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Supreme Court

Fourth time unlucky for HMRC at Supreme Court


What were HMRC lawyers thinking when they decided to fight Smith & Williamson’s employee benefit trust case all the way to the Supreme Court?

19th Apr 2022
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The Supreme Court’s judgment on the Smith & Williamson (EBT) case (2022 UKSC 9) offers disturbing hints of illogical, if not insane, thinking within HMRC.

There is a saying that insanity is doing the same thing over and over and expecting different results. This is the repeated pattern of HMRC’s appeals in this case:

  • May 2017: First-tier tribunal (FTT) hearing, HMRC lost.
  • February 2019: HMRC appealed to the Upper Tribunal (UT), and lost.
  • March 2020: HMRC appealed to the Court of Appeal (CA) and failed, for the same reasons as it had in the previous hearings.
  • February 2022: HMRC appealed to the Supreme Court, and failed again. 

Background facts

Smith & Williamson Holdings Ltd (SWHL) is the holding company of a professional services group, which also included NCL Investments Ltd (NCL) and Smith & Williamson Corporate Services Ltd (SWCS). Those companies employed staff whose services were supplied to other group companies in exchange for a fee (computed on a cost-plus basis).

The group operated a number of employee share schemes to encourage its employees to hold shares in SWHL and an EBT was established in Jersey to facilitate this. 

The options formed part of the employees’ remuneration package, but significant numbers of options granted were never exercised. NCL and SWCS’s objective in paying the recharge was to benefit their trade by incentivising their employees. Those companies passed the cost of the recharge on to the other group companies with a mark-up by including it in the fee.

Correct accounts

The parties in the case agreed that the group’s accounts complied with all applicable accounting standards, principally IFRS2, which required the companies to: 

  • “Recognise an expense in their income statements equal to the fair value of the options… granted”; and
  • Make a corresponding credit in the balance sheet, treated as a capital contribution received from the parent company.

Both entries were required whether or not the companies had to pay any amount such as the recharge.

For accounting periods ending on or after 20 March 2013 corporation tax relief is specifically disallowed for situations where options were never exercised (section 1038A of CTA 2009). This provision was not in force in the three years ended 30 April 2012, which are the subject of this case, so one might imagine that the companies were well within their rights to claim the tax relief.

However, HMRC imagined differently. It disallowed the deduction, and the companies appealed.

HMRC’s case

HMRC raised the following arguments.

Adjustment required or authorised by law – HMRC attempted to suggest that a 1940 case (Lowry) constituted authority for the court itself to disallow deductions made in connection with the issue of shares, in the absence of any specific statutory rule. The Supreme Court disagreed. 

It is by no means certain that Lowry, which had been heard before the primacy of generally accepted accounting practice, had been enshrined in statute, provided any principle applicable to the present situation. 

HMRC also argued that only accounting practices that are “directed at showing a true and fair picture of profit” fall within CTA 2009, s 46, and that practices directed to some other end (such as a company’s capital health) should be disregarded. This argument was roundly rejected. The concept of treating the P&L and the balance sheet as “separate and severable” enjoys no more support in law than it does in accounting.

Disallowed by CTA 2009, s 54(1)(a)? – HMRC argued that the expense mandated by IFRS2 was neither “incurred” nor “for the purposes of a trade”, and therefore fell within the realm of section 54.

The justices dealt swiftly with these arguments. “Incurred” is simply “a participle that takes its colour from the word ‘expenses’ and does not intend to impose a free-standing requirement to be applied to accounting debits”.

As to the suggestion that the expenses were not “for the purposes of a trade”, that was easily dismissed. The FTT’s finding, that the purpose was to incentivise employees and to earn profits from their activities, was a ruling of fact and HMRC had not offered any grounds to challenge it in law.

Disallowed by CTA 2009 s53? – HMRC argued that the debit in the P&L is nothing more than a necessary reflection of the credit on the balance sheet arising from the issue of shares, and should therefore be regarded as of a capital nature, and was disallowed by section 53

The court preferred to look at the motivation for the entire transaction: “the IFRS2 debits arose because the… employees were remunerated with share options and the remuneration of employees has a revenue, not a capital, nature”. “What matters is the character of the debits, not that of any corresponding credit”.

