When Earnings from Employment are not an Allowable CT Deduction
Written by
Dan Smitten
1 min read
Updated - November 3, 2025
We have now seen a number of settlement proposals from HMRC in relation to Employee Benefit Trusts, “EBTs”, where the deduction for Corporation Tax has been disallowed.
This is in line with the decision made in the case of Wired Orthodontics Ltd & Ors v HMRC [2023] UKFTT 17 (TC), which concerned a PAYE assessment on funds routed through an EBT.
Briefly, the company entered a scheme where it agreed to contribute £300,000 to an EBT, by purchasing gold bullion for its two directors and shareholders. The directors agreed to pay an equivalent sum to the EBT in return for the gold. The gold was sold immediately, with the proceeds credited to the Directors Loan Account, to be drawn down by the directors tax free whilst securing a Corporation Tax deduction for the company.
Whilst taxing the payments made via the EBT as employment income is consistent with various other tribunal decisions on similar structures, the decision to disallow the Corporation Tax deduction goes a step further and adds a substantial charge to already significant tax liabilities.
Broadly speaking, in most scenarios a company is entitled to a Corporation Tax deduction where paying employment income to their employees. However, the deduction still needs to meet the criteria of wholly and exclusively for the purpose of the trade.
In the decision of Wired Orthodontics, because the payments were linked to an avoidance scheme, it was held they were not made wholly and exclusively for the purposes of the company’s trade and were therefore not allowable.
After the FTT found in HMRC’s favour, the company were refused permission to appeal to the Upper Tribunal. Whilst this directly impacts other settlement discussions for users of the same scheme, what isn’t clear is whether HMRC will seek to apply the principle of the above decision onto wider cases.
