Stephen Hoey & Others v Commissioners for HM Revenue & Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Simler,Lord Justice Phillips,Sir Launcelot Henderson |
| Judgment Date | 13 May 2022 |
| Neutral Citation | [2022] EWCA Civ 656 |
| Docket Number | Case No: CA 2020 000291 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 656
Lady Justice Simler
Lord Justice Phillips
and
Sir Launcelot Henderson
Case No: CA 2020 000291
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
Mr Justice Adam Johnson and Judge Raghavan
[2021] UKUT 0082
Royal Courts of Justice
Strand, London, WC2A 2LL
Rory Mullan QC (instructed by RPC LLP) for the Claimants and Appellant
Sam Grodzinski QC, Aparna Nathan QC, Raymond Hill, Marika Lemos and Hitesh Dhorajiwala (instructed by the General Counsel and Solicitor to HMRC) for the Defendant and Respondent
Hearing dates: 28, 29, 30, 31 March & 1 April 2022
Approved Judgment
This judgment was handed down by the Judge remotely by circulation to the parties' representatives by email and released to the National Archives. The date and time for hand down is deemed to be 13 May 2022 at 10.30
Lady Justice Simler, Lord Justice Phillips,
This is the judgment of the court, to which all its members have contributed.
In this judgment we deal first with the claim for judicial review, and thereafter with the various issues that arise on the statutory appeal from the decision of the Upper Tribunal reported as Hoey v HMRC [2021] UKUT 0082, [2021] STC 792. The judgment is arranged in five sections as follows:
I. Introduction
| Section | Paragraph |
| I. Introduction | 3 – 22 |
| The facts | 23 – 30 |
| II. The judicial review: availability of a PAYE credit | 31 |
| The relevant legislation | 31 – 62 |
| The meaning and scope of section 684 (7A)(b) and its effect on the Claimants | 63 – 90 |
| Was the power lawfully exercised and its effect on the availability of the PAYE credit under regulations 185/188 | 91 – 109 |
| III The jurisdiction to determine the validity of the PAYE credit following exercise of the section 684 (7A)(b) power | 110 – 112 |
| The challenge to the Upper Tribunal's decision | 113 – 115 |
| Discussion and conclusion | 116 – 133 |
| IV The Transfer of Assets Abroad issue | 134 |
| The relevant legislation | 134 – 145 |
| Was there a transfer of assets abroad by Mr Hoey | 146 – 149 |
| Was income payable to the Employers as a result of the transfer and/or associated operations | 150 – 155 |
| The quantum of the Employers' profits | 156 – 169 |
| The wholly and exclusively rule: legal principles | 170 – 173 |
| The decisions of the FTT and Upper Tribunal | 174 – 187 |
| Discussion and conclusion | 188 – 204 |
| V Overall conclusion | 205 |
During the three tax years in issue in this case (from 6 April 2008 to 5 April 2011), Mr Hoey worked as an IT contractor in the UK for a variety of UK based entities (together referred to as “the End Users”) under arrangements with two offshore entities that employed him (together referred to as “the Employers”). There were other taxpayers who participated in the same or similar arrangements. A number of these taxpayers are claimants in the judicial review and followers in the statutory appeals. We refer to them collectively as “the Claimants”.
Under the arrangements, the Employers paid a significant part of Mr Hoey's remuneration into employee benefit trusts (“the EBTs”). The trustees of the EBTs then made regular interest free loans in an equivalent amount to him in respect of the services he provided to the End Users. In practice it was not expected that the loans would have to be repaid. The arrangements were part of a marketed tax avoidance scheme believed to allow the Employers to make payments through the EBT to Mr Hoey without deducting income tax (or national insurance contributions) under the Income Tax (Pay As You Earn) Regulations 2003 (referred to below as “the PAYE Regulations”). The arrangements were disclosed to The Commissioners for Her Majesty's Revenue and Customs (“HMRC”) under the DOTAS legislation; and no income tax was declared payable or paid by Mr Hoey, or the Employers, on the Employers' payments of contributions (which were ultimately received as loans) into the EBTs. There is no suggestion that any part of the arrangements which comprised the tax avoidance scheme was a sham.
