Unfunded UURBS Promises Are Outside s.1290 CTA 2009: Deductibility Turns on Purpose under s.54 CTA 2009

Introduction

In AD Bly Groundworks and Civil Engineering Ltd & Anor v Revenue and Customs [2025] EWCA Civ 1443 (Court of Appeal, 14 November 2025), the Court dismissed appeals by A D Bly Groundworks and Civil Engineering Limited (“A D Bly”) and CHR Travel Limited (“CHR”) against a decision of the Upper Tribunal (“UT”), which had upheld the First-tier Tribunal’s (“FTT”) refusal of deductions for provisions recorded in respect of unfunded pension promises under Unfunded Unapproved Retirement Benefit Schemes (“UURBS”).

The case arises from arrangements marketed by Charterhouse (Accountants) Limited and notified under DOTAS. Each company executed contractual pension promises in deeds at or around year-end and made accounting provisions (measured under FRS 17) equal to 100% of pre-tax profits in one year and 80% in the other. HMRC amended the returns, denying deductions.

Two central issues were before the Court:

Whether the provisions were “expenses incurred wholly and exclusively for the purposes of the trade” under s.54 CTA 2009; and
Whether, in any event, s.1290 CTA 2009 (“employee benefit contributions”) deferred any deduction until pensions were paid.

The Court held against the taxpayers on the s.54 issue and, though not strictly necessary, rejected HMRC’s alternative s.1290 argument. The judgment is significant for both the rigorous application of purpose analysis to remuneration/pension provisioning and the clarification that unfunded pension promises do not engage s.1290 CTA 2009.

Summary of the Judgment

The Court affirmed the UT and FTT: the provisions were not deductible under s.54 CTA 2009. The FTT’s findings established that the primary purpose of entering into the UURBS agreements was to secure tax deductions without actual expenditure, with pension provision being “at best” incidental (FTT [95], [99]).
On the alternative issue, the Court held that s.1290 CTA 2009 did not apply to unfunded UURBS promises. “Employee benefit contributions” under s.1291 require property to be “held, or may be used, under an employee benefit scheme,” which connotes a pot of assets. An unfunded promise does not meet this criterion, and the UURBS here were not a “trust, scheme or other arrangement” akin to a trust (NCL SC guidance followed).
Section 246 FA 2004 was identified as the legislative mechanism for “non-contributory provision,” underscoring that s.1290 is not aimed at unfunded pension promises. Parliament did not create a universal matching code to align deductions with receipts (NCL SC considered).
Appeal dismissed; the UT made no error. Cobb LJ and Newey LJ agreed.

Detailed Analysis

Factual matrix and determinative findings

The FTT made critical findings of fact which framed the outcome:

Charterhouse brought UURBS to each company as a tax planning scheme before any genuine board-led analysis of remuneration/pension needs (FTT [90]–[92]).
There was no properly evidenced prior board initiative to review remuneration; the witness accounts bore striking, template-like similarities and were treated with caution (FTT [11]–[13], [20], [90]–[91]).
No pensions advice was taken; “remuneration consultants” (Synergis, FLB) expressly gave no pension, financial or tax advice, and their comparators were superficial (FTT [92]–[93]).
The quantum of provisions was set mechanically by reference to profits (100% or 80%), regardless of variability or employee-specific needs; unexplained discrepancies arose between consultant figures and final allocations (FTT [95]–[97]).
The arrangements lacked commerciality, exposing the companies to future liabilities potentially equal to multiple years’ profits, and the annuity proxy was illusory (FTT [98]).

These findings underpinned the conclusion that the primary purpose was tax saving, not trade advancement via remuneration or pensions (FTT [99]).

