course which they were justified in taking and made a payment in the interests of the carrying on of their trade." (at 420).
- Noted by analogy in Williams's Executors.
Legislation:
Cases:
BW Noble Ltd v. Mitchell (1927) 11 TC 372 (CoA);
CIR v. Williams's Executors (1944) 26 TC 23 (HoL);
HMRC manuals:
Commentary:
See also:
- Payment to set up an employee pension scheme: not deductible (capital)
-Helsby Cables - payments to establish a pension scheme for current and future employees was wholly and exclusively for the purposes of the trade, but not deductible due to being capital expenditure.
- "The object and effect of the payment of this large sum was to enable the Company to establish the Pension Fund and to offer to all its existing and future employees a sure provision for their old age, and so to obtain for the Company the substantial and lasting advantage of being in a position throughout its business life to secure and retain the services of a contented and efficient staff." (at 193).
- On going contributions to the scheme would be deductible as not capital
Legislation:
Cases:
British Insulated and Helsby Cables, Limited v Atherton (1925) 10 TC 155 (HoL);
HMRC manuals:
Commentary:
See also:
Other rules re deduction
- Contributions to employee benefit schemes (deduction linked to qualifying benefits being provided)
Deduction linked to provision of qualifying benefits
- No deduction allowed in respect of employee benefit contributions for a period save insofar as (CTA 2009, s.1290):
(a) qualifying benefits or qualifying expenses are paid out of the contribution within 9 months from the end of the period; or
(b) the making of the contribution is itself the provision of qualifying benefits and the contributions are made within 9 months of the end of the period.
- If deduction not initially allowed, deduction allowed in subsequent period where condition satisfied (s.1290(3)).
- Not an overarching rule that seeks to align deduction and taxation in all cases (A D Bly, §57).
Employee benefit contributions
- Means a situation where, as a result of any act or omission (s.1291):
- property is held, or may be used, under an employee benefit scheme; or
- there is an increase in the total value of such property (including a reduction of liabilities).
- There must be some identifiable property that is made available for the purposes of the scheme.
- Does not include unspecified present or future assets of employer that could be used to fulfil a contractual commitment (A D Bly, §52).
- The contractual right of an employee to a pension is not property subject to an arrangement, it is the arrangement (A D Bly, §53).
- Employee benefit scheme: a trust, scheme or arrangement for the benefit of present/former employees of the employer (s.1291(2)).
- Other arrangement must be something akin to a trust or scheme (A D Bly, §54).
Legislation: CTA 2009, s.1290, s.1291;
Cases: A D Bly Groundworks and Civil Engineering Limited v. HMRC [2025] EWCA Civ 1443, Falk LJ;
HMRC manuals:
Commentary:
See also: