Court of Appeal provides guidance on the “wholly and exclusively” rule

In AD Bly Groundworks and Civil Engineering Limited & Anor v The Commissioners for HMRC [2025] EWCA Civ 1443 the Court of Appeal has, in a commendably clear judgment, provided important guidance on the “wholly and exclusively” rule.

Background  

AD Bly is a provider of civil engineering and groundwork contracting services, with 7 directors and around 220 employees. It was owned, through a holding company, by all but one of its directors. It subsequently transferred its business to an LLP, of which it became a partner.

On the advice of accountants, pursuant to a scheme which had been notified to HMRC under the Disclosure of Tax Avoidance Schemes (“DOTAS”) legislation, AD Bly entered into an Unfunded Unapproved Retirement Benefit Scheme (“UURBS”), under which unfunded promises were made to provide the directors and other key employees with future pensions.  The pensions were calculated by reference to a proportion of the company’s pre-tax profits, with the aggregate amount being 100% of those profits in one of the relevant accounting periods and 80% of those profits in the other.

The taxpayer made provision for the resulting liabilities and calculated their profits for corporation tax on the same basis.

HMRC’s main argument was that the amounts in question were liabilities incurred for the purposes of a tax avoidance scheme, rather than expenses incurred wholly and exclusively for the purposes of the trade, such that deductions should be denied under section 54 Corporation Tax Act 2009. Alternatively, HMRC’s view was that the deductions sought were in respect of “employee benefit contributions” and should be disallowed under section 1290 Corporation Tax Act 2009. The First-tier Tribunal (“FTT”) decided that s54 applied to disallow the deductions, which was upheld by the Upper Tribunal on appeal.

Decision

The Court of Appeal reviewed the case law on the “wholly and exclusively” test, before concluding that the FTT’s conclusion on the facts were fatal to the case, because the FTT had found that the UURBS was adopted as a tax saving scheme and that the provision of pensions was ‘at best’ an incidental aim. 

The Court noted that UURBS can be used as a legitimate method of making pension provision and that, “Amounts paid to remunerate employees will in the ordinary course be deductible… But the fundamental reason why expenses incurred to remunerate employees are deductible is that the object is indeed to remunerate them for their services. If that is the object, the mere fact that it is sought to be achieved in a way that avoids tax will not prevent a deduction being obtained.” However the Court concluded that the real driver here was tax saving, as opposed to pension provision.

The Court noted that the arrangements were simple and lacked the outward appearance of artificiality. But the Court also noted factors such as a lack of genuine concern about the level of remuneration and pension provision (and a lack of specialist advice on those matters) and the use of a percentage of profits, irrespective of what those profits were. Crucially, the Court concluded that, “this was not simply a choice of a tax-efficient method of making pension provision…”.

As regards HMRC’s alternative argument, HMRC concluded that section 1290 Corporation Tax Act 2009 did not apply.

Conclusion

The outcome of this case is, on the facts, unsurprising. This case involves an aggressive scheme, which had been notified to HMRC under DOTAS. However it is nevertheless an important, and commendably clear, judgment on the key question of when a tax-saving motive will cause the “wholly and exclusively” test to be failed.

Additionally, it illustrates the importance of fact-finding at FTT stage. The taxpayer sought permission to appeal factual findings on four grounds under Edwards v Bairstow, which was rejected.

Elizabeth Sherwood and Nicola Hine