PA Holdings has dropped its long-running case against HMRC over payments made to employees which would be taxable as dividend income.

The company appealed an earlier decision that the dividends it paid its staff were in fact emoluments chargeable to PAYE and NIC. Under the scheme, PA Holdings would also receive a corporation tax deduction for the expense as an employment cost.

HMRC duly challenged the planning, with the case being heard by the First Tier Tribunal (FTT) and Upper Tribunals.

The retreat now looks set to encourage HMRC to probe other firms using similar arrangements.

HMRC said: 'The judgment in the Court of Appeal is now final. HMRC will be contacting those whose appeals remain open or are stayed pending the outcome of this case.'

CCH tax expert, Mark Cawthron, said: 'This probably should not come as any great surprise. The Court of Appeal, led by the highly respected Moses LJ, had decided very firmly in HMRC's favour. Few would be betting on the Supreme Court finding differently.

'Other outstanding cases involving this type of avoidance will fall into line now - as ever though, depending upon their own particular facts and merits.'

The case has been problematic. Last year, Francesca Lagerberg, Grant Thornton's head of tax, spoke about the complexity of the case. 'It was previously thought that the then relevant s20, Income and Corporation Taxes Act 1988 gave the answer, giving priority to the taxation of the payments as dividends and the FTT and Upper Tribunal applied this reasoning,' she said.

'However, the Court of Appeal concluded that the payments were emoluments, subject to PAYE and NICs, and there was no need to consider s20 at all. This was despite the earlier tribunal hearings finding the payments were dividends as a question of fact.

The case was PA Holdings v HMRC ([2011] EWCA Civ 1414).