Marlborough DP Limited v Commissioners for HMRC

The Court of Appeal dismissed the appellant’s appeal against the Upper Tribunal. The court held that the phrase "in connection with … employment" in section 554A(1)(c) Income Tax (Earnings and Pensions) Act 2003 (Part 7A ITEPA) requires a question of connection rather than a causation test (employment need not be "part of the reason" for the payment). The Upper Tribunal correctly applied a context-sensitive test for "in connection with" and was entitled to find a sufficiently close connection between the director’s directorship and the loans routed through the Remuneration Trust.

Separately, on the alternative ground, the Court of Appeal upheld the UT’s conclusion that the contributions made by MDPL were not deductible for corporation tax because they were not incurred "wholly and exclusively" for the purposes of the trade but were made as part of a tax-avoidance scheme to extract profit to the benefit of the director.

Background and parties: Marlborough DP Limited (MDPL), a dental-practice company wholly owned and directed by Dr Thomas, used a marketed Remuneration Trust (RT) scheme promoted by third parties to extract company profits by way of contributions to the RT and subsequent loans to Dr Thomas. HMRC issued closure notices, discovery assessments and PAYE/NICs determinations. MDPL appealed to the First-tier Tribunal (FTT); HMRC succeeded in part at the Upper Tribunal (UT) and MDPL appealed to the Court of Appeal.

Nature of the claim / relief sought: MDPL sought reinstatement of the FTT decision that (a) the amounts routed through the RT were not caught as earnings under Part 7A ITEPA and (b) alternatively, if taxable under Part 7A, the corresponding contributions were deductible for corporation tax as incurred "wholly and exclusively" for the trade.

Procedural history:

• FTT decision: 1 September 2021 (Judge Harriet Morgan and Mr John Woodman) — found the sums were not earnings under general ITEPA rules and concluded Part 7A did not apply; on deductibility the Tribunal was split and Judge Morgan allowed a deduction by casting vote.
• UT decision: [2024] UKUT 98 (TCC); [2024] STC 1627 (Edwin Johnson J and Judge Guy Brannan) — dismissed HMRC’s appeal on the general earnings point but allowed HMRC on the Part 7A issue and on deductibility, remaking the decision that the loans were caught by Part 7A and the contributions were non-deductible.
• Permission to appeal to the Court of Appeal was granted; the appeal was heard 30 April–1 May 2025 and determined 26 June 2025.

Issues before the Court of Appeal:

• Issue 1 (primary): The proper interpretation of "in connection with … employment" in section 554A(1)(c) ITEPA — whether the statutory test requires that the employment be "part of the reason" (a causation test) or whether the statutory language requires a question of connection assessed from all relevant circumstances.
• Issue 2 (alternative): Whether MDPL’s contributions were deductible for corporation tax as incurred "wholly and exclusively" for the purposes of its trade.

Reasoning and disposition:

• On Issue 1 the court held that the UT was correct to reject a causation test. The phrase "in connection with" must be read in context and requires an objective assessment of whether, in essence, the arrangement (or part of it) is concerned with providing rewards, recognition or loans connected to employment (section 554A(12) requires taking all relevant circumstances into account). The UT reasonably concluded that the director’s role as the guiding mind of MDPL and the pattern of resolutions and requests to the trustee established a sufficiently direct and close connection between the loans and his directorship to engage Part 7A.
• On Issue 2 the court accepted the UT’s conclusion that the contributions were not "wholly and exclusively" for the purposes of MDPL’s trade because they were deployed to empty the company of profit to fund tax‑efficient loans to the director; that tax‑avoidance purpose meant the payments were not deductible.

Appeal dismissed. The Court upheld the Upper Tribunal’s interpretation that section 554A(1)(c) ITEPA requires an objective question of connection (not a test of causation that employment must be ‘part of the reason’), and concluded that on the facts there was a sufficiently close connection between the loans and the director’s directorship so Part 7A applied. The Court also upheld the UT’s decision that the company contributions were not deductible as not incurred wholly and exclusively for the trade but were made to effect a tax‑avoidance purpose benefitting the director.

FTT decision dated 1 September 2021 (First-tier Tribunal). Upper Tribunal (Tax and Chancery Chamber) judgment [2024] UKUT 98 (TCC); [2024] STC 1627 (12 April 2024) partially allowed HMRC's appeal and remade the decision. Permission to appeal to the Court of Appeal granted by the UT (5 June 2024). Newey LJ refused HMRC permission to cross-appeal (31 July 2024). Appeal heard in the Court of Appeal and judgment delivered 26 June 2025 ([2025] EWCA Civ 796).