Allan Jack v The Commissioners for HMRC

The appellant, Mr Jack, appeals against a closure notice issued on 8 March 2024 for the tax year ended 5 April 2011. The notice was issued under s28A(1B) & (2) of the Taxes Management Act 1970 (TMA 1970).

The closure notice concluded that amounts transferred by Mr Jack’s employer to an EBT were employment income and chargeable to tax under s62 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and that the employment income in Mr Jack’s self-assessment tax return for that tax year had therefore been understated by £48,034.

Mr Jack contended that he was overcharged by this closure notice and that the taxable amount for that year should be £24,554, as amounts received after 9 December 2010 should be outside the scope of the loan charge.

As set out below, I find that the loan charge provisions do not apply and that the amounts transferred to the EBT were taxable as Mr Jack’s employment earnings. The closure notice is upheld in full and the appeal is dismissed.

Mr Jack did not dispute that he had taken part in a disguised remuneration scheme in the relevant tax year, and did not dispute that the scheme operated (in summary) as follows. For the avoidance of doubt, no penalties were charged in connection with this closure notice and no criticism was made of Mr Jack’s participation in the AML scheme.

Mr Jack was engaged by Aston Management Limited (AML), an employer based outside the UK in the Isle of Man. As an employee of AML, he was also a beneficiary of an employee benefit trust (EBT) which had an Isle of Man trustee. Mr Jack was resident in, and worked in, the UK throughout the relevant tax year.

Mr Jack’s services were supplied by AML to end clients, who would pay AML for those services. It was agreed between Mr Jack and AML that (after deduction of administration fees) the amount paid by the end client would be paid out by AML in two ways: part was paid as a basic salary to Mr Jack and the balance was paid to an EBT. The EBT then paid benefits (in the form of loans) to Mr Jack from the money contributed by AML. That is, both the salary to Mr Jack and the balance paid to the EBT were paid by AML because of Mr Jack’s work as an employee of AML.

The loans were generally made by the EBT within a few weeks of Mr Jack submitting his paperwork to AML for work done, and Mr Jack agreed that amounts loaned to him in the tax year were effectively equivalent to the amounts paid by AML to the EBT in the tax year.

Following an enquiry, and an accelerated payment notice in respect of the arrangements, HMRC issued the closure notice which is the subject of this appeal. HMRC calculated the amount of the additional tax due in that closure notice from information provided by AML on Mr Jack’s P11D which showed that a net amount of £48,034 had been advanced to Mr Jack by the EBT during that tax year. Mr Jack did not dispute that this total amount had been advanced to him during that tax year. It was also not disputed that Mr Jack had repaid £23,479 of those loans on 21 April 2011.

It was not disputed that these arrangements were not ultimately effective for UK tax purposes, following the decision of the Supreme Court in RFC 2012 plc (in liquidation) (formerly Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 (Rangers). The Supreme Court concluded that the definition of earnings for the purposes of s62 ITEPA 2003 was wide and included, in this context, amounts paid to third parties (such as an EBT) which represented the product of an employee’s work.

The validity of the closure notice was also not in dispute. HMRC had opened an enquiry into Mr Jack’s 2010/11 self-assessment tax return on 27 November 2012, which was within 12 months of the date of filing of that return (24 January 2012). The enquiry was therefore opened within the standard enquiry window. As there is no statutory time limit for the issue of a closure notice (in the absence of a direction requiring HMRC to issue such a notice, which did not apply in this appeal) the closure notice was validly issued under s28A(1B) & (2) TMA 1970.

Although Mr Jack did not dispute the total amounts received by way of loan from the EBT during the relevant tax year, he contended that only £24,554 of this amount was taxable.

In summary, he contended that loans made to him on or after 9 December 2010 were not chargeable because the loan charge review had concluded that loans made on or after that date, which had been repaid before 5 April 2019, would not be within the scope of the loan charge. As he had repaid the amount of loans made to him by the EBT between 9 December 2010 and 5 April 2011 (£23,479) on 21 April 2011, that amount could not be chargeable. As such, only the amount of the loans made before 9 December 2010 (£24,554) could be chargeable.

