The Marlborough case – the latest tax avoidance scheme decision
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
3 June 2024
We explain the outcomes from the latest employment taxes decision relating to a tax avoidance scheme.
On 12 April 2024, a case was decided in the Upper Tribunal (UT) as a result of an appeal by HMRC against Marlborough DP Limited, a dental practice involved in a tax avoidance scheme.
HMRC appealed because the First Tier Tribunal had found loans which had been funded by Marlborough DP Limited through a Remuneration Trust were not deemed to be either disguised remuneration, or earnings. HMRC had originally raised assessments of PAYE and NICs in 2020.
The scheme
The scheme in question was conceived to provide loans to Dr Thomas, who was the sole director and shareholder, with loans from a trust which happened to be the same (in most instances) as the contributions to the trust from Marlborough DP Limited, and then a corporation tax deduction was claimed in the company accounts to fully negate the corporation tax charge.
The obvious place that most employment tax practitioners would look at this stage is at part 7A ITEPA 2003 which deals with disguised remuneration – and they would be likely to conclude that the Marlborough scheme would be highly likely to fail.
The Upper Tribunal
The UT decided that they would revisit the question of whether the FTT had considered both Part 7A and S.62 of ITEPA 2003 in enough detail, in connection with their application of the correct law.
They concluded that the FTT had erred in law when they concluded that the amounts loaned to Dr Thomas were distributions and should be treated as dividend income (and distributions do not attract corporation tax), even though it was clear that the amounts were not paid out for the benefit of the trade. This conclusion meant that all the amounts which had been settled into the trust by Marlborough DP Limited were not corporation tax-deductible after all.
The UT decided that the loans were in fact inextricably linked to Dr Thomas’s employment and his being a director of the business – but the amounts were not “from” the employment, i.e. general earnings under s.62 ITEPA 2003, rather, they were made “in connection with” the employment - i.e. disguised remuneration under Part 7A – a much wider scope of catchment.
This decision meant that not only was corporation tax due, but PAYE and NICs was also due, albeit not under s.62.
Important issues around the terms “connected with” and “nexus”
Clearly the UT wanted to communicate that while “connected with” is not without its limits, payments made to individuals through third parties does establish a viable connection. Therefore, Part 7A links remuneration paid through third parties to a form of employment income in the right circumstances. The other point which is worthy of note is that the “connection” here was the obvious connection or nexus between the director, the employment, the loans and the contributions from the business: Dr Thomas being the nexus, or lynchpin, in this case.
If you’ve spotted a tax anomaly that is producing an inequitable result or getting in the way of doing business, why not share it with the ICAS Tax Team?
