Marlborough DP Ltd v Commissioners for HM Revenue and Customs

Hearing dates: 30 April – 1 May 2025

Approved Judgment

This judgment was handed down remotely at 10 a.m. on 26 June 2026 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

It is my sad duty to record that William Davis LJ died after the hearing of this appeal. He agreed with the outcome of the appeal. On 16 June 2025 the Master of the Rolls issued a direction under section 54(4A) of the Senior Courts Act 1981 that the Court, comprising the two other members, is duly constituted to decide the matter.

This appeal is brought by Marlborough DP Limited (“MDPL” or “the Appellant”) against the decision of the Upper Tribunal (Tax and Chancery Chamber) (“UT”), comprising Edwin Johnson J and Judge Guy Brannan, dated 12 April 2024. The UT (in part) allowed the appeal by His Majesty's Revenue and Customs (“HMRC” or “the Respondents”). The Appellant seeks the restoration of the decision of the First-tier Tribunal (“FTT”), comprising Judge Harriet Morgan and Mr John Woodman, dated 1 September 2021.

This case arises from the Appellant's appeals to the FTT against:

(1) Corporation tax closure notices and discovery assessments for the accounting periods ended 31 March 2008 to 2015;

(2) PAYE determinations for the years of assessment 2010/11 to 2014/15; and

(3) Decisions relating to National Insurance contributions for the years 2011/12 to 2014/15.

The first main issue on this appeal concerns the interpretation of the phrase “in connection with … employment” in section 554A(1)(c) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), which is in Part 7A of ITEPA, which was introduced by the Finance Act 2011. The other main issue, which arises in the alternative, concerns 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.

At the hearing we heard submissions on behalf of the Appellant from Mr Michael Firth KC and (on the second main issue) Mr Ben Blades; and on behalf of the Respondents from Mr Julian Ghosh KC. After the hearing we also received written submissions from both parties about the second main issue.

The legislative framework

Section 554A of ITEPA states that:

“(1) Chapter 2 applies if–

(a) a person (“A”) is an employee, or a former or prospective employee, of another person (“B”),

(b) there is an arrangement (“the relevant arrangement”) to which A is a party or which otherwise (wholly or partly) covers or relates to A,

(c) it is reasonable to suppose that, in essence–

(i) the relevant arrangement, or

(ii) the relevant arrangement so far as it covers or relates to A,

is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A's employment, or former or prospective employment, with B,

(d) a relevant step is taken by a relevant third person, and

(e) it is reasonable to suppose that, in essence–

(i) the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement, or

(ii) there is some other connection (direct or indirect) between the relevant step and the relevant arrangement.” (Emphasis added)

Section 554A(2) provides that, in this Part, “relevant step” means a step within section 554B, 554C or 554D. For present purposes the relevant section is section 554C, which refers to the relevant steps of payment of a sum, transfer of asset etc. It provides, in subsection (1):

“A person (“P”) takes a step within this section if P–

(a) pays a sum of money to a relevant person,

(b) transfers an asset to a relevant person,

(c) takes a step by virtue of which a relevant person acquires an asset within subsection (4),

(d) makes available a sum of money or asset for use, or makes it available under an arrangement which permits its use–

(i) as security for a loan made or to be made to a relevant person, or

(ii) otherwise as security for the meeting of any liability, or the performance of any undertaking, which a relevant person has or will have

…” (Emphasis added)

Section 554C(2) provides that, in subsection (1), “relevant person” –

“(a) means A or a person chosen by A or within a class of person chosen by A, and

(b) includes, if P is taking a step on A's behalf or otherwise of A's direction or request, any other person.”

Section 554C(3) provides that, in subsection (2), references to A include references “to any person linked with A.”

Section 554Z, which is the general interpretation section for Part 7A of ITEPA, provides in subsection (7), that references to the payment of a sum of money “include (in particular) references to the payment of a sum of money by way of a loan.”

