Both HMRC and a taxpayer have lost their appeal and cross-appeal at the Court of Appeal (CoA). The case concerned a taxpayer that had made use of a marketed tax avoidance scheme whereby he was paid for his contracting services in the IT industry via an offshore employer in both salary and interest free loans granted by an employee benefit trust (EBT).
The taxpayer had appealed the closure notice and discovery assessments that he had received from HMRC relating to his self-assessment returns but later conceded that the interest free loans were disguised renumeration and should be taxed as employment income just before the litigation proceeded.
Before the litigation, HMRC had informed the taxpayer that any deemed PAYE credits would not be available as it determined that the UK based end users of his services could not have been reasonable expected to be aware of the tax avoidance scheme that the taxpayer participated in. Usually, PAYE liabilities fall on the employer, but HMRC can redirect this liability to the employee or an end user of a contractor’s services. In this case HMRC chose not redirect the liability to the UK based end users. The taxpayer appealed this decision to the First-tier Tribunal (FTT) as where HMRC had redirected the liability to the end users the taxpayer could have claimed a credit for the PAYE that should have been deducted.
The FTT held that it did not have jurisdiction to hear the appeal as the FTT could only hear cases that it was specifically allowed to hear under the legislation concerning its establishment. The power that HMRC was using was granted to it by way of primary legislation. The taxpayer held that it should have redirected the liability to end user and that HMRC had acted unlawfully. The taxpayer also held that the power couldn’t be used on a retrospective basis. The FTT dismissed the appeal and the taxpayer appealed to the Upper Tribunal (UT). The UT also held it didn’t have jurisdiction to hear the appeal and similarly dismissed the appeal. The taxpayer appealed this dismissal to the CoA who then deliberated on all the issues raised.
The CoA found that both tribunals did not have the jurisdiction to hear the appeal and that both had been correct in dismissing the appeals, that the only avenue available to the taxpayer was judicial review at the High Court. The CoA appeal also found that the power granted to HMRC via the primary legislation was wide ranging and could apply retrospectively. The CoA also found that HMRC had acted lawfully and that the taxpayer had no right to offset notional PAYE credits from his income tax liabilities.
HMRC had also raised a point that other legislation could have been used to counteract the avoidance, known as Transfer of Assets Abroad (TOAA) and that this would take priority over the charge to tax as employment income. The lower tribunals had previously considered this point and found that, while a charge in theory could apply, no charge arose as the overseas employer would have no taxable profits. The payments to the EBT were considered deductible in arriving at the taxable profits of the overseas employer as they were incurred wholly and exclusively for the trade of the overseas employers. The CoA agreed with the lower tribunals and dismissed HMRC’s cross-appeal. Fortunately, the point about TOAA legislation taking priority over the employment income tax point was dropped by HMRC during the hearing at the CoA but the CoA indicated that this didn’t seem correct. Subsequent questions about any motive defence or impact of EU freedoms related to the TOAA legislation were not considered by the CoA as they were academic once it was determined that no TOAA charge would arise.
The decision can be found at: Stephen Hoey & Ors. v Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
This case highlights the wide-ranging powers HMRC have over PAYE credits and where they determine that notional credits are not available appeal can only be made by way judicial review.
Please contact us if you have any questions over tax avoidance schemes, transfer of assets abroad, negotiations with HMRC or notional PAYE credits. We are experienced with these issues along and can provide experienced advice and assistance.