The “wholly and exclusively” test under s.54 CTA 2009

Established principles and their application

The parties agreed the useful summary in Scotts Atlantic Management Ltd [2015] UKUT 66 (TCC) at [50]–[55], re-stated by the Court (judgment [16], [28]–[31]):

Ascertain the taxpayer’s object at the time of incurring the expense (Mallalieu v Drummond; Vodafone Cellular v Shaw).
Distinguish object from effect; a merely incidental effect (including tax benefit) does not convert into a separate purpose.
Some results may be so inextricable as to be a purpose (MacKinlay); tribunals must take a robust, fact-sensitive approach.
Choice of means may be tax-influenced; that does not necessarily create duality of purpose—the focus remains the object of the expenditure.

Applying those principles, the Court emphasised that the FTT’s factual conclusions were “fatal” to the taxpayers’ case (judgment [32], [44]). This was not a case of choosing a tax-efficient vehicle to achieve a trading purpose; the FTT found that tax reduction was the real driver, with pension provision merely incidental (FTT [95], [99]; judgment [32]–[33], [39]).

Remuneration and pensions: distinguishing Hoey

The Court addressed Sir Launcelot Henderson’s observations in Hoey [2022] EWCA Civ 656 that reasonable remuneration is usually deductible and that fiscal motive does not generally denature trading transactions (judgment [36]–[38]). It affirmed that principle but stressed:

Remuneration/pension expenses are deductible because the object is to remunerate for services. When that object exists, a tax-efficient method does not, by itself, deny deductibility (Scotts Atlantic [55]).
Here, however, the FTT found the object was tax saving, not remuneration/pension provision. Thus, the strong prima facie inference in favour of deductibility for remuneration was displaced (judgment [39]).

Support from Marlborough DP Ltd

Marlborough DP Ltd [2025] EWCA Civ 796 is a close analogue. The company used a marketed arrangement to eliminate profits and to route funds tax-efficiently. The Court upheld the UT’s view that contributions could not be deductible on those facts; there was no trade-benefiting purpose, only tax avoidance (judgment [42]–[43], [122]). The present case tracks that logic: setting pension provisions at 80%/100% of profits to achieve a tax result signalled a non-trade purpose.

Section 1290 CTA 2009 does not apply to unfunded UURBS promises

“Employee benefit contributions” require property held under a scheme

The Court rejected HMRC’s alternative case that s.1290 applied. Under s.1291(1), an “employee benefit contribution” is made if, as a result of an act or omission, “property is held, or may be used, under an employee benefit scheme” or its value is increased (judgment [47]–[53]).

This language contemplates an identifiable “pot” of assets made available for the scheme’s purposes; it cannot be stretched to the employer’s general assets or to employees’ choses in action arising from the promise itself (judgment [52]–[53]).
Calling the creation of employee rights “property held under” the scheme is not a natural use of language and would empty “employee benefit contributions” of content (following NCL CA at [77]).

What counts as an “employee benefit scheme”

Section 1291(2) defines “employee benefit scheme” as a trust, scheme or other arrangement for employees. The Court, applying NCL SC, held that “other arrangement” must be akin to a trust or scheme (judgment [54]). Mere bilateral contractual promises, even taken together, are not such a scheme. There was no trust or pooled arrangement here; therefore s.1290 was inapt.

Legislative context: s.246 FA 2004 and the limits of s.1290

The reasoning was reinforced by s.246 FA 2004—expressly aimed at “non-contributory provision” for retirement benefits (judgment [59]–[63]):

Section 246 restricts deductions for non-contributory provision and defers them until benefits are paid, but it applies only to “employer-financed retirement benefits schemes” (EFRBS) as defined in ITEPA s.393A.
The UURBS here did not fall within EFRBS because they did not provide “relevant benefits” (ITEPA s.393B), given that any pensions paid would be taxable as pension income under Part 9 ITEPA and therefore excluded from “relevant benefits” (judgment [60]).
This structure shows Parliament reserved s.246 for non-contributory arrangements and did not deploy s.1290 for unfunded promises; nor did Parliament enact a universal matching rule mandating alignment of deductions with receipts (judgment [57], citing NCL SC at [73]).