Returning to section 554A, subsection (6) provides that, for the purposes of subsection (1)(c),

“it does not matter if the relevant arrangement does not include details of the steps which will or may be taken in connection with providing, in essence, rewards or recognition or loans as mentioned (for example, details of any sums of money or assets which will or may be involved or details of how or when or by whom or in whose favour any step will or may be taken).”

Section 554A(7) provides that, in subsection (1)(d), “relevant third person” means–

“(a) A acting as a trustee,

(b) B acting as a trustee, or

(c) any person other than A and B.”

Section 554A(12) provides that, for the purposes of subsection (1)(c) in particular, “ all relevant circumstances are to be taken into account in order to get to the essence of the matter.” (Emphasis added)

Having set out the relevant steps that may be taken under section 554B, 554C and 554D, the legislation contains a number of provisions setting out exclusions from the application of Chapter 2. Section 554F sets out exclusions in the context of “commercial transactions” but this is relatively limited in its scope. Subsection (1) provides that:

“Chapter 2 does not apply by reason of a relevant step which is the payment of a sum of money by way of a loan if–

(a) the loan is a loan on ordinary commercial terms within the meaning of section 176 (ignoring conditions B and C in that section), and

(b) there is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement.”

That takes one to section 176(2) of ITEPA, which provides, in subsection (2), that a “loan on ordinary commercial terms” means

“a loan–

(a) made by a person (‘the lender’) in the ordinary course of a business carried on by the lender which includes–

(i) the lending of money, or

(ii) the supplying of goods or services on credit, and

(b) in relation to which condition A, B or C is met.”

Factual Background

The salient facts were helpfully summarised by the UT in its judgment, at paras 12–17:

“12. MDPL is a company incorporated in England and Wales on 31 May 2007, whose principal activity during the period from 31 May 2007 to 5 April 2015 was that of operating a dental practice. Dr Thomas was the sole shareholder in MDPL for the whole of this period and the sole director since 27 November 2007. Dr Thomas worked as a dentist in MDPL's practice along with an associate.

13. MDPL used a marketed tax avoidance scheme promoted by entities connected with Mr Paul Baxendale-Walker (‘BW’).

14. Essentially, the scheme attempted to achieve a corporation tax deduction for MDPL in respect of sums paid by MDPL to a ‘Remuneration Trust’ (‘RT’), which were approximately equal to the profits made by MDPL for the relevant year (although contributions to the RT exceeded profits for the years 2008–2010 and 2012–2015 and were somewhat less than the profits for 2011).

15. The RT arrangements were as follows.

(1) On 4 September 2007, Dr Thomas was sent various documents from BW regarding ‘Remuneration Trust Arrangements’.

(2) On 3 October 2007, MTL Management Limited (‘MTL’) was incorporated in Belize with Dr Thomas as the sole director and shareholder.

(3) BW prepared two similar documents entitled ‘Report to the Board’ dated 16 November 2007 and 5 December 2007 setting out how the RT arrangements were intended to work.

(4) On 20 January 2008, Dr Thomas, as the director of MDPL, resolved to make contributions to the RT. Dr Thomas could not explain why this took place before the RT was established.

(5) The RT was established by Deed executed on 31 January 2008. The RT Deed was made between MDPL and Bay Trust International Limited (‘BTIL’) of Belize as the trustee. Dr Thomas signed the RT Deed as the director of MDPL.

(6) On 1 February 2008:

(i) BTIL delegated to UPL Holdings Limited, a company established in Belize, ‘the execution or exercise of all or any of the Trust's powers and discretions conferred upon it as Trustee as regards the management and custody of the Trust Fund.’

(ii) UPL Holdings Limited, as ‘the Principal’, and MTL, as ‘the Fiduciary’, entered into a ‘Fiduciary Services Agreement’ pursuant to which MTL was stated to have ‘all the rights to apply and deal with the Property and the income and capital thereof and all accumulations thereto as if it were the beneficial owner...