Tax-driven Pension Provisions and the ‘Wholly and Exclusively’ Test – What A D Bly v HMRC Means for UK Companies

In November 2025, the Court of Appeal in A D Bly Groundworks & Civil Engineering Ltd and CHR Travel Ltd v HMRC [2025] EWCA Civ 1443 confirmed that corporation tax deductions for certain unfunded pension provisions were not allowed. The arrangements were set up primarily to reduce tax rather than to provide genuine retirement benefits, not because pensions are inherently problematic. This decision matters for any company considering large tax-driven pension provisions, unfunded retirement promises, or promoter-led schemes. 

It clarifies how the “wholly and exclusively for the purposes of the trade” test operates in the context of pensions and how far a tax-motivated structure can go before it loses deductibility.

Our concern is practical: what did the court actually say, what went wrong in this case, and what does a compliant, defensible pension contribution look like for a UK business in 2026 and beyond?

Legal Background: UURBS, EFRBS and the ‘Wholly and Exclusively’ Test

Before looking at the facts of the case, it is important to understand the legal landscape the court was working within: the nature of unfunded schemes and the way the wholly and exclusively test works for pension costs.

Unfunded, unapproved retirement benefit schemes and EFRBS

Historically, many employers used “unapproved” pension arrangements to provide additional benefits outside the registered scheme regime. HMRC now groups these under the concept of employer-financed retirement benefit schemes (EFRBS). Within that category sit funded and unfunded schemes.

UURBS as a form of EFRBS

 HMRC’s internal manuals explain that, before 2006, unapproved schemes were broadly of two types: funded unapproved retirement benefit schemes (FURBS) and unfunded unapproved retirement benefit schemes (UURBS). After 2006 these sit under the EFRBS label. A UURBS is essentially a contractual promise by an employer to pay benefits in future, without building up a separate fund or trust to hold assets earmarked for those benefits. There is no registered scheme status and no automatic access to the tax privileges of registered pensions.

Tax treatment and risk profile of UURBS

Because UURBS are not registered schemes, they operate outside the mainstream relief rules. HMRC guidance and advisory literature note that, while employers can sometimes deduct actual benefits paid under such schemes, unfunded promises and accounting provisions do not enjoy the same straightforward treatment as contributions to a registered pension. That makes the purpose behind any provision absolutely central.

The ‘wholly and exclusively’ rule for pension contributions

For corporation tax, the starting point is that all expenditure must be incurred “wholly and exclusively” for the purposes of the trade to be deductible (s.54 CTA 2009). HMRC’s Business Income Manual confirms that this rule applies to pension contributions just as it does to other trading expenses.

HMRC’s general approach to pension contributions

HMRC recognises that pension contributions are normally part of the cost of employing people. Commentary from Slaughter and May (drawing on BIM46030) notes that the condition will be met in most cases, because properly structured pension payments operate as a normal staff cost.

When deductibility is at risk

However, HMRC’s own guidance and professional commentary stress that they may disallow contributions when a clear non-trade purpose exists — for example, when tax-avoidance aims dictate the level, timing or structure of a contribution rather than commercial remuneration policy. Barnett Waddingham’s analysis of HMRC guidance highlights that employer contributions must be “wholly and exclusively” for business purposes and that HMRC’s updated statements on this point caused concern precisely because of their focus on underlying purpose.

The A D Bly decision is essentially an application of these principles to an aggressively tax-driven unfunded scheme.

How the A D Bly and CHR Travel Arrangements Worked

The Court of Appeal accepted the factual findings of the First-tier Tribunal (FTT) and the Upper Tribunal (UT). Those findings are important because they explain why the scheme failed, not just what the scheme was.

Adoption of an unfunded scheme promoted under DOTAS

Both A D Bly Groundworks & Civil Engineering Ltd and CHR Travel Ltd were profitable trading companies. They did not historically operate complex pension arrangements. The evidence, summarised in professional coverage and tribunal materials, shows that the UURBS was introduced to them by a third-party promoter and was disclosable under DOTAS, indicating HMRC considered it a tax avoidance arrangement.

The companies entered into the unfunded scheme and recorded very large provisions in their accounts. In broad terms, the scheme worked as follows:

• The companies promised to pay certain key employees and directors pension-type benefits at some point in the future.
  
• There was no separate pension fund or trust to hold assets to meet those obligations; this was a purely contractual promise.
  
• The size of each year’s provision was calculated by a remuneration consultant, not by a pensions actuary, and was set as a proportion of pre-tax profits — typically 80% to 100% of estimated annual profits.
  
