Stephen Hoey v The Commissioners for HMRC

This is Mr Hoey’s appeal and HMRC’s cross appeal against the decision of the FTT published as Stephen Hoey v HMRC [2019] UKFTT 489 (TC).

Mr Hoey is a UK-based IT contractor who provided services to end users who were also in the UK. Mr Hoey’s employers were however based offshore (the first one in the Isle of Man and the second in Guernsey). The employers made contributions to Employee Benefit Trusts (“EBT”) which in turn made loans to Mr Hoey. Shortly before the FTT hearing, Mr Hoey conceded the payments of contributions into the EBT were, following the Supreme Court’s decision in Rangers (Footnote: ¹), taxable employment income which was subject to PAYE under the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

The obligation to deduct PAYE normally falls on a person’s employer. An employee’s self-assessment would therefore show that the employee was liable to tax on the employment income but then reflect a credit for the PAYE (“PAYE credit”) deducted by the employer. But, because Mr Hoey’s employers were based outside the UK, ITEPA provided that it was the UK end users of Mr Hoey’s services who were liable for PAYE on the employment income (that was, following Rangers, the employers’ contributions to the EBT). HMRC took the view it was not appropriate to hold those end users liable for the PAYE and exercised a statutory discretion, to relieve the end users from liability. That, HMRC say, meant no PAYE credit was due as Mr Hoey remained liable for the tax. In any case, HMRC argue the FTT had no jurisdiction, in the context of an appeal against an assessment or otherwise, to deal with the PAYE credit; that was a matter for collection proceedings.

Mr Hoey submits the relevant regulations do still give him the PAYE credit, and that the question of what amount a taxpayer must pay, which goes to the heart of an assessment, is within the FTT’s jurisdiction. He disputes the scope and legality of the discretion HMRC exercised (under s684(7A) ITEPA “the 7A discretion”) and submits these matters too fall within the FTT’s jurisdiction. He says the FTT was wrong to agree with HMRC that it lacked jurisdiction on the PAYE credit issue and regarding the 7A discretion. We refer to this group of issues as “the PAYE and jurisdiction issues”.

Mr Hoey’s appeal before the FTT dealt with his appeals against two discovery assessments (2008-9, 2009-10) and an appeal against a closure notice (2010-11). Mr Hoey further submits the FTT erred in upholding the validity of the discovery assessments. We refer to this issue as “the discovery assessment validity issue”. With the permission of the FTT, Mr Hoey raises a number of grounds before us relating to the PAYE and jurisdiction issues and the discovery assessment validity issue.

The assessments and closure notice, as well as imposing a charge based on employment income, raised a charge based on the Transfer of Assets Abroad (“TOAA”) code (Footnote: ²) in respect of amounts arising to the offshore employers. Mr Hoey also argued the TOAA charge did not apply because he had a statutory defence based on the lack of tax avoidance motive and that in any case that the TOAA code contravened EU law rights on free movement of capital. The FTT did not consider it strictly necessary, in the light of Mr Hoey’s concession on the employment charge, to deal with the TOAA arguments but nevertheless went on to analyse those. It considered Mr Hoey could not avail himself of the relevant defence, and that the TOAA code did not contravene EU law. However, it considered the income charged under TOAA was nil once the amounts the offshore employers received were offset by the sums the employers paid out in remuneration. HMRC’s cross-appeal, granted with permission of the FTT, maintains the FTT made various errors of law in reaching these findings. We refer to these as “the TOAA issues”.

We deal in turn with the PAYE credit and jurisdiction issues, the discovery assessment validity issue and the TOAA issues.

We set out the basic background facts the FTT found, some of which, in particular concerning Mr Hoey’s motivations, are subject to challenge and which we consider in more detail when discussing the relevant ground of appeal. Paragraph numbers are to those in the FTT Decision.

Mr Hoey is an IT specialist who provided his services to end users ([13]). He had previously, in around 2004, done this through a personal service company but had found the complexities of running his own company too much for him to deal with. He engaged the services of an intermediary (Dynamic Management Solutions Ltd “DMS”), and subsequently Cascade (the intermediary / intermediaries). DMS introduced him to Penfolds (an Isle of Man company ([3(1)][15]) who became Mr Hoey’s employer. In September 2009 he transferred his employment to Hamilton Trust, a Guernsey based trust company ([15]) (each an “Employer” and together “the Employers”).

The Employers provided Mr Hoey’s services to the end users who in the relevant periods were UK-based entities: Axa Investment Managers Ltd., Aviva Investors and Threadneedle Investments ([20][31]-[35] and [42]-[47]).

The Employers paid Mr Hoey a basic wage for his work, on which tax was paid in full by the Employers ([21] [36] [49]). Further payments were made to a trust for the benefit of employees of the Employer (“the Trust”) ([22] [37] [49]). The trust would then make interest free loans to the employees [(38]-[39] [50]-[51]).

The arrangements were disclosed to HMRC under the DOTAS legislation (Footnote: ³) and allocated scheme reference numbers ([24] [27] and [40]).

At the time, it was understood that only the benefit of the loans was taxable, by reason of Chapter 7, Part 3 ITEPA 2003. That benefit was declared on Mr Hoey’s tax returns. The tax treatment, for employment income purposes, of sums paid into EBTs was considered in the Rangers litigation culminating in the judgment of the Supreme Court given in 2017. On 12 June 2019, shortly before the FTT hearing, which took place on 1-9 July 2019, Mr Hoey accepted that the sums paid to the trusts were taxable payments of earnings within s62 ITEPA 2003.

To make sense of the PAYE credit and jurisdiction issues, which ultimately turn on statutory interpretation, it is convenient to deal first with the relevant law. We set these provisions at some length in order to see the relevant parts (which we have emphasised in bold) in their context, we later narrate in the discussion section our understanding of how the provisions fit together.

In broad outline, in this section we set out: 1) a) the provisions in ITEPA which charge tax, b) provisions in ITEPA setting out what PAYE regulations may provide for, c) the ITEPA provision under which HMRC’s statutory discretion to relieve the end-users is said to arise, and then 2) the basic framework of PAYE regulations. We then turn to 3) the provisions in the Taxes Management Act 1970 (“TMA 1970”) which set out the provisions on tax returns, assessments, payments and appeals, before returning at 4) to the specific PAYE Regulations 185 and 188 said to give rise to Mr Hoey’s PAYE credit.

Section 6 describes the nature of the charge to tax on “employment income” which is further defined in s7(2) and which includes, at s7(2)(a), “earnings within Chapter 1 of Part 3”. The term “earnings” is defined “in relation to an employment” in s62. That definition includes:

“(a)

any salary, wages or fee, (b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, or (c) anything else that constitutes an emolument of the employment.”

Section 9 defines the amount of employment income charged to tax.

Section 13(1) provides that the person liable for any tax on employment income [under this Part] is the “taxable person” as defined. That definition includes (subsection 2), if the tax is on general earnings, “the person to whose employment the earnings relate.”

Part 11 of ITEPA, as explained by s682 ITEPA, “provides for the assessment, collection and recovery of income tax in respect of PAYE income”, which s683 defines to include amongst other things, any “PAYE employment income”, which term in turn includes “any taxable earnings from an employment in the year…”. There is no dispute here that the sums paid into the trusts were PAYE employment income.

The PAYE regulations, which we come on to, deal with the standard situation of an employer paying its employee earnings and deducting tax from those earnings.

In so far as is relevant here, s689 applies where: a) an employee works for a person who is not the employee’s employer (“the relevant person”), b) the employer paid the employee PAYE income, c) PAYE regulations do not apply to the person making the payment, and d) income tax is not deducted, or not accounted for, in accordance with the regulations (the PAYE regulations) by the person making the payment.