HMRC issued Mr Hoey with discovery assessments in relation to the contributions to the EBTs (primarily on the basis that they were earnings from employment and liable to income tax) on 18 February 2013 and 5 March 2014 (for the years of assessment 2008/09 and 2009/10 respectively) and made a closure notice in relation to the tax year 2010/11 on 22 December 2015. These are the assessments challenged by Mr Hoey, both by way of statutory appeal under section 31 of the Taxes Management Act 1970 (“ TMA”) and by way of judicial review.
HMRC's primary basis for the assessments was that the contributions to the EBT were taxable as employment income under sections 6, 7, 9, 11 and 13 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
Although this was originally contested, following the judgment of the Supreme Court in RFC 2012 plc (in liquidation)(formerly Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45, [2017] 1 WLR 2767, on 12 June 2019, Mr Hoey conceded that the principle established in Rangers applied so that the amounts paid by way of EBT contributions for onward loans to him, were earnings from employment and chargeable to income tax on that basis. As the Supreme Court held at [41]:
“As a general rule, therefore, the charge to tax on employment income extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party. The legislation does not require that the employee receive the money; a third party, including a trustee, may receive it. …”
The payments were therefore a component of remuneration for services provided in the employment, and as such constituted taxable employment income subject to deductions in respect of PAYE. The Supreme Court held that the tax charge on employment income had primacy over any specific tax charge on employment-related loans or trust income. Accordingly, in Rangers the UK based taxpayer company making the payments into the trust of taxable emoluments should have made the necessary PAYE deductions.
Notwithstanding his concession, Mr Hoey's case is that the principal obligation to pay tax on the employment income represented by the EBT contributions is on the employer. Ordinarily the obligation to deduct PAYE on employment income does fall on an employer when making a payment of employment income. However, the tax can be collected directly from the employee (upon whom the economic burden falls in any event) where a decision or direction to that effect is made. In a case where the obligation to deduct or account remains on the employer (and is not transferred) the employee's self-assessment (if required to make one) should show his or her liability to income tax on the employment income but should then claim the PAYE amount deducted by the employer, as a credit for the PAYE that has been paid (referred to as the “PAYE credit”).
Moreover, as offshore entities (and absent a taxable presence in the UK) there was no obligation on the Employers to operate PAYE. In these circumstances, section 689 ITEPA treats a person in the UK for whom the employee works as a deemed employer making notional payments of employment income and therefore obliged to deduct or account to HMRC for PAYE on the notional employment income paid. HMRC proceeded on the basis that the End Users were deemed employers subject to PAYE obligations under the Regulations pursuant to section 689(2) in these circumstances. The End Users did not actually make any payments of employment income to Mr Hoey (or other contractors) and, unsurprisingly, they made no deductions of PAYE. Nor was the employment income ever declared in Mr Hoey's own tax returns or self-assessments for the years in question because of the avoidance scheme in which he participated. Indeed, Mr Hoey did not and cannot have proceeded on any assumption, expectation or understanding that the income tax due on payments of contributions to the EBTs had been deducted or accounted for to HMRC by the End Users (or anyone else for that matter).
By letter dated 13 October 2017, Andrew Finch, an officer of HMRC, wrote to Mr Hoey informing him that:
“HMRC retain a discretion under s.684(7A)(b) of ITEPA 2003 not to require a person to comply with the PAYE regulations where it would not be appropriate for that person to do so. In the circumstances of your use of the tax arrangements, I have no reason to believe that the end user of your services was aware of or party to the avoidance and I consider it inappropriate for the end-user of your services to be required to comply with the PAYE regulations in relation to your employment income. As such, you remain liable to pay the tax due…”
Similar letters were issued subsequently to the other Claimants by Scott McFarlane, an officer of HMRC, in May 2019. The decision to relieve the End Users of liability under the PAYE Regulations by exercising the power in section 684(7A)(b) ITEPA (which we shall refer to as the “7A power”) meant, according to HMRC, that no PAYE credit was available to Mr Hoey or the Claimants, who remained liable for the income tax due under the assessments on this basis.
Mr Hoey disputed the scope, application and legality of the 7A power exercised by HMRC in his case. He also contended that exercising this power did not have the effect of withdrawing his accrued right to the PAYE credit. While accepting that he had received payments of earnings and was liable to income tax on those earnings, he argued that the contributions made to the EBT were notional payments of PAYE income treated as made by the End Users who were obliged to pay...
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