The Commissioners for HMRC v Marlborough DP Limited

Payments routed through trusts may be employment income under Part 7A ITEPA even where they are not earnings under the ordinary employment-income rules. The statutory phrase “in connection with” requires a strong or direct nexus between the employment or office and the loan, although the connection need not be causally “from” employment. All relevant circumstances must be considered to identify the essence of the arrangement. A company’s profits may be sufficiently connected with its director’s office where the director is the guiding mind of the business generating those profits. An Edwards v Bairstow appeal requires precise identification of the challenged finding, its significance, the relevant evidence and why the tribunal was not entitled to make the finding.

Marlborough DP Limited operated a dental practice through its sole shareholder and director, Dr Thomas. It used remuneration trust arrangements under which company profits were paid to a trust and then advanced to Dr Thomas as loans. The First-tier Tribunal held that the payments were distributions rather than earnings under Income Tax (Earnings and Pensions) Act 2003 section 62 and that Part 7A did not apply. It also gave a contingent, divided decision on corporation-tax deductibility.

HMRC appealed. The Upper Tribunal had to determine whether the loans were connected with Dr Thomas’s employment or directorship for Part 7A, whether the FTT’s factual conclusions were legally flawed, whether the contributions were deductible, and how any anti-forestalling provisions applied.

1. General earnings. The appeal on the section 62 issue was dismissed. The FTT correctly identified the question as whether the source of the payments was Dr Thomas’s office as director or his shareholding. Its conclusion that the payments were distributions was an evaluative judgment based on the evidence. The FTT made no material error of law, failed to take account of no relevant evidence, and its conclusion was not perverse. Rangers concerned the taxability of redirected earnings and did not determine the source of the payments in this case.
2. Part 7A. The FTT erred in treating the connection test as requiring employment to be part of the reason for the loan. Section 554A requires an objective assessment of whether, in essence, the arrangement provided loans in connection with employment. The phrase must be construed in context and requires a strong or direct nexus, not necessarily a causal payment “from” employment. The fact that Dr Thomas authorised contributions and requested loans was insufficient by itself. However, the profits reflected the dental practice carried on by MDPL, and Dr Thomas was its sole director and guiding mind. That supplied the necessary close connection with his directorship. The loans were therefore taxable under Part 7A.
3. Anti-forestalling. Relevant steps taken between 9 December 2010 and 5 April 2011 were deemed to have been taken on 6 April 2012. The 2012–13 determination was sufficiently broad to permit the charge to include sums attributable to those steps.
4. Deductibility. The contributions were not incurred wholly and exclusively for MDPL’s trade. Their purposes were to empty the company of profit, obtain a tax advantage and fund tax-free loans to Dr Thomas. The tax-avoidance objective was an end in itself, rather than merely the method of achieving a trading purpose.
5. Disposition. The decision was set aside so far as it rejected Part 7A liability and allowed deductibility. The Upper Tribunal remade those parts of the decision, holding that the loans were chargeable under Part 7A and the contributions were non-deductible. No remission was required.

The Tribunal also gave guidance that an Edwards v Bairstow ground must clearly identify the challenged finding, its significance, the relevant evidence and why the finding was unavailable to the FTT.

1. First-tier Tribunal (Tax Chamber). In [2021] UKFTT 0304 (TC), the FTT allowed MDPL’s appeals concerning PAYE and NICs, holding that the payments were not general earnings and that Part 7A did not apply. It treated the payments as distributions and gave a contingent divided decision on deductibility.
2. Upper Tribunal (Tax and Chancery Chamber). HMRC’s appeal on general earnings was dismissed. The appeal on Part 7A and the contingent deductibility issue was allowed. The relevant parts of the FTT decision were set aside and remade without remission.