Hoey v Revenue and Custom Commissioners
| Jurisdiction | UK Non-devolved |
| Neutral Citation | [2021] UKUT 82 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 82 (TCC)
Mr Justice Adam Johnson, Judge Swami Raghavan
Upper Tribunal (Tax and Chancery Chamber)
Income tax – Offshore employer using EBT – Whether FTT had jurisdiction to determine if HMRC entitled to exercise discretion under ITEPA 2003 , s. 684(7A) to disapply PAYE regulations – Reg. 185 and 188 – FTT does not have jurisdiction.
Transfer of Assets Abroad code – Whether FTT erred in finding motive defence did not apply – No – Whether FTT erred in finding income of person abroad was nil – No – Whether TOAA infringed taxpayer's EU law free movement of capital – No – Taxpayer's appeal dismissed, HMRC's cross-appeal allowed in part.
The UTT found that the FTT did not err in law in deciding: (1) Mr Hoey's entitlement to a PAYE credit under PAYE reg. 185 and reg. 188 was not within its jurisdiction and as a result the taxpayer is denied credit (under reg. 185 and 188) for PAYE income tax which ought to have been deducted in respect of payments received under a tax avoidance scheme; (2) HMRC's discovery assessments were valid; (3) In respect of the TOAA code, that (a) the motive defence was not available, and (b) the TOAA charge was not unlawful under EU law. The appellant's appeal was therefore dismissed and in addition HMRC's cross-appeal on a number of issues related to the TOAA regime, were allowed in part.
This is a long and complex case which re-examined the various original decisions of the FTT in Hoey [2019] TC 07292 in considerable detail and in general upheld them, but the most important issue at stake was HMRC's controversial use of a discretionary power to deny the taxpayer a credit in respect of PAYE income tax which ought to have been deducted from him, but which was not.
Mr Hoey was a UK-based contractor who provided his services to UK clients via offshore employers (initially in the Isle of Man and later in Guernsey). The employers paid a minimal salary subject to PAYE and NICs and made substantial “loans” to Mr Hoey without deduction of PAYE or NICs. Following the Supreme Court decision in RFC 2012 plc (in liquidation) (formerly Rangers Football Club plc) v Advocate General for Scotland [2017] BTC 22, Mr Hoey accepted that the loans made to him were earnings within s. 62, Income Tax (Earnings and Pensions Act) 2003 (ITEPA) and thus were properly to be taxed as his earnings. However, as his actual employer was offshore and beyond the jurisdiction and scope of UK PAYE, liability to operate PAYE would normally have fallen onto the UK client for whom he was working, under s. 689 ITEPA. That client had not deducted tax and so Mr Hoey claimed credit for the tax which had not been so deducted, citing PAYE reg. 185.
HMRC took the view that it was not appropriate for the UK client to be held liable as that client would not have been aware of the tax avoidance arrangements, and so it invoked its discretion under s. 684(7A) ITEPA to relieve the end client from responsibility to operate PAYE – meaning that the liability for tax fell back to the individual employee. Mr Hoey was appealing against the decision of the FTT which had upheld HMRC's position.
The main question essentially hinged upon whether the operation of a credit under reg. 185 is a matter of assessment or of collection. The significance of this distinction arises because it is a general principle (accepted by all parties) that an assessment of the tax properly due is within the jurisdiction of the Tribunals, but that matters relating to the collection of that tax are not. Mr Hoey contended that the reg. 185 credit related to the assessment stage, whereas HMRC argued that it related to the collection stage.
The UT looked at the concept of the “amount payable” as defined within s. 8 and 9 of the Taxes Management Act 1970 (TMA) and distinguished it from that of the “amount payable by the taxpayer” as set out in s. 59B TMA. This draws attention to the difference between the amount of tax which is to be collected (that is, the total amount of tax contained in a self assessment tax return) and the person from whom that tax should be collected. The operation of the credit under reg. 185 is explicitly stated in the regulation itself to be in respect of the s. 59B amount and is thus related to the collection, rather than the assessment of tax. Accordingly, the UT found that the question of whether HMRC was right or even entitled to apply discretion lay outside of its jurisdiction.
In case it was wrong in the first argument, the UT looked at whether the application of HMRC's discretion under s. 684(7A) to relieve the end user from operating PAYE had any effect on the potential availability to Mr Hoey of a credit for PAYE and decided that it did not.
HMRC contended that reg. 185 only gives credit for the tax which an employer was “liable to deduct” and it should therefore follow that if HMRC's use of s.684(7A) has switched off the requirement so that the end user is no longer “liable to deduct”, then there is no credit to give. The UT found that this argument was incorrect.