• The companies then claimed corporation tax deductions for these provisions, amounting in total to around £5 million across both entities.

Crucially, no pension benefits were actually paid, and no cash left the businesses in relation to these promises during the relevant periods.

HMRC’s response and closure notices

HMRC opened enquiries and issued closure notices disallowing the deductions. The reasons were two-fold:

Failure of the “wholly and exclusively” test

HMRC argued that the primary purpose of the provisions was to reduce corporation tax, not to provide commercially justified pensions. In their view, the linkage to profits, absence of actuarial input, and the timing of the scheme’s introduction all pointed to tax avoidance as the central object of the expenditure.

Argument based on s.1290 CTA 2009

HMRC also advanced an alternative argument that the deductions were excluded by s.1290 CTA 2009, which restricts relief for certain “employee benefit contributions.” This point became important later, because the tribunals and Court of Appeal held that s.1290 did not actually apply to unfunded promises such as these.

The companies appealed the closure notices to the FTT.

Tribunal Findings: FTT and UT Focus on Purpose and Commerciality

First-tier Tribunal: primary purpose was tax reduction

The FTT examined the factual matrix in detail. It considered contemporaneous documents, emails and board minutes, as well as witness evidence from those involved.

From that evidence, the FTT drew a series of key conclusions:

Lack of pre-existing pension strategy

The companies had not previously engaged in structured pension planning or discussed a need to improve retirement benefits. The idea arose only after the promoter, Charterhouse, presented the UURBS arrangement.

Profit-driven contribution calculations

The size of the provisions was not determined by analysis of the employees’ likely retirement needs, nor by actuarial valuation. Instead, it was calculated as a high percentage of expected pre-tax profits for the year. The FTT interpreted this as a strong indicator that the scheme was designed to sweep profits into a tax-deductible provision.

Absence of genuine funding or benefit delivery

No funds were set aside, no trust was established, and no benefits were paid. The only tangible outcome was a reduction in taxable profits supported by an accounting provision.

On that basis, the FTT decided that the main purpose of the provisions was to reduce corporation tax. Any pension-related objective was, in its words, at best “incidental”. As a result, the expenditure failed the wholly and exclusively test and the deductions were denied.

Upper Tribunal: no error of law in the FTT’s approach

The companies appealed to the Upper Tribunal (UT), arguing that the FTT had misapplied the case law, in particular Scotts Atlantic, and that tax advantage should not be treated as a separate “purpose” in this way. The UT rejected those arguments.

The UT held that:

• The FTT had correctly identified and applied the legal principles governing “wholly and exclusively” expenditure.
• FTT was entitled to weigh factors such as the failure to obtain proper pension advice and the profit-based calculation of contributions.
• Factual findings — especially the tax-driven motivation — were open to the FTT on the evidence.

The Upper Tribunal therefore upheld HMRC’s position and confirmed that the provisions were not deductible.

The Court of Appeal’s Decision: Purpose, s.1290 CTA 2009, and the Role of Tax Avoidance

The companies then obtained permission to appeal to the Court of Appeal, advancing two central grounds:

1. That the FTT and UT had incorrectly applied the principles in Scotts Atlantic, or
2. That Scotts Atlantic itself had been wrongly decided and was inconsistent with later authority such as Hoey v HMRC.

The Court of Appeal dismissed the appeal. Its reasoning can be grouped into several key themes.

1. The tribunals applied the Scotts Atlantic principles correctly

The Court reaffirmed that the Scotts Atlantic line of authority, which sets out how to assess purpose in trading expenditure, remains good law. It emphasised that:

• The FTT did not simply “copy” Scotts Atlantic; it used that case to structure its analysis of purpose, which is exactly what tribunals are supposed to do.
• There was no inappropriate “fact matching”. The FTT did not assume that because Scotts Atlantic involved tax avoidance, this case must also; it made its own factual findings first.

In other words, the Court found that the FTT and UT had applied the right legal tests and had not committed any errors of law that would justify interference.

2. The dominant purpose was tax saving, not pension provision

The Court of Appeal placed heavy weight on the FTT’s factual findings and refused to disturb them. It accepted that:

• The UURBS was adopted primarily as a tax-saving scheme.
• There was no real evidence of prior concern about employee pensions or remuneration strategy before the promoter’s involvement.
• The use of profit percentages to calculate the provisions pointed clearly towards a tax-planning objective.

On that basis, the Court agreed that pension provision was only an incidental by-product and not the main object of the expenditure. That is fatal under the wholly and exclusively test, because once a substantial non-trade purpose is identified, the deduction must fail.

