Marlborough DP Limited v Commissioners for HMRC

Section 554A(1)(c) of Income Tax (Earnings and Pensions) Act 2003 does not require employment to be a reason for a loan or other benefit. It requires an objectively assessed connection, construed in its particular statutory context and in light of the legislative purpose. The phrase in connection with does not carry a universal requirement for a strong and close nexus.

Where a company’s profits were put into a remuneration trust and then loaned to its sole director, the arrangements could, on their substance and all relevant circumstances, provide loans in connection with that directorship. For corporation-tax deductibility, the decisive question is the object of the expenditure. A scheme intended to empty a company of profits and fund a tax-free benefit for its director was not expenditure wholly and exclusively for the purposes of the company’s trade.

Marlborough DP Ltd operated a dental practice. Its sole director and shareholder caused the company’s profits to be contributed to a remuneration trust. The trust then made broadly matching loans to him under a marketed tax-avoidance scheme.

The First-tier Tribunal held that the loans were neither general earnings nor caught by Part 7A of Income Tax (Earnings and Pensions) Act 2003. By a casting vote, it also held that the contributions were deductible for corporation-tax purposes. The Upper Tribunal allowed HMRC’s appeal on the Part 7A and deductibility issues, remade the decision, and held the loans taxable and the contributions non-deductible: [2024] UKUT 98 (TCC).

The company appealed. The central issues were the meaning of loans provided in connection with employment under section 554A(1)(c), and whether the contributions were incurred wholly and exclusively for the purposes of its trade.

1. Appeal dismissed. William Davis LJ had agreed with that outcome before his death. Singh LJ, with whom Whipple LJ agreed, held that the Upper Tribunal was right to set aside the First-tier Tribunal’s decisions on both live issues.

2. Section 554A(1)(c) of Income Tax (Earnings and Pensions) Act 2003 does not import a causation requirement. Parliament did not require that employment be part of the reason for the loan. The statutory question is whether, objectively and taking all relevant circumstances into account, it is reasonable to suppose that the arrangement was a means of, or concerned with, providing loans in connection with employment. The expression in connection with is context-sensitive. The phrase “strong and close nexus”, used in a different capital-allowances context, was not a freestanding gloss on this provision.

3. The Upper Tribunal was entitled to find the required connection. The company’s sole director controlled the business which generated the profits. He resolved that those profits be transferred to the remuneration trust and, shortly afterwards, requested loans in substantially matching sums. The overall arrangement therefore provided loans sufficiently connected with his directorship, which was treated as employment. Ordinary dividends would not ordinarily engage Part 7A because the statutory conditions, including a relevant step by a third person, would not be met.

4. The Upper Tribunal also gave adequate reasons. Its assessment followed its correction of the First-tier Tribunal’s legal error, and there was no proper basis for the Court of Appeal to interfere with that assessment of fact and degree. It was likewise entitled to conclude that the arrangement was a means of, or concerned with, providing the relevant loans.

5. On deductibility, the court applied the established distinction between an expenditure’s object and its effects. Although the taxpayer’s object is ordinarily a factual matter, the Upper Tribunal could intervene where, on the facts found, the contrary conclusion was not reasonably open. The contributions were made to eliminate the company’s profits and fund tax-free loans for the director. Their purpose was a tax-avoidance purpose for his and the company’s benefit, not the carrying on of the dental trade. They were therefore not incurred wholly and exclusively for the purposes of that trade.

• Court of Appeal (Civil Division): dismissed Marlborough DP Ltd’s appeal and upheld the Upper Tribunal’s conclusions on Part 7A and corporation-tax deductibility: [2025] EWCA Civ 796.
• Upper Tribunal (Tax and Chancery Chamber): allowed HMRC’s appeal in part, set aside the First-tier Tribunal’s conclusions on Part 7A and deductibility, and remade the decision by holding the loans taxable under Part 7A and the contributions non-deductible: [2024] UKUT 98 (TCC); [2024] STC 1627.
• First-tier Tribunal: held that the sums were not general earnings or Part 7A income. By a casting vote, it held that the contributions were deductible for corporation-tax purposes. Its citation is not stated in the judgment.