NCL (Court of Appeal and Supreme Court): why it matters here

The Court found NCL’s analysis illuminating (judgment [57]):

NCL SC confirmed that “other arrangement” is akin to a trust or scheme (judgment [54], NCL SC [72]).
It distinguished emoluments within EBT option grants, and rejected the idea that ss.1290–1297 form an overarching timing-matching code (NCL SC [70], [73]).
Those interpretative points applied even though the tax position of the receipt (pension vs. option grant) differed (judgment [56]).

Precedents and authorities: how they shaped the outcome

Mallalieu v Drummond [1983] 2 AC 861: Purpose is the taxpayer’s object at the time; separate the object from incidental effects (cited via Scotts Atlantic and applied throughout).
Vodafone Cellular Ltd v Shaw [1997] STC 734: A private benefit does not deny deduction if merely incidental; the question is fact-sensitive. Central to distinguishing object from effect (judgment [28], [34], [36]).
MacKinlay v Arthur Young [1990] 2 AC 239: Some results are so inextricable that they count as purpose; remuneration “cannot easily fail” to be deductible when truly for services (judgment [28], [38]).
Scotts Atlantic [2015] UKUT 66 (TCC): The Court endorsed its principles summary at [50]–[55]; the FTT correctly focused on the object of the expense, not the scheme as such (judgment [16], [28]–[31]).
Hoey [2022] EWCA Civ 656: Recognised the usual deductibility of remuneration when it is the true object; but that principle could not assist where the FTT found the object was tax reduction (judgment [36]–[39]).
Marlborough DP Ltd [2025] EWCA Civ 796: A contemporary application—marketed schemes to eliminate profits signal a non-trade purpose; supported the result here (judgment [42]–[44]).
BlackRock [2024] EWCA Civ 330; JTI Acquisition [2024] EWCA Civ 652; Kwik-Fit [2024] EWCA Civ 434: Summaries of purpose analysis (though in the “unallowable purpose” context) confirm the robust, evidence-led approach (judgment [29]).
NCL Investments: CA [2020] and SC [2022]: Framed the construction of ss.1290–1291 and emphasised that “other arrangement” must be akin to a trust; rejected a universal matching code (judgment [20]–[21], [54]–[57]).
Ransom v Higgs (Kilmorie) [1974] 1 WLR 1594: The “son-in-law wholesaler” example shows choosing a particular counterparty does not add a non-trade purpose where the object is to acquire stock; distinguished here (judgment [40]–[41]).
Investec Asset Finance [2020] EWCA Civ 579: Observations on the mixed nature of fact and law in s.54 questions, noted in Marlborough; not determinative here (judgment [43]).

Complex Concepts Simplified

UURBS (Unfunded Unapproved Retirement Benefit Scheme)

Unfunded: No assets are set aside; the employer makes a contractual promise to pay pensions in the future.
Unapproved: Not a registered pension scheme under FA 2004; different tax rules apply.
Accounting: Under FRS 17, liabilities are recognised actuarially based on expected future cash flows; proper accounting does not automatically translate into tax deductibility.

Section 54 CTA 2009: “Wholly and exclusively”

Focuses on the taxpayer’s object when incurring the expense, not merely the consequences.
Duality of purpose makes expenditure non-deductible unless an identifiable separable part is solely for trade (s.54(2)).
Knowing an expense is tax-deductible, or choosing a tax-efficient method, does not by itself defeat deductibility—unless tax saving is a substantive purpose (not merely an incidental effect).

Section 1290 CTA 2009: “Employee benefit contributions”

Defers deductions until benefits are provided if a contribution is made to an “employee benefit scheme.”
Under s.1291(1), an “employee benefit contribution” requires that, as a result of an act/omission, property is held or may be used under such a scheme. This implies a pot of assets.
“Scheme” or “other arrangement” must be akin to a trust or pooled arrangement (NCL SC). Unfunded promises do not qualify.

