Commissioners for HMRC v Marlborough DP Limited
[2024] UKUT 103 (TCC)
The Commissioners for HMRC v Marlborough DP Limited
16 April 2024
[2024] UKUT 98 (TCC)
Upper Tribunal
A dentist's company used a sneaky tax plan involving trusts. A court said the plan was wrong, the payments were taxable as income, and the company couldn't deduct those payments. The court also clarified the rules around when such payments are linked to employment.
Key Facts
- •Dr. Matthew Thomas, a dentist, conducted his practice through Marlborough DP Limited (MDPL).
- •MDPL used a tax avoidance scheme involving trust arrangements to obtain corporation tax deductions and avoid income tax on payments to Dr. Thomas.
- •The scheme was deemed ineffective, raising questions about the correct tax treatment of payments.
- •The First-tier Tribunal (FTT) allowed MDPL's appeal regarding PAYE and NICs, classifying the payments as distributions.
- •HMRC appealed to the Upper Tribunal (UT) challenging the FTT's decision.
- •The UT partially allowed the appeal.
Legal Principles
Payments are taxable as employment income under section 62 ITEPA 2003 if they are 'earnings from an employment'.
Income Tax (Earnings and Pensions) Act 2003 (ITEPA)
Part 7A ITEPA 2003 contains anti-avoidance provisions to tax payments made by third parties to employees 'in connection with' employment.
ITEPA 2003, Part 7A
Sections 383 and 384 of ITTOIA 2005 impose a charge to income tax on dividends and distributions of a UK resident company.
Income Tax (Trading and Other Income) Act 2005 (ITTOIA)
Corporation tax deductions are prohibited for expenses not incurred 'wholly and exclusively' for the purposes of the trade.
Income and Corporation Taxes Act 1988, section 74(1); Corporation Tax Act 2009, section 54(1)
In determining whether payments are 'from' employment, the key is the employer's purpose in making the payment, considering substance over form.
Case law (RFC 2012 plc v Advocate General for Scotland, HMRC v PA Holdings Ltd, Kuehne)
An Edwards v Bairstow challenge requires identifying a challenged finding, showing its significance, identifying relevant evidence, and demonstrating the tribunal's inability to make the finding based on that evidence.
Case law (Edwards v Bairstow, Georgiou v Customs and Excise Commissioners, Ingenious Games LLP v HMRC)
The phrase 'in connection with' requires considering the context and policy of the provision; connections can be direct or indirect, and a strong or close nexus may be required.
Case law (Barclays Bank plc v HMRC, London Luton Hotel BPRA Property Fund LLP v HMRC)
Outcomes
HMRC's appeal on general earnings (Ground 2) was dismissed.
The FTT correctly applied the legal principles, and its factual findings were not overturned due to lack of error of law.
HMRC's appeal on Part 7A ITEPA (Ground 1) was allowed.
The UT found that the loans had a sufficiently strong connection to Dr. Thomas's directorship, meeting the 'in connection with' employment test.
HMRC's appeal on the Deductibility Issue (Ground 3) was allowed.
The UT agreed with Mr. Woodman's dissenting view that the contributions were not deductible because tax avoidance was a primary purpose.
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