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  • Marlborough Man: Does Taxpayer ‘win’ at FTT in Remuneration Trust case highlight limits to Rangers decision?

    10 September 2021

    Introduction

    The Marlboro Man advertising campaign is said to be one of the most brilliant advertisement campaigns of all time.

    The campaign is seen as transforming the image of ‘filter’ cigarettes previously marketed under a “Mild as May” campaign into a much more ‘manly’ brand in just months.

    Does Marlborough Man have a similar impact on remuneration schemes following the FTT’s decision in Marlborough DP Limited v HMRC?

    Whilst reading the usual short form summary included with my regular case update, I saw that here that two of the main issues were whether “amounts paid under trust arrangements are taxable as earnings from employment” or “under Part 7A”.

    I must confess to being quite blindsided by the fact that this said “no”.

    Definitely a double take.

    The facts

    The taxpayer was a dentist and operated as a limited company, Marlborough DP Limited (MDPL).

    He entered into a scheme with Baxendale-Walker along the same lines as the one described in my earlier article around the Dukeries case (which wasn’t a tax case). As such, I will not set out the main features of the trust deed and the other nuts and bolts in detail here.

    However, broadly, the desired tax advantages were as follows:

    • Contributions to the trust by MDPL were deductible for corporation tax purposes
    • Neither the benefits paid to the trust or the subsequent loans were subject to earnings

    In short, as Ghosh QC put it for HMRC, a kind of “fiscal paradise”

    It should be noted for the purposes of this tribunal, MDPL accepted that the payments were taxable as distributions.

    As with the Dukeries case, there is a lot of evidence set out in the facts section. Whereas, in that case, there appeared to have been questions over the taxpayer’s credibility, here, Dr Thomas had no such issues – despite him seemingly admitting to apparent ‘untruths’ in some of the documents completed by BW.

    Were the contributions earnings?

    The arguments

    The taxpayer argued that neither the contributions or the loans were made as a reward for Dr Thomas’ services. Instead, they were paid in respect of his shareholding in MDPL. In other words, there was not the necessary link between the payments and Dr Thomas’ role as a director.

    HMRC argued that the payments must “represent the fruits of Dr Thomas’ work for MDPL.

    The law on earnings

    As set out by Lord Hodge in Rangers, income tax on earnings is “principally but not exclusively, a tax on the payment of money by an employer to an employee as a reward for his or her work as an employee.”

    Some of the case law in this area is set out in my earlier article on Charles Tyrwhitt LLP v HMRC.

    Broadly speaking, there must be, as a matter of fact, a relevant connection or link between the payments to the employees and their employements. In order to satisfy the test, one must be able to say that the payment is from employment rather than from a non-employment source.

    This requires the judge to make a finding of fact based on the evidence as to “the reasons and background to the payment and then apply a judgement as to whether the payment was from employment rather than something else.

    Further, although employment does not have to be the sole cause, it does have to be “sufficiently substantial as to characterise the payment as one from employment”.

    Of course, Rangers is the big, recent beast in the area of employee benefit trusts. Unsurprisingly (HMRC’s counsel in this case was their representative in Rangers), HMRC relied on the Supreme Court’s decision.

    As I have argued previously, the decision in Rangers is not without it’s boundaries. Importantly, it was found as a matter of fact that the payments made to the relevant players and executives represented remuneration from employment.

    As you will have noticed from the brief discussion of case law above, where the payments are ‘from’ employment, then they should be subject to tax.

    The FTT decided that the relevant sums did not constitute earnings. They were not satisfied that the payment was from employment rather than from a non-employment source.

    The reasons for this can be broadly summarised as follows:

    • There was no contractual obligation on MDPL to pay the sums as a reward for Dr Thomas’ services as a director or employee
    • The sums paid to Dr Thomas represented the totality of the overall profits of the business after the deduction of expenses, such as salaries paid to other staff and a relatively small salary paid to Dr Thomas
    • Dr Thomas’ evidence was that the profits, had they not been routed through the RT, would have been paid to him by the Company as a dividend

    With regard to the final point, the FTT noted that the payment of a small salary and a large dividend was the bedrock of profit extraction for Companies Indeed, it was noted that the GAAR guidance provides commentary saying that this type of structuring is outside the scope of those provisions.

    Further, the fact that the company did not go through the legal formalities in declaring a dividend were not a concern for the tribunal (perhaps adopting the substance over form analysis from the PA Holdings case). I will talk about this more in a later article.

    Did Part 7A apply to the arrangements?

    Going back to my previous article on Dukeries, I set out the conditions required to trigger Part 7A in the section entitled A word (or several) on Part 7A and the loan charge.

    It was common ground that the payments of loans from the arrangement were ‘relevant steps’.

    However, it is necessary to show that the scheme was a means of providing Dr Thomas with loans and that the loans were provided in connection with Dr Thomas’ employment with MDPL.

    For all the same reasons set out in relation to the discussion of whether the payments were earnings, it was held that the connection between the payments and Dr Thomas’ employment was not satisfied.

    This perhaps cuts to the heart of what was ‘clear’ in December 2010 when we see Ministers and HMRC defending the loan charge.

    Corporation tax deduction

    The case also considered whether, had they held that the payments were earnings, they would have been deductible for corporation tax purposes.

    For the purposes of this article, I will not go into detail on this issue.

    However, HMRC had sought to argue that the contributions to the trust were not deductible on the basis of Scotts Atlantic. In other words, they were not incurred wholly and exclusively for the purposes of the trade.

    The FTT again found against HMRC and that MDPL would be entitled to a deduction.

    Care should be taken as there was one dissenting voice. This is relevant as there were only two voices on the panel. Judge Morgan using her casting vote to determine this issue.

    Conclusion

    Despite it being held up as a beacon of advertising brilliance, in later years, a number of those who portrayed the Marlboro Man have died of smoking-related diseases.

    This meant that Marlboro earnt the less enviable name of ‘Cowboy Killers’.

    It is worth pointing out that this is only an FTT decision (HMRC will almost certainly appeal this decision), then there is potential for a similar reversal of fortunes.

    If you have any queries about this article or tax matters in general then please get in touch.

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