Out-Law / Your Daily Need-To-Know

Supreme Court decision highlights complexity of the UK’s tax system

Out-Law Analysis | 15 Aug 2022 | 10:10 am | 4 min. read

A recent UK Supreme Court decision is a reminder of some of the issues that need to be considered when calculating UK corporation tax profits whilst also highlighting the complexity of the UK’s tax system.

Recent political discourse has focused on whether the UK corporation tax rate, due to rise from 19% to 25% in April 2023, should be reviewed. However, there is little discussion of the underlying tax base, which can have as much, or greater, impact on the overall level of UK corporate taxation. This could be because the computation of the corporate tax base in the UK is complicated and requires a nuanced understanding of different factors – a point highlighted by the Supreme Court earlier this year.

The Supreme Court’s decision in favour of NCL Investments serves as a reminder of some of the issues that need to be considered when calculating taxable profits for UK corporation tax purposes. The discussion in that case arose in respect of accounting debits recognised within a UK resident company (the taxpayer) in respect of share options provided to employees of that company by its parent. The taxpayer’s business was to provide employees to other members of its group. A detailed review of the facts of the case or the relevant accounting standard is beyond the scope of this article, but it is important to note that the accounting standards in this case (International Financial Reporting Standard (IRFS) 2) required the taxpayer to recognise the debit separately to the actual recharge payments made to its parent company (in other words, the debit did not relate to the actual payment of any expenses) and that the opposite entry to the debit was a credit to equity to reflect a notional capital contribution by the taxpayer's parent in granting the option.

The main issue arising out of this was whether the IRFS 2 debit should be included within the tax base calculation and therefore, ultimately, reduce the corporation tax payable by the taxpayer.

Complicated tax base

HM Revenue & Customs (HMRC) attempted to challenge the inclusion of the debits within the computation of taxable profits by reference to several principles involved in calculating such profits.

Jamie Robson

Jamie Robson

Senior Associate

The UK tax system is complex and simply changing rates does nothing to improve this compliance burden on business

The starting point is that the relevant profit is calculated in accordance with generally accepted accounting profits, subject to any adjustment required or authorised by law. It was not argued that the debit should not have been included based on IRFS 2. However, HMRC did argue that the debit should be disallowed as an adjustment required by law. Typically, such disallowances would be mandated by statute and legislation has subsequently been passed clearly denying a corporation tax deduction in these circumstances. With no such statute in force at the time, HMRC relied on what is referred to as judge-made law – common law – to find an adjustment. In this case, the common law was not sufficiently clear to result in such an adjustment to the accounting profit but that the question was asked shows the uncertainty that can arise in this area and that taxpayers generally need to have regard to more than just the tax legislation.

HMRC's next contention was that the debit was not incurred wholly and exclusively for the purposes of the taxpayer's trade. An accounting debit would not be allowed for the purposes of the tax base calculation unless it was so incurred wholly and exclusively for the purpose of the trade. The taxpayer's trade was the provision of employees to group companies, and the debit was found to be incurred for that purpose, but HMRC considered that "incurred" required the taxpayer to actually have suffered an expense. For support in this respect, HMRC referred to how the relevant legislation had been drafted in a prior iteration which referred to items "laid out or expended" rather than "incurred". The previous iteration had existed until the 2009 Corporation Tax Act was introduced, and this Act was intended as a tax consolidation and re-write exercise rather than to change tax law.

The Supreme Court’s decision was broadly that reference should be made to the words in the existing statute and, consequently, HMRC did not succeed on this point. However, a note of caution was sounded by the Supreme Court that this point was likely to be discussed in the future. This means that, going forward, some uncertainty should be expected on this issue of interpretation and, again, taxpayers should have regard to more than just the tax legislation currently in force.

The court debate moved on to whether the debit should be disallowed as a capital item. There has long been a distinction between revenue items and capital items with only the former being deductible in determining profits subject to corporation tax. In this case, despite the equivalent credit to equity representing a capital contribution, the Supreme Court found "compelling" reasons for the debit being revenue in nature given the taxpayer's trade. There is a long history of case law in relation to whether expenses are capital or revenue in nature and the distinction is often not clear cut, causing uncertainty, in particular where the amounts expended might be significant and the difference in tax treatment stark.

Finally, HMRC went on to consider further statutory provisions that they contended could have disallowed the deduction. These were specific to the case in hand and the Supreme Court found none to apply but all required careful consideration.


This case can be considered from several different angles. Many practitioners are particularly interested in the treatment of the tax-rewrite legislation and how that would apply in other contexts. There is also the substantive outcome in respect of the tax deduction available on the grant of the options, something denied by statute from March 2013 with deductions typically available only on the exercise of options under specific statutory regimes. However, ultimately the case is interesting simply for the fact it made it to the Supreme Court at all and for highlighting how difficult it is to calculate the tax base including in respect of something so commonplace as the grant of share options.

Truly, the UK tax system is complex and simply changing rates does nothing to improve this compliance burden on business. Here is hoping that one of these Conservative leadership contenders starts tacking such complexity in the tax base as well as the headline rates. They just might get better headlines for it.

A version of this article was first published in the International Law Office (ILO) corporate tax newsletter.

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