Mr Jack argued that this was supported by the fact that HMRC had, in correspondence, referred to loans made to 9 December 2010 and action to be taken in respect of the period up to that date.

HMRC contended that the closure notice raised a tax charge under s62 ITEPA 2003 on the amounts transferred from AML to the EBT which were redirected employment income of Mr Jack. The closure notice did not apply the loan charge provisions to loans received by Mr Jack.

HMRC stated that references to 9 December 2010 in correspondence arose because HMRC had misunderstood the P11D submitted by AML as applying only to the period to 9 December 2010, rather than because they considered that the loan charge applied in this context.

HMRC were aware that AML attempted to restructure their schemes in order to remove the prospect of the loan charge applying to loans made after 9 December 2010 and HMRC had therefore believed that the P11Ds produced by AML did not include any loans made after that date. As such, they had understood that any loans included on P11Ds produced by AML were loans made prior to 9 December 2010. It was only later in the enquiry that it became clear that, in Mr Jack’s case, AML had reported all loans made to him by the EBT during the 2010/11 tax year on his P11D and not only those made before 9 December 2010.

This appeal unfortunately arises from misunderstandings on both sides, not assisted by the changes in case law and legislation over the years relating to employment remuneration arrangements including schemes such as that operated by AML.

Mr Jack’s grounds of appeal related to the loan charge provisions introduced in 2011 and amended in 2017 and 2019. He contended that the amount charged in the closure notice included amounts of loans made to him on or after 9 December 2010 and that, as he had repaid the relevant loans before the cut-off date of 5 April 2019, no tax should be due as the loan charge could not apply to those loans.

The closure notice does not apply the loan charge provisions. It applies an income tax charge under the employment earnings provisions to the transfer to an EBT of money received by AML from Mr Jack’s services to end clients. As set out in the decision in Rangers, such transfers are redirected employment income which are earnings (within the meaning of s62 ITEPA 2003) which are taxable on the employee when the transfer is made to the EBT (and not if or when the funds are eventually made available to the employee, whether by loan or otherwise).

The closure notice is clear that it is charging income tax under the employment income provisions on the transfers from AML to the EBT and not on the loans to Mr Jack. The loan charge, the anti-forestalling provisions that applied after 9 December 2010, and the loan charge review, do not operate to remove any liability to a tax charge under the employment earnings provisions and so, in the circumstances of this case, amounts transferred from AML to the EBT during 2010/11 are taxable on Mr Jack as employment earnings regardless of when in the 2010/11 tax year those amounts were transferred.

The subsequent repayment of the loans in the 2011/12 tax year does not alter the tax charge arising in 2010/11 (as confirmed in Advocate General of Scotland v Murray Group Holdings Ltd [2015] CSIH 77 at [61]): the tax charge arises on and because of the transfer from AML to the EBT. Anything that happens to that money later (such as the making of a loan or its repayment) does not affect the tax charge arising on that transfer.

The burden of proof is on Mr Jack to show that he has been overcharged by the closure notice. As the loan charge provisions are not relevant to this charge under s62 ITEPA 2003 and Mr Jack did not dispute that the payment by AML to the EBT was redirected earnings, and agreed that the amount of the loans made to him was equivalent to the amount transferred from AML to the EBT in the 2010/11 tax year, I therefore find that Mr Jack was not overcharged to tax for the tax year 2010/11 by the closure notice under appeal.

HMRC noted in the hearing that, to the extent that the loan charge provisions might apply to any amounts loaned by the EBT to Mr Jack in the 2010/11 tax year, the double taxation provisions in the loan charge legislation should take into account the fact that Mr Jack has incurred income tax on the amounts transferred to the EBT by AML.

For the reasons set out above, the appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.