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, …Continue reading "Marlborough DP Ltd v Commissioners for HMRC [2021] WTLR 1329"