In Stephen Hoey v HMRC [2021] UT 0082, the Upper Tribunal confirmed that the First Tier Tribunal has no power to challenge HMRC's discretion to disapply the PAYE regulations and upheld an EBT discovery assessment.
Mr Hoey was an IT specialist who participated in two contractor loan schemes, Penfolds and Hamilton, whereby he received loans from offshore Employee Benefit Trusts (EBTs).
- Penfolds/Hamilton were his employers. He was paid a basic salary taxed under PAYE and received interest-free loans from the EBTs which were repayable on demand.
- Both schemes were notified to HMRC under the Disclosure Of Tax Avoidance Scheme (DOTAS) rules.
- Mr Hoey disclosed, on his tax returns, the DOTAS numbers for one year and the Benefit In Kind on his interest-free loans for all years in question. The loans were clearly described as coming from Employee Benefit Trusts.
- HMRC issued discovery assessments for 2008-09 and 2009-10 and a closure notice for 2010-11. In doing so they exercised their discretion under s.687(7A) to transfer the PAYE tax burden from the employers to Mr Hoey.
On appeal to the FTT (see Discovery on disclosed EBT loans is valid):
Mr Hoey accepted the reasoning in the Rangers EBT case that the original payments to the EBTs were taxable as his employment income.
- Under s.684(7A) ITEPA 2003 HMRC can use their discretion to disapply the PAYE regulations in respect of the taxation of employment income in circumstances where they consider it 'unnecessary or not appropriate' to pursue the employer.
- In his initial appeal to the FTT, the FTT confirmed that it does not have the jurisdiction to interfere with whether or not that discretion was properly exercised.
The taxpayer appealed to the UT on the basis that the employer's obligation to deduct PAYE was given by the PAYE regulations and that the FTT should therefore have given him credit for PAYE deducted and HMRC had no discretion on that matter.
- The Upper Tribunal considered the rules and decided that being given credit for PAYE paid was a matter of tax collection and not PAYE assessment. Thus the FTT indeed had no jurisdiction to disturb the matter.
- Editorial note: This part of the decision now leaves the matter as to whether the employee can claim the PAYE credit for the tax that the employer should have deducted to be decided in the County Court as, should the taxpayer decline to pay the assssment HMRC will need to take debt collection proceedings in the County Court. The County Court will presumably find that the taxpayer can claim the credit and therefore HMRC loses the case. We have to wait and see what happens...
A further aspect of the appeal related to the conditions that must be met for HMRC to make a valid Discovery assessment.
- The taxpayer argued that being paid via a tax-free loan from an EBT was the 'prevailing practice' at the time of the transactions. He tried to demonstrate this as a fact by reference to Dextra Accessories Ltd & Ors v Inspector of Taxes [2002] STC (SCD) 413 and Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062. Those cases both found that arrangements, such as the appellant’s, did not result in a tax charge and it must therefore have been prevailing practice because HMRC did not appeal either decision at the time.
- This argument was rejected by the UT on the basis that it "falls at the first hurdle regarding the state of the law."
- Both Sempra and Dextra were first instance decisions that did not create a precedent. There was also no evidence to suggest that HMRC had accepted those judgments.
A further argument on the discovery aspect was raised: would HMRC's hypothetical officer have been aware that there was a potential insufficiency of tax by virtue of the disclosures made on the tax return? This was also rejected by the UT, who considered that the disclosures did not provide sufficient detail for such an officer to realise that there was a loss of tax.
The final element of the case was a Transfer of Assets abroad argument. The UT found that the FTT had made an error of law in failing to deal with the matter, however as it correctly decided that quantum of the income of the “person abroad” was nil, there was no impact on the outcome.
Useful guides on this topic
DOTAS: Disclosure of tax avoidance schemes
What are rules on Disclosure of tax avoidance schemes (DOTAS)? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?
Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?
P11D: Reporting benefits and expenses
Employers have an annual obligation to complete forms P11D in respect of each employee in receipt of taxable employment benefits or expenses.
Disguised Remuneration Zone
how to settle up with HMRC in respect of any pay that has been disguised as loans 'disguised remuneration' and includes contractor loans and Employee Benefit Trust loans.
External links
Stephen Hoey v HMRC [2021] UT 0082
Report on FTT decision: Stephen Hoey v HMRC [2019] TC07292