Connected employment

Mr D set up the appellant company in 1992. He and his wife were sole shareholders.

He was company director and his wife was company secretary although she played no active role in the company. In 1999 they sold the share capital to E Ltd under a share purchase agreement.

At the same time Mr D and E Ltd entered into a non-compete agreement which resulted in Mr D being paid a loyalty bonus to be paid in two equal instalments on the first and second anniversaries of the agreement.

Mr D was also appointed service manager for the appellant company now controlled by E Ltd.

The loyalty payments were duly made by E Ltd but no tax or National Insurance were deducted and no parts of the payments were recharged to the appellant company. E Ltd later made a payment equivalent to basic...