Section 246 FA 2004: “Non-contributory provision”

Targets employer’s non-contributory expenses for retirement benefits and, broadly, defers deduction until payments are made, but only where an EFRBS (as defined by ITEPA s.393A) provides “relevant benefits.”
Where the benefit is taxable as pension income under Part 9 ITEPA, it is excluded from “relevant benefits” and the scheme is not an EFRBS; s.246 then does not apply.

DOTAS and evidential inferences

Marketing, DOTAS notifications, and engagement letters flagging “aggressive tax planning” may support inferences about purpose when triangulated with other evidence (timing, documentation, quantum set by profit percentages).

Practical Implications and Impact

For companies considering unfunded pension promises

Deductibility turns on purpose at the time of incurring the liability. If the object is tax reduction, a deduction will be denied under s.54.
Robust contemporaneous evidence is essential: independent pensions advice, genuine remuneration benchmarking, and board minutes explaining why the benefit levels meet commercial needs.
Avoid mechanical formulas tied to profit percentages without employee-specific rationale; unexplained departures from adviser reports invite adverse inferences.
Do not assume that s.1290 will defer deduction timing for unfunded promises; it will not apply unless there is property held under an employee benefit scheme akin to a trust.

For advisers

Template witness statements and boilerplate “aggressive tax planning” disclaimers may undermine credibility about commercial purpose.
Where the aim is legitimate pension provision, align process and documentation with that aim: proper pensions advice, detailed remuneration analyses, and clear, non-tax-centric rationale.

For HMRC

The decision confirms s.54 as the primary tool against tax-motivated unfunded pension provisioning where s.246 FA 2004 does not apply.
Section 1290 cannot be stretched to cover unfunded promises; cases must be built on purpose evidence and commerciality assessments.

Doctrinal impact

Reaffirms the object-versus-effect framework in s.54 cases and the high deference to FTT fact-finding absent Edwards v Bairstow error.
Clarifies the scope of s.1290 and the meaning of “employee benefit contributions” and “employee benefit scheme,” aligning with NCL SC.
Confirms Parliament has not enacted a universal “matching” regime aligning deductions and taxable receipts in all employment-benefits contexts.

Conclusion

AD Bly establishes two key propositions with practical force. First, even in the remuneration/pensions sphere—where deductibility is often presumed—the s.54 inquiry is fundamentally purposive and evidence-led. If the primary object is to obtain a deduction without true commercial rationale, the expense is not “wholly and exclusively” for the trade. Here, UURBS provisions determined mechanically by profit percentages, unsupported by genuine pensions or remuneration analysis, and promoted as tax planning, failed that test.

Second, the Court clarifies that s.1290 CTA 2009 is not a catch-all timing provision for unfunded promises. “Employee benefit contributions” require property held under a trust or akin arrangement; contractual promises alone are outside the statute. The relevant legislative architecture for non-contributory provision is s.246 FA 2004, but it does not apply where future pensions will be taxed as Part 9 ITEPA pension income. Parliament has not mandated universal deduction/receipt matching in this area.

The judgment, firmly grounded in established authorities (Mallalieu, Vodafone, MacKinlay) and recent guidance (Hoey, Marlborough, NCL), offers a clear roadmap: prove the commercial pensions purpose with contemporaneous substance, or expect s.54 to bar deductions; do not look to s.1290 to rescue unfunded pension promises. The decision will guide tribunals and practitioners across the considerable litigation cohort arising from similar DOTAS-marketed UURBS structures.

Key takeaways

Purpose is king: a tax-driven object defeats s.54, even for putative remuneration/pension expenses.
Evidence matters: independent pensions advice and granular remuneration analysis are critical to substantiating commercial purpose.
S.1290 CTA 2009 does not apply to unfunded promises; property must be held under a trust or akin arrangement.
S.246 FA 2004 addresses non-contributory provision but does not apply where benefits will be taxed under Part 9 ITEPA as pension income.
Expect increased scrutiny where provisions are pegged to profits (e.g., 80%/100%) without employee-focused rationale.