The Court of Appeal has now heard the case of AD Bly Groundworks and Civil Engineering Ltd v HMRC [2025] EWCA Civ 1443 which was concerned about whether a provision for future pension payments was deductible for corporation tax purposes.
It is generally accepted that the costs of remuneration and benefits of employees are nearly always deductible from the company’s profits under CTA 2009 s 54 as being incurred wholly and exclusively for the purposes of the trade. However, this is not necessarily always the case.
The Upper Tribunal did not need to dwell on the usual issue relating to deductible expenditure, which is the problem of duality of purpose. It disallowed the deduction on the grounds that the primary purpose of the company was to reduce their liability to corporation tax, and not to benefit the employees. The Court of Appeal agreed, and the company’s appeal was dismissed.
However, there is a puzzling aspect to this case which was not addressed in the UT or the CA and I would very respectfully suggest that the right conclusion may have been reached for the wrong reasons.
To recap, the issue was whether a provision in the company’s accounts in respect of liabilities to make future pension payments was deductible for corporation tax purposes under s 54, that is to say the expense was ‘incurred wholly and exclusively for the purposes of the trade’.
However, it was a provision – which is a figure that the accountants considered the company would probably have to pay sometime in the future. A provision is not (as seems to have been assumed) synonymous with the incurring of an expense.
Section 54 requires the expense to be ‘incurred’, and the UT confirmed that no expense had been incurred. It said:
‘We think that it would have been more accurate for the FTT to have referred to the incurring of actual expenditure in the accounting period in which the deduction arose for tax purposes, since in AD Bly’s case it did incur some of the expenditure albeit in subsequent accounting periods.’
In other words, the company had not incurred the expenditure in the accounting period for which it made the claim. It is perhaps relevant to point out that if the company had incurred an expense and it remained unpaid, that would not have given rise to a provision – it would have been a creditor.
So, all the arguments in this case about whether the expenditure was wholly and exclusively for the purposes of the trade must surely have been irrelevant. The amount claimed by the company was not incurred in that accounting period, so obviously it could not be deductible. The expenditure was actually incurred in a later accounting period – and it is that later accounting period where the issues of wholly and exclusively would be relevant.
The Court of Appeal has now heard the case of AD Bly Groundworks and Civil Engineering Ltd v HMRC [2025] EWCA Civ 1443 which was concerned about whether a provision for future pension payments was deductible for corporation tax purposes.
It is generally accepted that the costs of remuneration and benefits of employees are nearly always deductible from the company’s profits under CTA 2009 s 54 as being incurred wholly and exclusively for the purposes of the trade. However, this is not necessarily always the case.
The Upper Tribunal did not need to dwell on the usual issue relating to deductible expenditure, which is the problem of duality of purpose. It disallowed the deduction on the grounds that the primary purpose of the company was to reduce their liability to corporation tax, and not to benefit the employees. The Court of Appeal agreed, and the company’s appeal was dismissed.
However, there is a puzzling aspect to this case which was not addressed in the UT or the CA and I would very respectfully suggest that the right conclusion may have been reached for the wrong reasons.
To recap, the issue was whether a provision in the company’s accounts in respect of liabilities to make future pension payments was deductible for corporation tax purposes under s 54, that is to say the expense was ‘incurred wholly and exclusively for the purposes of the trade’.
However, it was a provision – which is a figure that the accountants considered the company would probably have to pay sometime in the future. A provision is not (as seems to have been assumed) synonymous with the incurring of an expense.
Section 54 requires the expense to be ‘incurred’, and the UT confirmed that no expense had been incurred. It said:
‘We think that it would have been more accurate for the FTT to have referred to the incurring of actual expenditure in the accounting period in which the deduction arose for tax purposes, since in AD Bly’s case it did incur some of the expenditure albeit in subsequent accounting periods.’
In other words, the company had not incurred the expenditure in the accounting period for which it made the claim. It is perhaps relevant to point out that if the company had incurred an expense and it remained unpaid, that would not have given rise to a provision – it would have been a creditor.
So, all the arguments in this case about whether the expenditure was wholly and exclusively for the purposes of the trade must surely have been irrelevant. The amount claimed by the company was not incurred in that accounting period, so obviously it could not be deductible. The expenditure was actually incurred in a later accounting period – and it is that later accounting period where the issues of wholly and exclusively would be relevant.
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