Boyer Allan Investment Services Ltd v. Revenue & Customs: Defining 'Generally Prevailing Practice' in Tax Assessments

Introduction

In the landmark case of Boyer Allan Investment Services Ltd v. Revenue & Customs ([2013] STI 66), the First-tier Tribunal (Tax) delved into the complexities surrounding the deductibility of payments made by companies to Employee Benefit Trusts (EBTs). The core issue revolved around whether the contributions made by Boyer Allan to its EBT were deductible under Schedule D, Case 1 of the Finance Act 1989 (FA 1989), specifically considering the application of Section 43(11) and whether the company's tax return adhered to the practice generally prevailing at the time of submission.

The parties involved were Boyer Allan Investment Services Limited (the Appellant) and the Commissioners for Her Majesty's Revenue and Customs (HMRC) (the Respondents). Legal representatives included Kevin Prosser QC and Jonathan Bremner for Boyer Allan, and Christopher Tidmarsh QC and James Rivett for HMRC.

Summary of the Judgment

The Tribunal dismissed Boyer Allan's appeal against HMRC's discovery assessments for the accounting periods ending 30 April 2000 and 30 April 2001. The assessments challenged the deductibility of substantial payments made to the EBT, deeming them as potential emoluments under Section 43(11) of FA 1989. The crux of the Tribunal's decision lay in determining whether Boyer Allan's tax returns were made on the basis of a practice generally prevailing at the time. The Tribunal concluded that no such practice existed that would prevent HMRC from making discovery assessments, thereby upholding HMRC's deductions.

Analysis

Precedents Cited

The judgment extensively referenced prior cases and legal provisions to frame its analysis:

• Macdonald v Dextra Accessories Ltd ([2004] STC 339 (CA); [2005] STC 1111 (HL)): This case established that contributions to EBTs could be considered potential emoluments if trustees had discretion to distribute funds as emoluments to employees.
• Household Estate Agents Ltd ([2008] STC 2045): This High Court case clarified that for a practice to be generally prevailing, it must be long-established, clear, and accepted by both HMRC and taxpayers' advisers.
• Rafferty v Revenue and Customs Commissioners [2005] STC (SCD) 484: Emphasized that a settled practice requires long-term acceptance and should be clearly identifiable.
• Rose Smith & Co Ltd v IRC (1933) 17 TC 586 (Ch): Highlighted that unless there is clear evidence of a commonly accepted practice, HMRC can challenge tax positions based on errors in returns.
• Langham v Veltema [2002] STC 1557: Underlined the importance of clarity and finality in self-assessment tax schemes.

Legal Reasoning

The Tribunal's legal reasoning focused on interpreting "practice generally prevailing" as outlined in FA 1998, Schedule 18, paragraph 45. The key points included:

• Clarity and Consistency: For a practice to prevail, it must be clear, consistent, and identifiable by both HMRC and taxpayers' advisers.
• Mutual Acceptance: The practice must be mutually accepted and adopted by both the tax authorities and the taxpayer community.
• Long-Established Practice: The practice should be relatively well-established and not a new or emerging one.
• Documented Guidance: Internal HMRC guidance, such as the Inspector's Manual and Regional Technical Updates (RTUs), were scrutinized to assess whether they reflected a settled practice.

The Tribunal concluded that HMRC did not have a clear, settled practice regarding the application of Section 43 to EBT contributions prior to the Dextra decision. The internal guidance was deemed too vague and inconclusive to constitute a generally prevailing practice.

Impact

This judgment has significant implications for future tax assessments involving EBTs. It clarifies that for HMRC to rely on a "generally prevailing practice" to invalidate taxpayer deductions, there must be clear evidence of such a practice being well-established and mutually accepted. Taxpayers and their advisers must ensure that their practices are in line with explicitly stated HMRC guidelines to withstand potential challenges.

Additionally, the decision underscores the importance of clarity in HMRC's internal guidance and the necessity for taxpayers to base their tax positions on well-documented and widely accepted practices.

Complex Concepts Simplified

Employee Benefit Trusts (EBTs)

An EBT is a trust established by an employer to provide benefits to employees. These benefits can include cash bonuses, shares, or other incentives designed to reward and retain employees.

Section 43(11) of the Finance Act 1989

This section deals with "potential emoluments." If a payment made by a company to a trust could reasonably be expected to become an emolument (a benefit or compensation) to an employee, it may not be deductible for tax purposes unless paid within nine months of the accounting period's end.

Generally Prevailing Practice

This refers to a method or approach that is widely accepted and consistently applied within a particular context—in this case, tax assessments involving EBTs. For HMRC to rely on such a practice, it must be clear, long-established, and mutually recognized by both the tax authorities and the taxpayer community.

Discovery Assessments

These are assessments made by HMRC outside the normal tax filing process, usually based on new information indicating that a taxpayer has underreported tax. They can increase the tax liability and include interest and penalties.

Conclusion