Emoluments or not?

The appellant business established an employee benefit trust with itself as settlor and an Isle of Man company as trustee. The beneficiaries included directors officers and employees of the settlor. Bonuses were paid into the trust against which the employees could draw loans. In 2000 payments stopped as the company was taken over. Two years later the appellant replaced the employee benefit trust with a family benefit trust. This was similar to the first trust except that directors officers and employees could not be beneficiaries; only certain members of their families could be. The appellant deducted the payments to the trusts from its profits.

HMRC disallowed the claim on the ground that the payments were non-deductible:

• the payments to the employee benefit trust were potential emoluments within FA 1989 s 43(11)(a);
• the family benefit trust was effectively an employee benefit scheme...