“Connection Not Causation”: The Court of Appeal’s Authoritative Construction of s 554A ITEPA 2003 in Marlborough DP Ltd v HMRC [2025] EWCA Civ 796

1. Introduction

The England & Wales Court of Appeal (Civil Division) has delivered a landmark decision that reshapes the application of Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). In Marlborough DP Ltd v Commissioners for His Majesty’s Revenue & Customs (“Marlborough DP”), the Court dismissed the taxpayer company’s appeal, holding that:

• the phrase “in connection with … employment” in s 554A(1)(c) ITEPA is not a causal test; a sufficient “connection”, direct or strong, will satisfy the condition even if employment was not the reason for the payment/loan, and
• payments channelled through a Remuneration Trust (“RT”) with the real purpose of extracting profits tax-free for the director could not be deducted for corporation tax because they were not incurred “wholly and exclusively” for the company’s trade.

The judgment therefore tightens the net around disguised-remuneration schemes and gives authoritative guidance on the meaning of “in connection with” across tax legislation.

2. Case Overview

2.1 Parties

• Appellant: Marlborough DP Ltd (“MDPL”) – a dental-practice company wholly owned and directed by Dr Thomas.
• Respondent: HM Revenue & Customs (“HMRC”).

2.2 Procedural History

1. FTT (Sept 2021) – scheme held not to trigger Part 7A; majority (casting vote) allowed CT deduction.
2. UT (Apr 2024) – reversed on both points; held loans taxable under Part 7A and non-deductible.
3. Court of Appeal (Jun 2025) – upheld UT; permission to cross-appeal on “general earnings” had earlier been refused.

2.3 Facts in Brief

MDPL paid virtually all annual profits into an offshore RT; the trustee loaned back matching amounts to Dr Thomas. The scheme sought (i) a corporation-tax deduction for the contributions and (ii) to deliver untaxed cash to the director as loans rather than earnings or dividends.

3. Summary of the Judgment

1. Interpretation of s 554A(1)(c) – The Court affirmed the UT’s view that the statutory phrase “in connection with” imports only a link, not a requirement that employment be “part of the reason” for the loan. A strong or direct nexus suffices.
2. Application to the Facts – Dr Thomas’ sole directorship and operational control of MDPL’s profit-generating trade provided the requisite nexus between the RT loans and his employment. Part 7A applied; the loans were deemed employment income.
3. Corporation-Tax Deduction – The company’s purpose in making RT contributions was to extract profit free of tax for Dr Thomas, not to advance the trade. The expenditure therefore failed the “wholly and exclusively” test; no deduction available.
4. Appeal Dismissed – All five grounds failed; the Court endorsed UT’s decision in full.

4. Detailed Analysis

4.1 Precedents and Authorities Considered

• Coventry & Solihull Waste Disposal v Russell [1999] – emphasised contextual reading of “in connection with”.
• Barclays Bank plc v HMRC [2008] – established that “in connection with” can be indirect and multiple.
• London Luton Hotel BPRA LLP v HMRC [2023] – demonstrated context-sensitive range (“strong & close nexus” vs “weak & loose”).
• Mathur v HMRC [2024] – confirmed broader reach of “otherwise in connection with”.
• Rangers EBT litigation (RFC 2012 plc) [2017] – backdrop for Part 7A; Supreme Court taxed redirection of earnings.
• Mallalieu v Drummond [1983] & Scotts Atlantic [2015] – dual-purpose expenditure and “wholly & exclusively”.
• Investec Asset Finance [2020] & Vodafone Cellular (1999) – interplay of findings of fact and legal characterisation for deduction tests.

These cases formed the interpretive scaffolding for the Court’s twin holdings on connection and deductibility.

4.2 Legal Reasoning Explained

4.2.1 “In Connection With … Employment”

1. Statutory Language – Parliament deliberately eschewed “from” or “by reason of” (traditional causative phrases) and selected “in connection with”, signalling a broader net.
2. Contextual Guard-Rails – Five cumulative conditions in s 554A(1) (employee status, relevant arrangement, connection, relevant step, link between step & arrangement) plus specific exclusions (e.g., s 554F commercial loans) cabin the breadth, securing certainty.
3. Objective Test – “Reasonable to suppose” injects an objective perspective; no need to divine subjective motive.
4. Strength of Nexus – Following Barclays and London Luton, the Court accepted that degrees of connection vary with context; here a strong/direct nexus is required but not causation.
5. Application – Dr Thomas’ managerial control and profit-deriving services meant the flow of company profits (via RT loans) was intimately tied to his employment. That link was enough.

4.2.2 Corporation-Tax Deduction (“Wholly & Exclusively”)

1. Purpose vs. Effect – Building on Mallalieu, the Court distinguished the taxpayer’s object from mere consequences.
2. Dual Purpose Present – The real object was to divert profits and secure a personal tax advantage; any benefit to the trade was incidental.
3. Irrational to Allow Deduction – On the factual matrix, Judge Morgan’s contrary conclusion was “simply unrealistic”; UT right to treat it as an error of law in Edwards v Bairstow terms.

4.3 Immediate and Long-Term Impact

• Disguised-Remuneration Schemes – Schemes recast as “loans” or “returns on investment” now face easier capture by Part 7A; taxpayers cannot argue employment was not the reason.
• Professional Advice – Advisers must revisit any planning that assumed a causation threshold; risk assessments should be updated.
• Corporation-Tax Deductions – The case underscores that steps taken primarily to achieve a tax effect rather than advance trade will likely fail the “wholly and exclusively” hurdle.
• Interpretation Beyond Part 7A – The Court’s methodology (context-driven, purposive, rejecting judicial glosses) will influence readings of “in connection with” in other codes (Capital Allowances, SDLT anti-avoidance, etc.).
• Retroactive Interplay with 2017 Amendments – Judgment confirms that Parliament’s 2017 overlap provisions are safety-valves, not indicators that initial scope was narrow.

5. Complex Concepts Simplified

• Part 7A ITEPA – Anti-avoidance regime taxing “disguised remuneration” where a third party provides an employee with money, assets or loans under an arrangement.
• Relevant Arrangement / Relevant Step – Arrangement covering the employee; “step” includes paying money or making a loan to, or for, the employee.
• “In Connection With” vs. “By Reason Of” – The former requires only a link; the latter demands causation. Marlborough DP confirms Parliament intentionally chose the broader link.
• Wholly & Exclusively – A corporation may deduct only those expenses whose sole object is to further the business. Dual purposes (trade + tax benefit/personal benefit) generally disqualify.
• Edwards v Bairstow Jurisdiction – Appellate courts can overturn findings where, on undisputed facts, the only reasonable conclusion contradicts the tribunal’s determination.

6. Conclusion

Marlborough DP crystallises two pivotal principles: (1) “in connection with” in tax statutes imports a contextual nexus, not a causal requirement, and (2) attempts to secure corporate deductions for sums whose true object is personal tax avoidance will fail the “wholly & exclusively” test. The decision fortifies HMRC’s arsenal against remuneration-trust and similar schemes, demands heightened diligence from tax advisers, and supplies courts with a robust interpretive template for future controversies over the protean phrase “in connection with”.