Neutral Citation: [2025] UKFTT 659 (TC)
Case Number: TC09542
FIRST-TIER TRIBUNAL
TAX CHAMBER
Taylor House, London
Appeal reference: TC/2023/08062
PROCEDURE - application for the Tribunal to determine as a preliminary issue whether the 'wholly and exclusively' test of deductibility set out in section 34 of the Income Tax (Trading and Other Income) Act 2005 should be construed in accordance with European Union law - application refused
Heard on: 10 October 2024
Judgment date: 5 June 2025
Between
B K DHALIWAL
Appellant
and
THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS
Respondents
Before
TRIBUNAL JUDGE KIM SUKUL
Representation:
For the Appellant: Setu Kamal LLM (Tax) of counsel, instructed by Moor Green & Co
For the Respondents: Colm Kelly of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs
DECISION
introduction
appellant's application
(1) Contributions made to trusts during the assessed years should be deductible because the 'wholly and exclusively' rule in section 34 ITTOIA should be interpreted in line with EU laws, specifically Articles 49, 56, and 63 of the Treaty on the Functioning of the European Union ('TFEU'), and the contributions should therefore be considered deductible for trade purposes.
(2) The 'wholly and exclusively' test infringes on the Right to Establish, Freedom to Provide Services, and Free Movement of Capital under the TFEU, and this compatibility issue should be addressed as a preliminary point to save costs and resources.
(3) Retained EU Laws (Reform and Revocation) Act 2023 impacts the recognition of EU laws in domestic law. Previous cases show the UK judiciary's stance on EU law post-Brexit and the principle of 'direct effect' requires courts to apply EU laws. EU law issues can therefore be raised in this Tribunal.
(4) An infringement includes anything that dissuades the exercise of a freedom. Various cases illustrate the broad interpretation of 'dissuasion' and even minor restrictions can constitute an infringement. Administrative burdens and various national measures can be considered infringements. Discrimination is not necessary for an infringement; measures hindering the exercise of freedoms can also be infringements.
(5) Justification for restrictions must be proportionate and necessary. The 'wholly and exclusively' test is disproportionate and not indispensable for achieving its objectives. An expense should be deductible to the extent it is made for trade purposes, regardless of other purposes. Legal fees incurred to ensure contributions are deductible should also be considered deductible.
"The combined experience of the lawyers and the judge in this courtroom is probably 400 years plus. If we extract from that one simple, but vital, principle which we have all learned it is the right to know the case against oneself and the corresponding right to respond to it."
"65 Accordingly, the answer to the first question must be that the principle of effective judicial protection of an individual's rights under Community law must be interpreted as meaning that it does not require the national legal order of a Member State to provide for a free-standing action for an examination of whether national provisions are compatible with Article 49 EC, provided that other effective legal remedies, which are no less favourable than those governing similar domestic actions, make it possible for such a question of compatibility to be determined as a preliminary issue, which is a matter for the national court to establish."
Grounds of appeal
General Grounds of Appeal
(1) Review Process: The review officer accepted facts without comprehensive analysis, indicating the review process was inadequate.
(2) Delays: Significant delays in issuing Discovery Assessments and Closure Notices are unacceptable, making it difficult for the Tribunal to make an equitable decision.
Specific Grounds of Appeal
Discovery Assessments (Years ended 5 April 2012, 2013, 2014)
(3) Incorrect Decision: HMRC's decision on tax liability is incorrect; deductions claimed are appropriate.
(4) Remuneration Trust Contributions: Contributions were in line with generally accepted accounting practice ('GAAP') and incurred wholly for the Appellant's trade.
(5) Disclosure and Time Limits: Proper disclosures were made, invalidating the discovery provisions due to time limits.
(6) No Careless or Deliberate Conduct: There was no incomplete disclosure or negligent behaviour by the Appellant.
Closure Notices (Years ended 5 April 2015, 2016, 2017, 2018)
(7) Incorrect Decision: HMRC's decision on tax liability is incorrect; deductions claimed are appropriate.
(8) Remuneration Trust Contributions: Contributions were in line with GAAP and incurred wholly for the Appellant's trade.
(9) Commercial Incentives Fund: Contributions were made to a commercial incentives fund, not disguised remuneration.
(10) Trust Purpose: The trust was established for the benefit of the business, not for personal gain.
(11) Review Officer's Misunderstanding: The review officer misunderstood the purpose of the trust and the nature of the contributions.
(12) Long-term Nature of Trust: The trust is long-term, and the lack of immediate benefits does not invalidate the contributions.
HMRC's response
discussion
"(1) The matter should be approached on the basis that the power to deal with matters separately at a preliminary hearing should be exercised with caution and used sparingly.
(2) The power should only be exercised where there was a 'succinct, knockout point' which would dispose of the case or an aspect of the case. In this context an aspect of the case would normally mean a separate issue rather than a point which was a step in the analysis in arriving at a conclusion on a single issue. In addition, if there was a risk that determination of the preliminary issue might prove to be irrelevant then the point was unlikely to be a 'knockout' one.
(3) An aspect of the requirement that the point must be a succinct one is that it must be capable of being decided after a relatively short hearing (as compared to the rest of the case) and without significant delay. This was unlikely if (a) the issue could not be entirely divorced from the evidence and submissions relevant to the rest of the case, or (b) if a substantial body of evidence was required to be considered. This explained why preliminary questions would usually be points of law. The tribunal should be particularly cautious on matters of mixed fact and law.
(4) Regard should be had to whether there was any risk that determination of the preliminary issue could hinder the tribunal in arriving at a just result at a subsequent hearing of the remainder of the case.
(5) Account should be taken of any potential for overall delay, making allowance for the possibility of a separate appeal on the preliminary issue.
(6) The possibility that determination of the preliminary issue might result in there being no need for a further hearing should be considered.
(7) Consideration should be given to whether determination of the preliminary issue would significantly cut down the cost and time required for pre-trial preparation or for the trial itself, or whether it could in fact increase costs overall.
(8) The tribunal should at all times have in mind the overall objective of the tribunal rules to enable the tribunal to deal with cases fairly and justly."
conclusion
Right to apply for permission to appeal
KIM SUKUL
TRIBUNAL JUDGE
Release date: 05th JUNE 2025