Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another [2022] UKSC 9

Two subsidiary companies claimed corporation tax deductions for accounting debits arising from share options granted to their employees by the parent company's employee benefit trust. HMRC contested the deductions. The Supreme Court held the debits were deductible trading expenses calculated in accordance with generally accepted accounting practice.

Facts

NCL Investments Ltd and Smith & Williamson Corporate Services Ltd (‘the Companies’) employed staff who were granted share options by the trustees of an employee benefit trust established by their ultimate parent company, Smith & Williamson Holdings Limited. Under International Financial Reporting Standard 2 (IFRS2), the Companies were required to recognise accounting debits in their profit and loss accounts representing the fair value of these options as employee remuneration expenses. The Companies claimed these debits as deductions when calculating their trading profits for corporation tax purposes.

The Share Option Arrangements

The Companies employed staff and made them available to other group companies for a fee. Options to acquire shares in the parent company were granted to employees as part of their remuneration package to incentivise them. The Companies paid a ‘Recharge’ to the parent company equal to the fair value of options granted to their employees.

Issues

The appeal raised four main issues:

1. Whether disregarding the debits was an ‘adjustment required or authorised by law’ within section 46(1) CTA 2009
2. Whether the deduction was disallowed by section 54(1)(a) CTA 2009 as expenses not wholly and exclusively for trade purposes
3. Whether the deduction was disallowed by section 53 CTA 2009 as items of a capital nature
4. Whether the deduction was disallowed by section 1290 CTA 2009 concerning employee benefit contributions

Judgment

The Supreme Court unanimously dismissed HMRC’s appeal, upholding the decisions of the First-tier Tribunal, Upper Tribunal and Court of Appeal.

Issue 1: Generally Accepted Accounting Practice

The Court reaffirmed the ‘golden rule’ that trading profits must be computed in accordance with generally accepted accounting principles. Lord Hamblen and Lady Rose stated:

“The golden rule is that the profits of a trading company must be computed in accordance with currently accepted accounting principles. They are the best guide as to a true and fair view of the profit or loss of the company in the relevant accounting period.”

The Court rejected HMRC’s reliance on Lowry v Consolidated African Selection Trust Ltd [1940] AC 648, finding it provided no support for a judge-made rule requiring adjustment to profits calculated in accordance with GAAP. Section 48 CTA 2009 made clear that debits brought into account are expenses whether or not amounts have actually been paid.

Issue 2: Expenses Incurred for Trade Purposes

The Court held that section 54’s requirement that expenses be ‘incurred’ did not import additional requirements beyond sections 46 and 48. The word ‘incurred’ was simply a participle taking its colour from ‘expenses’ and did not impose a freestanding requirement. The FTT’s finding that the debits were incurred wholly and exclusively for trade purposes was upheld.

Issue 3: Capital Nature

The Court agreed the debits were not capital in nature. They arose from employee remuneration, which has a revenue character. The debits arose periodically, were recurring costs connected with earning income, and reflected consumption of employees’ services – all characteristics of revenue expenditure.

Issue 4: Employee Benefit Contributions

The Court held that section 1290 did not apply. Once options were granted to employees, their purpose was spent. The options were actual emoluments, not ‘potential’ emoluments held under an employee benefit scheme. There was insufficient causal link between option grants and share acquisitions by the EBT trustee.

Implications

This decision confirms that accounting debits required by IFRS2 for share-based payments are deductible for corporation tax purposes. It reinforces the primacy of generally accepted accounting practice in computing trading profits under section 46 CTA 2009. The judgment provides important clarification on the scope of the employee benefit contribution rules in sections 1290-1297 CTA 2009, confirming they do not apply to the outright grant of share options to employees. The decision supports Parliament’s policy of encouraging employee share option schemes.

Verdict: Appeal dismissed. The accounting debits arising from the grant of share options to employees were deductible expenses for corporation tax purposes. HMRC’s arguments under sections 46, 53, 54 and 1290 of the Corporation Tax Act 2009 were all rejected.

Source: Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another [2022] UKSC 9