Marlborough DP Ltd v Commissioners for HMRC [2021] WTLR 1329

WTLR Issue: Winter 2021 #185

MARLBOROUGH DP LIMITED

V

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS

Analysis

Marlborough DP Ltd (MDPL) operated a dental practice, through which a Dr Thomas, its director and sole shareholder, provided dental services. It had instituted a ‘remuneration trust’ (RT), which it had stated to be for the benefit of persons who had provided or might in the future provide services, custom or products to MDPL. MDPL made ‘contributions’ to the RT which were said to reflect ‘part of the economic cost to [MDPL] of earning its profits’. MDPL then deducted its contributions to the RT as business expenses in computing its profits for accounting purposes, and claimed deductions for them in computing its profits for corporation tax purposes. Very shortly following the making of every such ‘contribution’ to the RT, payments described as ‘loans’ were made, using those contributions, by a company acting on behalf of the RT’s trustee, and controlled by Dr Thomas, to Dr Thomas in an amount that was either the same or else was very nearly the same as that of the preceding contribution. It was accepted that the sole purpose of the scheme was to allow profits of MDPL to be passed to Dr Thomas on a basis that it was imagined would avoid any liability to tax, the payments to him being ‘loans’, but which would at the same time still enable MDPL to obtain tax deductions in respect of the sums paid, such deductions serving to reduce the profits of its dental trade for corporation tax purposes.

HMRC sought to impose various tax charges on MDPL. It sought to impose corporation tax charges by making amendments to MDPL’s corporation tax returns on closure of their enquiries into MDPL’s returns for relevant accounting periods and issuing corporation tax discovery assessments for relevant accounting periods under para 41 of Sch 18 to the Finance Act 1998. It sought to impose income tax charges, in amounts alleged to be due under the Pay as You Earn (PAYE) system, by issuing determinations under Reg 80 of the Income Tax (Pay As You Earn) Regulations 2003 for relevant periods. It sought to impose National Insurance Contributions (NICs), by making decisions under s8 of the Social Security (Transfer of Functions, etc.) Act 1999 in respect of relevant periods.

It did so on the basis that MDPL was not entitled to a deduction for the contributions in computing its profits for corporation tax purposes, these contributions not having been laid out, expended or incurred wholly and exclusively for the purposes of its trade under the general rules in s74(1) of the Income and Corporation Taxes Act 1988 or s54(1) of the Corporation Tax Act 2009. It further maintained that even were MDPL so entitled, it was nevertheless prevented from obtaining a deduction under the rules relating to employee benefit schemes in Sch 18 to the Finance Act 2003 or ss1290 to 1296 Corporation Tax Act 2009. Moreover it contended that, for each relevant tax year, under the PAYE system, MDPL was liable to account for income tax and primary and secondary class 1 NICs in respect of the monies paid by MDPL as contributions which were passed to Dr Thomas as ‘loans’ on the basis that they either constituted ‘earnings from an employment’ within the meaning of the general rules in the Income Tax (Employment and Pensions) Act 2003 and to NICs under corresponding provisions, or else were taxable under the disguised remuneration provisions in chapter 2 of Part 7A of the same Act, which part contains anti-avoidance provisions designed to bring certain payments made by third parties to or for the benefit of employees within the charge to income tax and NICs.

MDPL appealed against these various assessments, determinations and decisions. It contended that certain of those determinations were not validly issued by HMRC, because it did not identify correctly the employee or class of employee to which they related for the purposes of Reg 80 of the Income Tax (Pay As You Earn) Regulations 2003. HMRC had identified the employees who were ‘liable to tax on employment income’ arising in connection with the RT. MDPL maintained that this was nonsensical because HMRC was aware that MDPL did not believe that any employee was so liable and so would conclude that no one was specified in the determinations. MDPL further contended that the delay in issuing the determinations made them ‘stale’ and so invalid. Moreover, the contributions were not taxable as ‘earnings from employment’ under the general rules in the Income Tax (Employment and Pensions) Act 2003 (and, accordingly, not subject to NICs) and MDPL was not, therefore, liable to account for sums in respect of income tax and NICs under the PAYE system.

MDPL accepted that, on its primary case, those contributions were taxable as distributions and, on that basis, that it was not entitled to a deduction for the contributions in computing its profits for corporation tax purposes, but argued that if, contrary to its primary case, the relevant sums were taxable under the Income Tax (Employment and Pensions) Act 2003, and were the corresponding NICs therefore due, it would follow that MDPL would be entitled to a deduction in respect of the contributions in computing its profits for corporation tax purposes.

