It has been announced that PA Holdings Limited has withdrawn its appeal to the Supreme Court. Accordingly, the Court of Appeal judgment in HMRC v PA Holdings Limited [2011] ECWA CIV 1414 is final.

This is a disappointment because the Court of Appeal judgment raised some really important questions which will not now be answered without further litigation.

In very broad terms, what happened in this case is that some employees acquired shares in a company connected with their employer. The issue was the tax treatment of dividends subsequently paid by the company on those shares. HMRC argued that the dividends could reasonably be said to have derived from the employment and should therefore be taxed as earnings.

The First Tier Tribunal found that the dividends were correctly categorised as dividends. However, they also found that they could be treated as earnings - but that did not stop them being dividends. There was therefore an uncertainty about whether they should be charged to tax as dividends under Schedule F or as earnings under Schedule E (as we understood them at the time). It is because of the possibility of income being chargeable under two separate heads that Section 20 Taxes Act 1988 was enacted - and it dealt specifically with the point to confirm that dividend treatment took priority. Section 20(2) says:

"No distribution which is chargeable under Schedule F shall be chargeable under any provision of the Income Tax Acts."

However, the Court of Appeal said that once the Tribunal had concluded that the payments were emoluments, that was the end of the matter. There was no room for further consideration of anything else. Schedule F was irrelevant - the income never came within Section 20 at all. The dividends were earnings and that was the end of it.

The difficulty with this conclusion is that the Tribunal found as a fact that the payments were dividends. There was no challenge to this finding of fact. The Court of Appeal could have said with equal force that the Tribunal found the payments were dividends and therefore there was no scope for the application of any other Schedule. They were dividends and that was the end of it.

Where does this leave the taxpayer? It leaves him in an impossible position. If HMRC had chosen to argue that the payments were dividends, they must have succeeded. They were dividends in form, they were found to be dividends as a fact by the Tribunal and Section 20 says precisely that dividend treatment must prevail. HMRC could not possibly have lost that argument. However, HMRC argued exactly the opposite and the Court of Appeal agreed with them. There is something profoundly wrong for the State to be able to advance completely opposite arguments and succeed on both.

If this sounds familiar - it is. This is exactly what happened in the case of Aspect Capital Ltd (2012) and MJP Media (2010).

It may be that this decision will not be of lasting significance because section 20 has been rewritten in rather different terms In section 366 ITTOIA 2005, However the implications are really important and many will regret that we will not have the benefit of the views of the Supreme Court on the matter.