Disallowed/deferred by CTA 2009 s1290?Section 1290 relates to “employee benefit contributions”, and is designed to ensure that CT relief for such contributions is aligned with the time when employees receive the actual benefit of them. 

HMRC argued that relevant “property” as mentioned in section 1291 consisted of either the shares that employees received on exercising their options or the options themselves. In the first situation, the shares were being held by the EBT as part of an employee benefit scheme subject to s1291; in the second, the options were held by the employees under an arrangement which constituted an employee benefit scheme.

The court disagreed. Once an option had been granted, it was not “held” under any scheme: it was the absolute property of the employee, and represented a right exercisable against the EBT with no future reference to the preferences of the employer.

As for the shares, the EBT “acquired the shares in order to fulfil its contract – it was not conferring some benefit on the employees in addition to the benefit already conferred on them by their employer”.


The justices of the Supreme Court unanimously agreed with three successive judgments that HMRC’s arguments were simply wrong.

This case has little practical effect, since the 2013 changes mean that its circumstances cannot recur. Its primary outcome is to highlight the bloody-minded determination that HMRC so often appears to exhibit when pushing a weak case in pursuit of a sizeable chunk of tax.

Replies (19)

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By Paul Crowley
19th Apr 2022 11:25

Surely if HMRC's opinion was correct then the change in the law was not needed.
The cost in persuing this case would have been better spent in persuing real liabilities.

Thanks (2)
By Hugo Fair
19th Apr 2022 12:31

The precise circumstances of the case may not be able to re-occur, but HMRC's attitude and behaviour will ... and do with alarming frequency.

It's like watching a 3-year old being told they can't have what they've (randomly) decided they want and being given the opportunity to justify their demand ...
'cos (sob) .. 'cos (gulp) .. 'cos (tears) ...... it's just not fair (screamed)!

Thanks (14)
By Justin Bryant
19th Apr 2022 12:56

I wouldn't mind so much if it was not our taxpayer's money being spent on these rubbish, hopeless arguments. HMRC are basically totally unaccountable, which is why this sort of crazy nonsense is allowed to happen in the 1st place. See also:

Thanks (6)
By Beef curtains
19th Apr 2022 13:00

Insane?.................have you only just realised this? (Typing while I continue my 32 minute [so far] wait to get an answer to their buggering up an RTI system with their update).

Thanks (0)
By G Webber CTA
20th Apr 2022 09:45

Sadly this is not the first nor the last time that HMRC will pursue a hopeless cause.

I used to think that SOLS was a haven of common sense and a place where the zealots of HMRC, often pursuing a personal vendetta driven by envy, would be cut off at the pass and would not be allowed to waste taxpayer money.

I now know that to be untrue and SOLS is either unable or unwilling to advise an HMRC that following a particular argument will be hopeless in terms of legal analysis and hopeless in terms of abiding with the LSS.

Why is HMRC not subject to oversight in these situations?

It's a constant frustration that HMRC is unaccountable to any party that actually matters.

Thanks (1)
By meadowsaw227
20th Apr 2022 09:46

Or could it just be that "clever" accountants use a bit of tax legislation in a way it was never intended to be used and therefore HMRC had to close it down and try to recoup some of lost revenue ? .

Thanks (1)
Replying to meadowsaw227:
By More unearned luck
20th Apr 2022 11:22

No. There is no such thing as a free lunch. GAAP recognises this fact by requiring the cost of the supposedly free-lunch (shares actually) to be debited to the P&L. As tax profits are measured by GAAP absent any special rule to the contrary (which there wasn't at the time) S&W didn't need to be clever but merely doughty in the face of HMRC's persistent attempts to deny relief.

The blocking legislation is another part of the scandal. There is a cost of giving employees shares or allowing them to subscribe for new shares at a discount: the value of the existing shares are diluted. It's wrong for the tax system to no longer recognise this, especially as often the value is subjected to PAYE & NIC as if it was a cash payment.

Thanks (2)
By listerramjet
20th Apr 2022 09:48

About time HMRC was limited to applying the law as it is, rather than making it up as they go!

Thanks (2)
By Mr J Andrews
20th Apr 2022 09:53

HMRC should realise that the days of General Commissioners meetings are over.