HMRC maintained that the determinations had been validly issued, since a determination could specify the entirety of the tax which HMRC was seeking to apply, rather than the class of employees to which it applies, that one of the determinations had specified Dr Thomas by name, and the other determinations clearly applied both to the entirety of the tax sought to be applied and also to all employees involved with the RT arrangements, and that it was sufficient that the determinations had identified a class of employees with a common characteristic, namely the characteristic of being involved with the RT. HMRC further maintained that MDPL should not be permitted to raise any argument on this point, it having been raised only at too late a stage in the proceedings. It moreover argued that MDPL could not obtain a tax deduction for the contributions in computing its profits for corporation tax purposes whether or not the relevant sums are subject to income tax under Income Tax (Employment and Pensions) Act, and to related NICs again since these contributions had not been incurred wholly and exclusively for the purposes of its trade.

Held:

The First-tier Tribunal held that the sums loaned did not constitute earnings and so were not taxable as such. Sums constituted earnings if they were paid as remuneration or a reward in return for a person’s services as employee. Establishing the purpose for which a payment was made was therefore key. There was little here to indicate what the purpose of the making of the contributions which enabled the funds to flow to Dr Thomas had been, but what evidence there was suggested that the purpose was to provide him with distributions as a return on his shareholding in MDPL rather than a reward for his services as director. Nor were the contributions taxable under the general rules in the Income Tax (Employment and Pensions) Act 2003 or under Part 7A of that Act, and NICs were therefore not due. For the RT arrangement to have attracted tax on this basis it would have had to, as far as it related to Dr Thomas, been a means of providing rewards in connection with his employment. Determining whether the RT had been such a means required essentially the same analysis as did the assessment of whether the sums were ‘earnings’. As such, the sums were not covered by the relevant provisions.

Were these conclusions incorrect, that would have entailed that MDPL would have been entitled to a deduction for the amount of the contributions in computing its profits for corporation tax purposes. Had they been taxable they would have constituted earnings. Their purpose in that event would have been to provide Dr Thomas with income. Any intention to avoid tax through the RT would have been incidental to the true intent which would have been to reward Dr Thomas for his services as director, and as such a deduction would have been available.

MDPL was permitted to raise an argument to the effect that HMRC’s determinations had been invalid, as it was in the interests of fairness and justice that they be allowed to do so, and since MDPL had flagged the question as to validity in its grounds of appeal. However the tribunal found that none of the determinations were in fact invalid, the Supreme Court having decided that the application of the concept of ‘staleness’ to discovery assessments was wrong.

JUDGMENT JUDGE HARRIET MORGAN: Part A – Overview [1] MDPL has appealed against various assessments, determinations and decisions issued by HMRC in which HMRC seek to impose taxes in respect of payments made under a ‘remuneration trust’ structure which MDPL used for a number of years for the benefit of its sole shareholder and director, …
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Counsel Details

Michael Firth (Gray’s Inn Tax Chambers, 36 Queen Street, London, EC4R 1BN, tel 020 7242 2642, email clerks@taxbar.com) instructed by Morrisons Solicitors LLP (Connect House, 133-137 Alexandra Road, Wimbledon, London, SW19 7JY, tel 020 8971 1020, email wimbledon@morrlaw.com) for the appellant.

Julian Gosh QC and Barbara Belgrano (both Pump Court Tax Chambers, 16 Bedford Row, London, WC1R 4EF, tel 020 7414 8080, email clerks@pumptax.com), instructed by the General Counsel and Solicitor to HM Revenue and Customs (HM Revenue and Customs Solicitor’s Office, 14 Westfield Avenue, Stratford, London E20 1HZ) for the respondents.