3. Tax avoidance can defeat deductibility even for “remuneration” expenses

A critical part of the taxpayers’ argument was that pension and remuneration costs should only lose deductibility if they are “excessive”. They suggested that, as long as an amount can be described as remuneration, the existence of a tax advantage should not in itself prevent a deduction.

The Court rejected that argument. It held that:

• There is no principle in the case law that ring-fences remuneration or pension contributions from the normal purpose-based analysis.
• While tax efficiency is not objectionable, a transaction whose main object is to secure a tax advantage is not incurred “wholly and exclusively” for trade purposes, even if it has the form of a salary or pension provision.

This confirms that labelling something “pension” or “remuneration” does not protect it if the underlying purpose is artificial tax reduction.

4. Unfunded promises fall outside s.1290 CTA 2009

Although not strictly necessary to the outcome (given the finding on purpose), the Court of Appeal also addressed HMRC’s alternative argument under s.1290 CTA 2009, which restricts relief for certain employee benefit contributions.

Drawing heavily on reasoning already accepted by the Supreme Court in NCL Investments, the Court held that:

• s.1290 and s.1291 CTA 2009 concern employee benefit contributions involving identifiable property, usually held in a trust or similar arrangement for employees.
• A bare contractual promise to pay a pension in future, without a fund, trust, or separate assets, is not an “employee benefit contribution” for these purposes.
• Unfunded UURBS promises therefore sit outside s.1290. Any question of deductibility is instead governed directly by the general “wholly and exclusively” rule in s.54 CTA 2009.
  

This part of the judgement is important because it closes off a potential argument that s.1290, rather than the general trading rules, should dictate the treatment of unfunded pension provisions.

Practical Lessons for UK Businesses

The case is not just of academic interest. It gives very concrete signals about how HMRC and the courts will approach pension-related tax planning.

1. Purpose and evidence will be scrutinised

Companies must assume that HMRC will examine not only what they have done but why they did it. In practice:

• Employers need contemporaneous evidence showing that any pension or remuneration provision was introduced for coherent commercial reasons – such as staff retention, succession planning, or aligning director rewards with long-term performance.
  
• If the only documented discussions revolve around tax savings or profit extraction, it will be very difficult to argue that the expense was incurred wholly and exclusively for the trade.
  

The A D Bly decision shows that tribunals will read board minutes, emails and advice letters closely and draw inferences about motive from them.

2. Profit-based formulas are a warning sign

Basing a pension provision on a simple percentage of estimated profits, without any link to employee circumstances, is now especially dangerous.

• A profit-linked formula strongly suggests that the real goal is to strip profits out of the corporation tax base.
  
• Without separate actuarial or remuneration analysis, it is difficult to demonstrate that the resulting amount is a reasonable reflection of retirement needs.
  

In A D Bly, this approach was one of the decisive factors leading the courts to treat the arrangements as tax-driven.

3. Unfunded promises are structurally weak from a tax perspective

The decision does not say that unfunded schemes are always ineffective. It does, however, underline why they are inherently vulnerable:

• There is no cash outflow that can readily be characterised as a “cost of employing staff”.
• There is no trust or separate fund, so the statutory rules that deal with contributions to EFRBS and employee benefit trusts do not apply neatly.
• The only real impact is on the accounting profit and the tax computation, which heightens the perception of artificiality if the scheme is promoted as tax planning.

Case commentary following the Court of Appeal judgment has emphasised that deductibility for unfunded UURBS provisions will always come down to purpose and commercial substance under s.54 CTA 2009, not technical arguments under s.1290.

4. Genuine pension contributions remain safe – if properly structured

The case is not an attack on mainstream pension saving. HMRC’s own manuals, as well as independent law firm guidance, make clear that contributions to registered schemes are usually deductible as part of normal staff costs, provided they are reasonable and genuinely linked to employment.

To preserve deductibility:

• Contributions should be made to registered pension schemes or properly structured, funded EFRBS arrangements.
  
• The level of contribution should reflect salary, responsibilities, and long-term reward policy, rather than being reverse-engineered to match profits.
  
• The employer should be able to point to a consistent remuneration policy and professional advice supporting the structure.

How Apex Accountants Can Help

Given the complexity and risk highlighted by A D Bly, many companies will want to review their pension and remuneration structures. Apex Accountants can assist in several specific ways.

