In the case of Mawsley Machinery Ltd -v- Robinson, which was heard by a Special Commissioner, a decision was made in favour of the Inland Revenue that the contributions made to the trust were of a capital nature and thus were not expended for the purposes of the company's trade.
Because of the Revenue's success in arguing that the payments should not be deductible from the profits of the trade the second point to be decided, namely how the payment should be properly relieved was never determined. If this point was to be determined then it would have been necessary to consider the tax implications of SSAP 2, FRS 5 and UITF 13. As stated, however, these points never came to be considered.
It is clear that in the Mawsley case the main reason why the contributions into the trust were not deductible was because it was proved that the primary purpose of establishing the trust was so that the trustees could buy the majority of the managing director's shares on his retirement from the business and not to benefit the employees.
Of course, employees who were beneficiaries under the trust would benefit but the primary purpose was clearly to benefit the vendor.
Because of this the Revenue were successful in their argument that the payment into the trust was essentially capital and any benefits accruing the employees were in effect secondary.
As payments were essentially to fund the managing director`s retirement they really couldn't be agreed to be for the purpose of the company's trade.
It is absolutely essential, in the light of this case, that in establishing any employee trusts any purpose and this includes future purchase of shares perhaps funded by the proceeds of a life assurance policy that is held to an employee benefit trust, at all points especially as documented in the agreement the primary purpose must be and be seen to be to benefit the employees.
The above mentioned accountancy issues connected with SSAP 2, FRS 5 and UITF 13 still await determination. The essence of these, it is believed, is that once a payment is agreed to be for a Revenue purpose and is thus deductible normal accountancy principles should be taken into account in determining when the deduction should be given for tax purposes.
The basic principle of UITF 13 is that in the case of an employee benefit trust no deduction should be given until the shares (or on a wider reading, assets) are distributed for the benefit of the employees. The rationale is that until that time the assets in effect remain, for accountancy purposes at least, on the company's books.
There is, currently, much talk round the use of employee benefit trusts for all sorts of reasons but it is absolutely essential that those involved in their construction or advising on them take full account of the Mawsley decision and the accountancy issues discussed above.