In Marlborough DP Ltd v HMRC [2025] EWCA Civ 796, the Court of Appeal (CoA) agreed with an earlier ruling made by the Upper Tribunal (UT), in which contributions made by a dentist to a Paul Baxendale-Walker remuneration trust were found to be 'in connection with' his employment.
The case involved a disguised remuneration scheme in which Marlborough DP Ltd (MDPL), a dental practice owned by Dr Thomas, made contributions to a remuneration trust. The trust then loaned the funds to Dr Thomas.
MDPL appealed against an Earlier decision made by the Upper Tribunal (UT), which ruled that the loans funded by the remuneration trust should be chargeable to Income Tax and the contributions made by the company to the remuneration trust were not deductible for Corporation Tax purposes.
- MDPL set up a Baxendale-Walker offshore remuneration trust for “the benefit of persons who had provided or might in the future provide services, custom or products to MDPL”.
- Contributions were made to the trust for which MDPL claimed Corporation Tax deductions.
- Loans of a similar amount to the contributions were then made to Dr Thomas by a Belize company controlled by Dr Thomas.
- HMRC disallowed the contributions for Corporation Tax (CT) purposes and issued Discovery assessments.
- HMRC also raised PAYE assessments for Income Tax and National Insurance Contributions (NICs) on the basis that either the loans were earnings under ITEPA 2003 or that the loans were taxable under the Part 7A ITEPA Disguised remuneration rules.
- MDPL appealed the PAYE assessments, accepting that the amounts received by Mr Thomas were taxable as distributions, meaning no CT deductions were available.
- The First Tier Tribunal (FTT) allowed the appeals, finding that the contributions did not meet the 'connection test' at Part 7A, s.554A(1)(c) ITEPA 2003 and that they were not disguised remuneration payments under the general principles. This finding meant no PAYE or NIC was due on the loan payments; however, the contributions were not allowed for CT purposes due to the fact that no Income Tax liability had arisen.
- The UT overturned this decision, finding that the FTT had erred in law and the contributions were connected with Dr Thomas's employment/directorship under Part 7A, s.554A(1)(c) ITEPA. The UT also found no trade occurred, meaning, again, no deduction was allowed for CT purposes.
MDPL appealed to the Court of Appeal (CoA) on the grounds that the UT applied the wrong test when determining whether the loans were 'in connection with' Dr Thomas's employment.
The CoA found that:
- MDPL's interpretation of the legislation created a 'test of causation' which was simply not there.
- Had Parliament intended to create a causation test, they would not have used the phrase 'in connection with' and would have opted for the use of the words 'from' employment or 'by reason of''.
- The wholly and exclusively test was not met:
- The CT deductions were not for the purpose of MDPL's trade.
- The sums expended were incurred for the benefit of Dr Thomas.
- The purpose of the trade was 'a tax avoidance purpose'.
- The UT was correct in concluding that the arrangements fell within the general provisions of disguised remuneration and should be taxed as employment income.
- The UT were also correct to conclude that the contributions were not deductible for CT purposes.
The appeal was dismissed.
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