In Martyn Arthur and Denise Arthur v HMRC [2022] TC08539, the First Tier Tribunal (FTT) found that unexplained payments made to company shareholders should be subject to tax as self-employment income and not PAYE.

  • Mr Arthur (Mr A) carried on business via two companies which he controlled and partially owned.
    • Mrs Arthur (Mrs A) was a shareholder in both companies and had been a director, but resigned before the periods under consideration.
  • In May 2020, Mr A was convicted of cheating the public revenue over the period up to 2012-13.
  • Throughout 2014-15 and 2015-16, Mr and Mrs A received a number of unexplained payments into their bank accounts from the companies.
  • Both companies’ accounting records were described by HMRC as “incomplete, chaotic and substantially unreliable”.
  • Working from bank statements, HMRC compiled a list of payments Mr and Mrs A received from the companies, which HMRC regarded as being taxable income.
    • This excluded amounts considered to be employment earnings already reported under Real-Time Information and amounts which were obviously offsetting payments in the opposite direction.
    • Amounts equal to dividends reported on Mr and Mrs A’s tax returns were also excluded.
  • From this exercise, HMRC identified excess amounts received by Mr and Mrs A from the companies that had not been subject to tax.
    • HMRC argued these should be taxed as profits from self-employment, giving rise to additional tax of £48,068 and £11,991 for Mr A and Mrs A respectively.
    • Mr and Mrs A argued that all payments between them and the companies should be regarded as debits or credits to a running Loan account, with any net balance owing to the companies being subject to Section 455 tax.
  • Mr and Mrs A Appealed to the First Tier Tribunal (FTT).

The FTT found that Mr A regarded the payments he and Mrs A had received from the companies as being their own money, with no obligation to repay it. They were therefore taxable income and not a loan.

  • Mr A regarded the companies’ money as an asset that was freely available to him and Mrs A.
  • There was no evidence that a record was kept to ensure transactions were appropriately credited or debited to a loan account.
  • The director’s loan account balances in each company’s accounts bore no relationship to what Mr A stated to have been the running balance.
  • When Mr A applied for the Dissolution of the companies, there was no evidence of any attempt to ascertain and repay any outstanding balance.

The FTT took account of all payments between Mr and Mrs A and the companies, excluding the reimbursement of personal expenditure paid out by the companies, and compared this with the amounts included on their respective Self Assessment tax returns.

Using this approach, the FTT found that:

  • The 2014-15 assessment for Mr A should be cancelled; there were no excess payments. For 2015-16, Mr A’s self-employment income was £68,225, reduced from £84,482.
  • In 2014-15 Mrs A should have been taxed on self-employment income of £4,605, not £2,708.
  • Mrs A’s 2015-16 self-employment income was £17,258, not £17,457.

When considering penalties, the FTT concluded that:

  • Mr A’s mental health and alcohol dependency did not render his Inaccuracies careless rather than deliberate.
  • By 2015-16, Mrs A was aware of HMRC’s criminal investigation into Mr A’s affairs, but she continued to delegate responsibility for her returns to him, without checking them herself.
    • This amounted to deliberate behaviour on her part.
  • It could not be shown that, at the time of Mrs A’s 2014-15 tax return being submitted, she was aware of Mr A's criminal investigation. For that reason, her 2014-15 inaccuracies were careless and not deliberate.


Mr and Mrs A did not argue that there was any other basis on which HMRC should not treat the payments as self-employment income, such as them being additional dividends or employment income. 

Useful guides on this topic

Tax-efficient extraction of profits: toolkit (2022/23)
This toolkit is designed to help a company and its owner decide how company profits are to be extracted.

Penalties: Errors in Returns and Documents (subscriber version)
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

Directors' loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points. 

Close company loans toolkit (loans to participators)
This guide takes a detailed look at the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder). It also provides links to our guides for individuals on the making of loans to companies.

Dividends: Formalities for companies
This is a briefing note for discussion with directors about the formalities of declaring and paying dividends.

External link

Martyn Arthur and Denise Arthur v HMRC [2022] TC08539

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