COMPLIANCE
Key points ● the Hoey case is about a tax avoidance scheme involving loans paid out of an employee benefit trust (EBT) ● the Court of Appeal found in favour of HM Revenue and Customs (HMRC) ● HMRC used a little-known pay as you earn (PAYE) Regulation to pass the liability on to the employee.
A decision released by the Court of Appeal on 13 May 2022 proved unlucky for those involved in disguised contractor loan schemes. The important test case of Hoey and others v HMRC [2022] EWCCA Civ 656 examined the relationship between self-assessment and PAYE legislation. In this case, the taxpayer, a UK resident, was engaged by an offshore umbrella company (OUC) to provide information technology consultancy services to ‘end user’ clients (AXA Investment Managers Ltd, Aviva Investors and Threadneedle Investments). He was remunerated using a loan scheme derived from an EBT, which formed the greater part of his income from that source. Rangers football club The Rangers case decision from July 2017 led to the taxpayer, Mr Hoey, accepting he’d received employment earnings during the three years in question (2008/9, 2009/10 and 2010/11). Those earnings were therefore deemed liable to income tax. Taxpayer protection Ordinarily you’d expect that, if a UK-based employee earns employment income, they’d normally suffer PAYE and National Insurance (NI) deductions on that income at source. The difficulty here was that Mr Hoey’s employer, the OUC, was offshore, and was therefore not required under Section 689 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 to make PAYE deductions. So, HMRC couldn’t hand a bill to the OUC for the underpaid liabilities accruing from the loan payments which had been made from an EBT. The next expected step under the PAYE Regulations at Section 689 would be for the next entity in the chain (in this case, the ‘end user’), which is situated in the UK to bear the liability. Ordinarily, the employee would thus be protected
from having to personally bear any liability in these circumstances, because HMRC will usually penalise the employer for not deducting and paying over the PAYE and NI liabilities. The employee can claim a credit through the self-assessment regime as if they had paid them personally. Mr Hoey made a claim for this credit entitlement, arguing that, in the absence of the OUC being liable for the PAYE and NI, the ‘end user’ should be paying them. Hidden powers An infrequently used power in the PAYE Regulations at Section 7A of Regulation 684 gives HMRC the discretion not to impose a liability on the payer of the employment earnings where ‘an officer of Revenue and Customs is satisfied that it’s unnecessary or not appropriate for the payer to do so’. HMRC argued, in this case, that the UK-based ‘end user’ should not, in fact, be liable for paying the tax liabilities because they hadn’t made the payments directly to Mr Hoey. Rather, the OUC had funded the EBT with payments sent from the ‘end user’, and the EBT had then made the payments of the loans to the individual. In dismissing the decisions of the Upper Tribunal (UT), the Court of Appeal agreed with this stance. HMRC also submitted a secondary argument, which was that the provisions relating to the transfer of assets abroad should apply under Chapter 2 of Part 13, the Income Tax Act (ITA) 2007. This argument was, however, rejected by the Court of Appeal, because the judiciary considered that HMRC’s primary argument (that Regulation 684 should apply in this case) was the correct way to go. Subsequently, this meant the transfer of assets abroad rules couldn’t have the effect of creating a separate liability. Due to the above, Mr Hoey was refused a credit through self-assessment
because the ‘end user’ wasn’t required to bear any liability. This meant the liability would now instead be passed on to Mr Hoey to bear personally. Judicial review? Mr Hoey had requested a judicial review on both Regulation 684 and the Transfer of Assets Abroad legislation. His request failed on both counts, because the Court of Appeal considered both arguments presented by HMRC were brought using the correct legislation, and the tribunals hadn’t erred in law. Retrospection – opening the floodgates? Not only did the judiciary consider that no credit entitlement could apply to Mr Hoey because of the application of Regulation 684, but the Court of Appeal then also overturned the consideration of the UT by agreeing with HMRC that the PAYE Regulations could, and should, have retrospective effect. They confirmed there was no time limit associated with the power to absolve an employer of their obligation to deduct and pay over PAYE and NI, unlike in other situations, in which liabilities can be transferred from employer to employee (please note that the power at Regulation 684 can also be used protectively for prospective purpose). This seems to be rather at odds with the fundamental principles of the PAYE regime. It’s also a little concerning that there’s no related appeal mechanism against Regulation 684, Section 7A in this context, other than for the employee to seek judicial review in the Administrative Court. One wonders whether this may be the way HMRC wishes to proceed on tax avoidance cases involving employers and employees in future. n
Links corner Hoey and others v HMRC case: http://ow.ly/zzIN50MnAlN Rangers v Advocate General for Scotland case: http://ow.ly/46ZY50MnAvg
ITEPA 2003, Section 689: http://ow.ly/ftcn50MnAJl ITEPA 2003, Section 684: http://ow.ly/x6cJ50MnATk ITA 2007, Part 13, Chapter 2: http://ow.ly/HM2x50MnB46.
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| Professional in Payroll, Pensions and Reward |
Issue 87 | February 2023
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