The Commissioners for HMRC v MR Currell Limited

For PAYE purposes, a payment is earnings only if the payment itself is remuneration or a reward for employment. A company contribution to an employee benefit trust does not become earnings merely because it funds a benefit arising from employment. Payment to a third party may still be earnings where the underlying payment is remuneration, even without a prior legal entitlement.

A genuine loan with a real repayment obligation normally provides access to funds, not taxable earnings equal to the principal. The benefit of using the funds is generally addressed by the employee-loan provisions in Part 3 of the Income Tax (Earnings and Pensions) Act 2003. A different result may arise where the purported loan is a sham or was never intended to be repaid.

HMRC determined that an £800,000 payment by the respondent company to an employee benefit trust constituted earnings of its director and was subject to PAYE and national insurance contributions. The trust immediately lent the same amount to the director, secured against shares and subject to a genuine repayment obligation.

The First-tier Tribunal dismissed the company’s appeal: [2023] UKFTT 613 (TC). The Upper Tribunal allowed the company’s appeal, set aside the FTT’s decision and remade it: [2024] UKUT 00404 (TCC). The central issues were whether the payment to the trust was earnings, whether the loan principal could itself be earnings, and whether the UT had correctly identified a material error of law.

Appeal dismissed. Falk LJ gave the leading judgment, with Singh LJ and Foxton LJ agreeing.

1. The UT correctly identified a material error of law in the FTT’s reasoning and correctly set aside and remade the decision under section 12(2)(a) and (b)(ii) of the Tribunals, Courts and Enforcement Act 2007.
2. Under section 62 of the Income Tax (Earnings and Pensions) Act 2003, the payment itself must have the character of remuneration or a reward for employment. The fact that a payment funds an employment-related benefit does not make the funding payment earnings. The purpose of the payment explains why it was made, but does not determine its nature.
3. The principle in Rangers SC, [2017] UKSC 45, that remuneration may be taxable when paid to a third party without a prior legal entitlement, did not assist HMRC beyond that point. In that case the payments to the trust were accepted to be remuneration. Here, that was the very issue in dispute.
4. As a general proposition, advancing the principal of a genuine loan with a real repayment obligation is not payment of earnings. The benefit is access to and use of the funds, and is generally dealt with under the employee-loan provisions in Part 3 of the Act. A loan may be earnings in limited circumstances, such as where it is a sham or repayment was never intended, but that possibility was immaterial here.
5. The loan was genuine, secured and understood to be repayable. It did not replace remuneration, and there was no evidence that the sum would otherwise have been paid as salary or other remuneration. The payment to the trust therefore did not constitute earnings.
6. Under section 14 of the Tribunals, Courts and Enforcement Act 2007, the Court of Appeal’s role was to identify an error of law in the UT’s decision. Although a material error will normally justify setting aside, justice did not require that course where the correct result was the only result properly open to the UT. The court therefore dismissed the appeal and gave its own reasons confirming the UT’s conclusion.

The court added obiter observations that later legislation, including Part 7A of the Act, would have addressed arrangements of this kind, but could not justify extending the pre-existing law beyond its proper scope.

1. Court of Appeal (Civil Division): appeal dismissed.
2. Upper Tribunal (Tax and Chancery Chamber): allowed the company’s appeal, set aside the FTT’s decision and remade it: [2024] UKUT 00404 (TCC).
3. First-tier Tribunal (Tax Chamber): dismissed the company’s appeal against HMRC’s determinations: [2023] UKFTT 613 (TC).