The Court of Appeal today released its decision in the case of Marlborough DP Ltd v HMRC. The decision has been anxiously awaited by the hundreds of business owners seeking to agree settlement terms with HMRC following their use of Remuneration Trusts (RTs). The Morr & Co team who acted for Marlborough DP Limited in this significant case were led by Sally Hutchings, Legal Director in our Dispute Resolution team, alongside Michael Firth KC of Gray’s Inn Tax Chambers. This high-profile litigation forms part of a broader national conversation around disguised remuneration schemes, a key area of HMRC scrutiny in recent years. Background to Marlborough DP Ltd v HMRC Dr Thomas is a dentist and, at all times material to this appeal, operated a dental practice through his wholly owned company, Marlborough DP Limited (MDPL). MDPL entered into a tax avoidance scheme under which it made payments through certain trust arrangements, which were then paid to Dr Thomas by way of loans. This structure was commonly marketed to owner-managed businesses throughout the 2000s and early 2010s, with the aim of providing perceived tax efficiencies without triggering immediate PAYE or NIC obligations. The Court of Appeal decision The Court of Appeal dismissed MDPL’s appeal, which will come as a bitter blow to taxpayers in the same position. There were two main issues to be decided by the Court of Appeal. The first issue concerned the interpretation of the phrase “in connection with… employment” as found at section 554A(1)(c) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). Part 7A of ITEPA which was introduced by the Finance Act 2011. The Court found that Parliament did not intend to create a causation test by using the phrase “in connection with” in Part 7A. Instead, it determined that had Parliament intended such a test, it would have used the “from” employment test or the “by reason of” employment test (§37 and §47). The Court of Appeal states that that construction of a taxing statute requires close attention to purpose (§45). The second issue, arising as an alternative, concerned the deductibility of certain expenses for the purpose of corporation tax on the ground that they were incurred “wholly and exclusively” for the purposes of the trade of MDPL. The Court upheld the Upper Tribunals’ (UT) decision that the expenses were not deductible, and that the UT was correct to conclude that the purpose in this case was not for the purposes of MDPL’s trade, but rather for the benefit of Dr Thomas. It was a tax avoidance purpose. What are the key implications of the decision in Marlborough DP Ltd v HMRC? As a result of the decision, corporate taxpayers found to have used the remuneration trust in a similar fashion to Dr Thomas and MDPL will now, subject to the recommendations made by the Second Independent Loan Charge Review, be required to settle with HMRC on a PAYE, National Insurance and Corporation Tax basis. While the final liability remains uncertain, businesses and individuals should prepare themselves for HMRC’s response to the Court of Appeal decision. Sally Hutchings, Legal Director in the Dispute Resolution team at Morr & Co, who advised on this case, comments on the Court of Appeal’s decision: We are disappointed with this decision and will spend the next few days considering the judgment in detail, to see whether an application to the UK Supreme Court should be made. Is this the end of the road for Marlborough DP Limited? An appeal to the Supreme Court would afford some hope for taxpayers in the same position as MDPL, but we will all have to wait to see whether this happens. The criteria for permission to appeal are stringent and the Supreme Court will need to be convinced that the case raises a point of law of public importance. We also await with interest to see how HMRC responds to this decision. In the meantime, those affected may wish to seek urgent advice to assess their exposure and plan next steps. Sally Hutchings is available for comment on this case and can be contacted directly on 020 8971 1048 or sally.hutchings@morrlaw.com How can Morr & Co help? If you would like to discuss the potential implications of the decision on any of your clients, please do not hesitate to contact our Dispute Resolution team on 0333 038 9100 or email info@morrlaw.com Disclaimer Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position. Authored by Sally Hutchings Legal Director Message Tags News On this page Download the Court of Appeal judgement Download