Cases Referenced

  • Abbott v Philbin [1960] UKHL 1; [1961] AC 352
  • Astall & anr v Revenue and Customs Commissioners [2009] EWCA Civ 1010; [2010] STC 137
  • Aveling Barford Ltd v Perion Ltd & ors [1989] BCLC 626
  • Barclays Bank plc & anor v HM Revenue & Customs [2007] EWCA Civ 442
  • Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51
  • Bentleys, Stokes & Lowless v Beeson [1952] 22 All ER 82; [1952] 33 TC 491
  • Blakiston v Cooper (1908) 5 TC 347; [1909] AC 104
  • Bourke & anr v Favre & anr [2015] EWHC 277 (Ch)
  • Brumby v Milner (1975) 51 TC 583; [1976] 1 WLR 29; [1976] STC 534
  • Brumby v Milner [1976] UKHL 7; [1976] 1 WLR 1096
  • Burgess & anr v Revenue and Customs [2015] UKUT 578 (TCC); [2016] STC 579
  • Carreras Group Ltd v Stamp Commissioner (Jamaica) [2004] UKPC 16
  • Cenlon Finance Co Ltd v Ellwood (Inspector of Taxes) [1962] AC 782
  • Clark v HMRC [2020] EWCA Civ 204
  • Dale v IRC [1954] AC 11
  • Dextra Accessories Ltd & ors v Macdonald (Inspector of Taxes) [2002] UKSC SPC00331; [2002] STC (SCD) 413, 77 TC 146; [2003] WTLR 349 SpC
  • Edwards v Roberts [1935] EWCA Civ 1; (1935) 19 TC 618
  • Fidex Ltd v HM Revenue & Customs [2016] EWCA Civ 385; [2016] STC 1920
  • Fry v Salisbury House Estate Ltd [1930] UKHL 1; [1930] AC 432
  • Hadlee & anr v Commissioner of Inland Revenue [1993] UKPC 8; [1993] AC 524
  • Hamblett v Godfrey [1987] STC 60
  • Hartland v Diggines (1926) 10 TC 247; [1926] AC 289
  • HMRC v Charlton & ors [2012] UKUT 770 (TCC)
  • HMRC v PA Holdings Ltd [2011] EWCA Civ 1414
  • HMRC v Tooth [2019] EWCA Civ 826
  • HMRC v Tooth [2021] UKSC 17
  • Hochstrasser v Mayes (1959) 38 TC 673; [1959] Ch 22; [1960] AC 376
  • Inland Revenue Commissioners v Mackinlay’s Trustees 1938 SC 765; 22 TC 305 75
  • (
  • Interfish Ltd v Revenue and Customs Commissioners [2014] EWCA Civ 876; [2015] STC 55
  • Kuehne and Nagel Drinks Logistics Ltd [2012] EWCA Civ 34
  • Laidler v Perry (1965) 42 TC 351; [1966] AC 16
  • Landind Property Ltd & La Vita Pizzeria Ltd v HMRC [2017] UKFTT 692 (TC)
  • London Luton Hotel BPRA Property Fund LLP v Revenue & Customs [2019] UKFTT 212 (TC)
  • MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co (1989) 62 TC 704; [1989] STC 898; [1990] 2 AC 239
  • MacNiven v Westmoreland Investments Ltd [2001] UKHL 6; [2003] 1 AC 311
  • Mairs v Haughey (1993) 66 TC 273; [1994] 1 AC 303
  • Mallalieu v Drummond (Inspector of Taxes) [1983] STC 665; [1983] 2 AC 861
  • Progress Property Company Ltd v Moorgarth Group Ltd [2010] UKSC 55; [2011] 1 WLR 1
  • Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 (Comm)
  • R (Bancoult) v Secretary of State for Foreign and Commonwealth Affairs (No 3) [2018] UKSC 3; [2018] 1 WLR 973
  • R (National Association of Health Stores) v Department of Health [2005] EWCA Civ 154; The Times, 9 March 2005
  • Re Halt Garage (1964) Ltd [1982] 3 All ER 1016
  • Revenue and Customs Commissioners v Forde and McHugh Ltd [2014] UKSC 14; [2014] 1 WLR 810
  • RFC 2012 plc (in liquidation) (formerly Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45; [2017] STC 1556
  • Ridge Securities Ltd v Inland Revenue Commissioners [1964] 1 WLR 479
  • Scottish Provident Institution v Inland Revenue Commissioners (2004) 76 TC 538; [2004] 1 WLR 3172
  • Scotts Atlantic Management Ltd & anr v HMRC [2015] UKUT 66 (TCC); [2015] STC 1321
  • Sempra Metals Ltd v Revenue and Customs Comrs [2008] STC (SCD) 1062
  • Shilton v Wilmhurst (Inspector of Taxes) (1991) 64 TC 78; [1991] STC 88
  • Strong & Co Ltd v Woodifield [1906] UKLawRpAC 30; [1906] AC 448
  • Toone & ors v Ross & anr, Re Implement Consulting Ltd [2019] EWHC 2855 (Ch)
  • Tower MCashback LLP v Revenue and Customs Commissioner [2008] EWHC 2387 (Ch); [2008] STC 3366
  • Tyrer v Smart (Inspector of Taxes) (1978) 52 TC 533; [1979] 1 WLR 113
  • Vodafone Cellular Ltd & ors v Shaw [1997] STC 734
  • Westek v HMRC [2008] STC (SCD) 169
  • Wilcock v Eve [1995] STC 18
  • WT Ramsay Ltd v Inland Revenue Commissioners [1981] UKHL 1; [1982] AC 300; (1981) 54 TC 101

Legislation Referenced

  • Corporation Tax Act 2009, ss54, 1290-1296, and 1298
  • Corporation Tax Act 2010, ss1000, 1024-1028, 1113
  • Finance Act 1998, Sch 18
  • Finance Act 2002, Sch 24
  • Finance Act 2003, Sch 18 and 24
  • Finance Act 2004, Sch 34
  • Finance Act 2011
  • Income and Corporation Taxes Act 1988, ss1, 15-20, 74 and 577
  • Income Tax (Employment and Pensions) Act 2003
  • Income Tax (Pay As You Earn) Regulations 2003
  • Income Tax (Trading and Other Income) Act 2005, ss383-385
  • Social Security (Transfer of Functions, etc.) Act 1999, s8
  • Social Security Contributions and Benefits Act 1992, ss3 and 6 and Sch 1
  • Taxes Management Act 1970, s29