Thanks (0)
By rememberscarborough
20th Apr 2022 10:20

Simple fact is that EBTs are and have always been a way of avoiding tax more specifically NI. Yet, during the pandemic many of those who didn't pay NI were first in line for medical and financial assistance for them and their families. Our tax system stinks to high heaven and cases like this just highlight it regardless of HMRC's debatable decision making process.

Thanks (0)
By Rgab1947
20th Apr 2022 10:24

It would appear to be a case of barristers needing some fee income and having a sucker for a client with deep pockets.

Thanks (1)
By bobsto12
20th Apr 2022 10:29

Ifrs2 p/l charges are not a real cost to the business might have something going for it as an argument i would have thought. There is no cost to the company of issuing share options the cost is borne by existing shareholders having their returns diluted.

Thanks (0)
Replying to bobsto12:
By richard.snape
20th Apr 2022 21:10

The shareholders are the company.

Thanks (0)
By Springfield
20th Apr 2022 11:01

I have no knowledge or interest in the underlying case. However, the answer to the question as to why HMRC pursued this to the end is a simple one. Why wouldn't they?

Costs don't matter to them - as a public body they can't go bust as such, so have no financial imperative to consider. Unlike any other commercial business or private individual there is no downside to them losing. No financial responsibility, no reputational issue. Nothing.

The only way to stop this behaviour would be to adopt a judicial principle which said that anyone - utility company, debt collector, HMRC etc - who tried wrongly to claim a sum of money off another party should automatically have to pay the other party double the amount of the claim.

Sadly, with HMRC acting as the government's debt collector - it ain't gonna happen.

Thanks (1)
By tedbuck
20th Apr 2022 11:41

I don't know about HMRC acting as the Government's debt collector - If they were acting on my behalf I'd sack them. What about the Covid mess and they reckon they (the Government's debt collectors) might recover a quarter.
When they use outside debt collectors and don't even bother to update them you have to think their systems are not fit for purpose.
But then I expect most of them are sat at home with a laptop on the kitchen table trying hard to read the morning paper when work doesn't intervene. One wonders whether GDPR is being observed. I wouldn't want to think of clients' data being available to the spouse and children as they eat their lunch. Or hadn't they thought of that?
It was a long time ago that one expected and found competence at HMRC (actually it was the Inland Revenue then) - suddenly they got computers and thought everything was sorted and done for them. What a joke!
Their belief in the rubbish they spout is mind-blowing. They expect computers to be the panacea to all tax woes whereas the reverse is the case. GIGO we used to say in the old days and it hasn't changed if you put rubbish in you get rubbish out. Look at all the plcs who have suffered disaster because of computer error. Carillion being one of them and close to HMG as a major supplier but there are many others. I expect HMRC is full of graduates from university, working from home, with little or no knowledge of the tax system and probably 'trained' online as well. So no surprises that they are so inept.

Thanks (6)
Replying to tedbuck:
By Latinaid
20th Apr 2022 20:38

tedbuck wrote:

Look at all the plcs who have suffered disaster because of computer error. Carillion being one of them and close to HMG as a major supplier but there are many others.

Also the Horizon scandal, where Royal Mail chose to believe that thousands of sub-postmasters throughout the country simultaneously decide to steal, rather than investigating the far more obvious explanation of computer error.

Thanks (4)
By More unearned luck
20th Apr 2022 11:51

"Its primary outcome is to highlight the bloody-minded determination that HMRC so often appears to exhibit when pushing a weak case in pursuit of a sizeable chunk of tax."

As it is Aweb's view (and that of most of the respondents above) that HMRC have pursued this litigation contrary to HMRC's LSS, I suggest that Aweb puts that point to HMRC's press office and reports back to us their response.

Thanks (0)
Ray McCann
By Ray McCann
20th Apr 2022 16:18

That’s the point, the only thinking HMRC does in cases such as this is think it’s right. It pursues issues from a narrow perspective driven by the LSS, “we think we are right, therefore we are right, we think!”

Thanks (0)
By Justin Bryant
21st Apr 2022 10:19

Then again, the SC can be also blamed to a degree by encouraging HMRC with biased decisions in their favour like this (with the same HMRC tax barristers I note):

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