Section 684(7A) had been operated retrospectively, that is, HMRC only applied its discretion after the event. At the time payment was actually made, there was a liability to operate PAYE. In order to “switch off” that requirement, HMRC would have had to apply its discretion prospectively, ie in advance of the payment being made. The UT therefore found that, if it had the necessary jurisdiction (which it had already decided against) then it would have found in favour of Mr Hoey and awarded a credit.
Finally, the UT considered whether, if it was wrong in both of the preceding arguments, discretion was available for HMRC to exercise in the first place and decided that it was. Section 684(7A) was introduced by the Finance Act 2003 and an extract from the explanatory notes accompanying the Finance Bill was submitted which in part stated:
The new Subsection (7A) confirms that the Inland Revenue can agree to different tax collection arrangements being set up that reflect the particular circumstances of a payer. Or alternatively that the payer does not have to follow PAYE regulations, where these would be unnecessary or inappropriate.
The UT considered that this only served to confirm its finding that s. 684(7A) was intended to work prospectively and could not be retrospective, but did not impose any other limit. The discretion it gives does allow HMRC, if the officer considers it necessary or appropriate, to disapply the PAYE regulations. Accordingly, the UT held that Mr Hoey's argument would have failed.
HMRC's power of discretion under s. 684(7A) to disapply PAYE regulations is wide-ranging and controversial. It has been speculated that this case (and that of Higgs [2020] TC 07611) may lead to an increase in the incidence of HMRC pursuing individual employees for PAYE arrears rather than the employer under PAYE regulations. However, it is important to note that this case does not preclude a challenge to HMRC's use of discretion, it simply confirms that the FTT/UT is not the appropriate route for such a challenge, which would instead need to be pursued by means of a judicial review.
Mr Hoey's initial application for judicial review was rejected 1 May 2020 and his appeal to the Court of Appeal against that refusal, which had been stayed pending the outcome of this case, should now proceed to great interest.
Rory Mullan, counsel, instructed by RPC for the Appellant, and appeared for the Respondent to the Commissioners' cross-appeal)
Aparna Nathan QC and Marika Lemos, counsel, instructed by the General Counsel and Solicitor to HM Revenue & Customs, appeared for the Respondents in Mr Hoey's appeal, and for the Appellants in the Commissioners' cross-appeal
| Para. | |
| Introduction | 1 |
| Background facts | 8 |
| The PAYE credit and jurisdiction issues: The statutory provisions | 15 |
| 16 | |
| PAYE regulations | 28 |
| TMA: Provisions on self-assessment / assessment | 36 |
| PAYE Regulations: Regulations 185 and 188 | 42 |
| HMRC exercise 7A discretion | 45 |
| FTT Decision on PAYE and jurisdiction issues | 47 |
| Does the FTT have jurisdiction over Regulation 188/185? | 50 |
| Question of Statutory interpretation | 62 |
| Discussion | 81 |
| Our explanation of statutory provisions: Points to note about s8 /9/ s31 /s59 TMA and Regulations 185 and Regulation 188 | 87 |
| Regulation 185 – only for s59B purposes or wider? | 97 |
| Regulation 188 | 102 |
| Jurisdiction to address exercise of HMRC's discretion under s684(7A)(b) ITEPA | 109 |
| Effect of exercise of 684(7A)(b) on availability of Regulation 185 and Regulation 188 PAYE credit | 112 |
| On the assumption the 7A discretion does affect the availability of the Regulation 185, Regulation 188 PAYE credit, what is its scope? | 127 |
| The Discovery Assessment Validity Issue | 134 |
| 1) Discovery | 137 |
| The FTT's findings | 137 |
| Parties' submissions and Discussion: | 141 |
| 2) Failure to include income the result of error attributable to Generally Accepted Practice (s29(2)) | 151 |
| Discussion: s29(2) Generally Accepted Practice | 164 |
| 3) S29(5) TMA – awareness of hypothetical HMRC officer | 172 |
| Discussion on s29(5) | 188 |
| TOAA code issues: HMRC's cross-appeal and appellant's grounds | 198 |
| Overview of cross-appeal and grounds | 1+8 |
| HMRC Cross-Appeal Ground 1 | 204 |
| HMRC Cross-Appeal Ground 2 | 207 |
| i) Did the FTT apply the wrong test? | 211 |
| ii) No evidence /Insufficiency of evidence for finding? | 218 |
| HMRC Cross-Appeal Ground 3 – motive test – FTT wrong to reject additional reasons for why motive test not satisfied – only reasonable conclusion on facts was that neither limb of motive... |
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