Reviewing existing pension and remuneration arrangements

We can undertake a structured review of your current pension promises and related accounting entries. This includes:

• Identifying any unfunded retirement promises, EFRBS or historic UURBS that might expose the business to challenge.
• Analysing whether contributions and provisions align with HMRC guidance and case law on the wholly and exclusively test.
• Flagging high-risk patterns, such as profit-linked provision formulas, absence of advice, or schemes introduced solely on promoter recommendation.
  

Designing compliant pension contribution strategies

Where existing structures are risky or inefficient, we can help design more robust alternatives:

• Moving from unfunded promises to funded, registered schemes or more conventional employer contributions that fit within the normal tax relief framework.
• Creating contribution policies that reflect commercial objectives, such as retention of key personnel, succession plans for owner-managers, or gradual de-risking of founder involvement.
• Working alongside pension advisers and solicitors to ensure that legal, tax and regulatory aspects are aligned.

Supporting documentation and HMRC-facing evidence

One of the strongest messages from A D Bly is the importance of evidence. We can:

• Help you document remuneration and pension decisions through appropriate board minutes, internal policies and rationale papers.
• Prepare clear explanations linking pension contributions to business strategy, rather than tax motivation.
• Assist in responding to HMRC enquiries, using both the technical analysis and the factual context to defend legitimate deductions.

Integrating pensions into broader corporation tax planning

Pensions are only one part of the tax and reward picture. We also:

• Review how pension contributions interact with dividends, bonuses and other profit extraction routes for shareholders and directors.
• Model the tax and cash-flow impact of different remuneration mixes, so that you can plan over several years rather than reacting in a single year.
• Help ensure that any tax planning remains within the line of accepted practice, avoiding high-risk arrangements that are likely to attract HMRC challenge.

Conclusion

The Court of Appeal’s decision in A D Bly and CHR Travel underscores a simple but powerful point: pension-related deductions are only safe when they are grounded in genuine commercial purpose and real employee benefit. When provisions are engineered to mirror profits, introduced via promoters, and unsupported by actuarial or remuneration analysis, HMRC and the courts will treat them as tax-driven and refuse relief.

For UK businesses, this means revisiting unfunded promises, documenting decision-making more carefully, and ensuring that pension contributions, however tax-efficient, can be defended as part of a coherent employment strategy rather than an accounting device.

Apex Accountants can help you carry out that review, adjust the course where needed, and design structures that support both staff and shareholders without falling foul of the “wholly and exclusively” test.

FAQs on Tax-driven Pension Provisions

1. Are unfunded UURBS provisions still ever deductible for corporation tax?

In principle, it is not impossible for an unfunded promise to be deductible, but A D Bly shows that the bar is high. Where there is no funded scheme, no trust, and no actual payment, the only basis for deduction is that the accounting provision genuinely reflects a commercial liability incurred for the purposes of the trade. If the facts show that the arrangement was mainly created to reduce tax, as they did in A D Bly, the deduction will fail.

2. Does the decision affect normal employer contributions to registered pension schemes?

No, not in the sense of removing their basic deductibility. HMRC’s Business Income Manual still treats contributions to registered schemes as typically allowable, because they form part of staff costs. However, they must still satisfy the wholly and exclusively test. Extremely large or irregular contributions, introduced for obvious tax-planning reasons, could still be challenged, but orthodox contributions in line with salary and role remain low risk.

3. How does HMRC decide whether a pension contribution is “wholly and exclusively” for the trade?

HMRC and the courts look at the object of the expenditure. They examine surrounding documents, advice, and how the contribution amount was set. If those materials show that the main goal was staff retention, succession planning, or aligning incentives, the contribution is likely to pass the test. If they show that the main goal was to eliminate taxable profits, it will not. This object-based analysis is exactly what the FTT, UT and Court of Appeal applied in A D Bly.

4. Why did s.1290 CTA 2009 not rescue or block the deduction in A D Bly?

Section 1290 CTA 2009 restricts relief for certain “employee benefit contributions”, but the Court of Appeal, echoing the Supreme Court in NCL Investments, held that it only applies where there is identifiable property, typically held in trust or under a scheme structure. Because the UURBS in A D Bly involved only unfunded promises and no separate fund, s.1290 did not apply. Deductibility therefore turned entirely on the general trading rules and the wholly and exclusively test.

5. What practical steps should an employer take before introducing any pension-related tax planning?

Before implementing any significant pension-related strategy, employers should:

• Obtain independent tax and pensions advice, not rely solely on promotional material.
  
• Ensure the proposed contributions or provisions can be justified by a written remuneration or people strategy.
  
• Avoid automatic linkage of contributions to year-end profits.
  
• Document discussions in board minutes and internal papers in a way that clearly sets out the commercial rationale.