HMRC appealed a decision by the First Tier Tribunal (FTT) relating to a tax avoidance scheme. They won on two of three grounds with the result being that the loans made are taxable as earnings but not deductible for Corporation Tax.

In HMRC v Marlborough DP Limited [2024] UKUT 98 (TCC), the Upper Tribunal (UT) considered an FTT decision that found loans funded by a Remuneration Trust (RT) were not earnings or Disguised remuneration and allowed that appeal. HMRC were permitted to appeal the FTT decision.

Dr Matthew Thomas is a dentist and worked through his wholly-owned company, Marlborough DP Limited (MDPL). He entered into a Tax avoidance loan scheme which has separately been shown to be ineffective. He appealed to the FTT in 2020 against assessments by HMRC for PAYE and National Insurance Contributions (NICs) in respect of payments made through certain trust arrangements.  

Before the UT finalised its decision it directed both parties to several authorities which were not cited during the hearing but which the UT felt would be helpful.

Further submissions were made by the parties in January 2024. After seeing the draft decision, the appellant contended there had been a procedural unfairness entitling them to make further submissions. The UT held a further hearing in March 2024 and separately decided there was no procedural unfairness so there was no right to make further submissions ahead of their decision.

 Ground 2 of the appeal held that the FTT had erred in law in finding the payments to the RT were not earnings under s.62:

  • The UT felt it was more logical to consider this issue first as the FTT had done.
  • In effect, HMRC made an Edwards v Bairstow challenge regarding some of the FTT's findings of fact. Dr Thomas had said the payments to the RT by the MDPL did not relate to his shareholding. Therefore, it was perverse for the FTT to find the payments were distributions. The UT did not agree with the basis of this challenge.
  • The key issue for the appeal was the source of the payments by MDPL. Were they the result of Dr Thomas' office as a director of MDPL or because of his shareholding in MDPL?
  • Dr Thomas stated the payments by MPDL were intended to empty the company of profit. There was no evidence the amount paid out on a sporadic basis was an amount intended to represent a market-value salary to Dr Thomas. 
  •  The UT dismissed this ground of appeal.

Ground 1 of the appeal, the tests for Part 7A and s.62 ITEPA 2003, are not the same and Part 7A was therefore not properly considered:

  • The UT accepted the FTT could have been clearer, but they did not say the two tests were the same. For s.62 the test is 'from' employment. For the anti-avoidance legislation of Part 7A at s.554A(1)(c), the test is 'connected with A's employment' which is intended to be much broader. 
  • But the FTT did err in law in saying the test was that the employment had to be part of the reason for the reward as that is not the statutory test. The legislation requires a test of connection not of causation.
  • The UT concluded the loans from the RT to Dr Thomas were connected with his employment/directorship under s.554A(1)(c) and allowed HMRC's appeal on this ground.
  • There was also an examination of anti-forestalling provisions under Part 7A. Concerning this, the UT accepted HMRC's submission and agreed the amount determined for 2012-13 could be increased.

 Ground 3 of the appeal, the deductibility issue:

  • The UT concluded the FTT had dismissed this ground for appeal in the original case because it had decided the relevant payments were distributions.
  • Because the UT had allowed HMRC's appeal under Ground 1, the deductibility issue became relevant.
  • To be allowable an amount must be for the benefit of the trade. Dr Thomas had himself confirmed the contributions were the amounts necessary to reduce the MDPL profits to nil. The other objective of the scheme adopted was to advance that profit via the RT to Dr Thomas by way of non-taxable loans. There was no intention to benefit MDPL's trade.
  • HMRC's appeal on this ground was allowed.

The UT remade the previous decision on Grounds 1 and 3. It ruled the loans/contributions for the relevant years are chargeable to Income Tax and the contributions to the RT are not deductible for Corporation Tax.

Useful guides on this topic

Disguised remuneration loan charge
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Disguised remuneration 2020 settlement opportunity
What is HMRC's position on disguised remuneration loans where settlement was not reached by 30 September 2020? Can a settlement still be reached?

FAQs for Disguised Remuneration Settlements
Can I just repay my loans? Which is cheaper: the loan charge or settling? How much will it cost to settle? And many other FAQs.

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

HMRC v Marlborough DP Limited [2024] UKUT 98 (TCC)