There is no dispute that HMRC considered s689 to apply: a) Mr Hoey worked for the end-users, not his employers (Penfolds and Hamilton), b) those employers paid him, c) the PAYE regulations were not considered by HMRC to apply to Penfold and Hamilton because they were outside of the UK, and d) Penfold and Hamilton did not deduct or account for income tax on the payments into the trusts.

The consequence of s689 applying is that (under s689(2)) the person for whom the employee works (i.e. the end user) is treated as making a payment of PAYE income.

That end user is treated, by virtue of s710(2)(b), as an “employer”, and the amount of PAYE income paid by it is termed a “notional payment” (s710(2)(a)) for the purposes of s710. That section provides:

“(1)

If an employer makes a notional payment of PAYE income of an employee, the employer must, subject to and in accordance with PAYE regulations, deduct income tax at the relevant time from any payment or payments the employer actually makes of, or on account of, PAYE income of the employee.

(2)

For the purposes of this section—

(a)

a notional payment is a payment treated as made by virtue of any of sections 687, 689 and 693 to 700, other than a payment whose amount is given by section 687(3)(a) or 689(3)(a), and

(b)

any reference to an employer includes a reference to a person who is treated as making a payment by virtue of section 689(2).

(3)

Subsection (4) applies if, because the payments actually made are insufficient for the purpose, the employer is unable to deduct the full amount of the income tax as required by subsection (1).

(4)

The employer must, subject to and in accordance with PAYE regulations, account to the Commissioners for Her Majesty's Revenue and Customs at the relevant time for an amount of income tax equal to the amount of income tax the employer is required, but is unable, to deduct.

Section 684(1) requires HMRC to make regulations (“PAYE Regulations”) with respect to the assessment, charge, collection and recovery of income tax in respect of all PAYE income. Section 684(2) provides PAYE regulations may:

“…in particular, include any such provision as is set out in the following list.

LIST OF PROVISIONS

Further subsections in s684 provide:

We come on to the relevant parts of the PAYE regulations but at this point we highlight the particular importance to this appeal of s684(7A) ITEPA. According to HMRC, this gives HMRC the ability to remove the liability to deduct and account for PAYE from the end user with the result, that the employee, Mr Hoey, is liable for the tax.

Regulation 2 defines “notional payment” by reference to s710(2)(a) ITEPA and “other payer” as “a person making relevant payments [defined in Regulation 4] in a capacity other than employer, agency or pension payer.”

Regulation 3 provides a definition of “Net PAYE” income (neither of the amounts used to derive that amount – allowable pension contributions and charity donations – are relevant in this case).

Regulation 4 – defines “relevant payments” as “payments of, or on account of, net PAYE income….[exceptions not relevant]”.

Under Regulation 12 “other payers” are treated as employers.

Under Regulation 21(1) an employer, on making a relevant payment to an employee during a tax year, “must deduct or repay tax in accordance with [the PAYE Regulations] by reference to the employee’s code, if the employer has one for the employee”.

Regulation 62 applies if an employer (which according to Regulation 12 above includes an “other payer”) makes a relevant payment which is a notional payment. Under Regulation 62(2), the employer (other payer) must “so far as possible, deduct tax required to be deducted in respect of a notional payment…from any relevant payment or payments which the employer actually makes to the employee at the same time as the notional payment”, or (under subsection 4) from other payments of net PAYE income. Regulation 62(5) provides that if such payments made “are insufficient to deduct the full amount of tax due in respect of notional payments” then the employer must account to HMRC for any amount which the employer is unable to deduct. (Again by virtue of Regulation 12 “employer” includes an “other payer”.)

There are then a number of provisions enabling HMRC to make a direction transferring liability from the employer/ end user to the employee: Regulations 72, 72F and 81. Each contain notice provisions the employee and appeal rights for the employee.

Mr Hoey’s case, that if such a direction is not made, he is entitled to treat the PAYE tax as having been paid by the employer, rests on Regulation 185 and Regulation 188. As those provisions cross refer to provisions in the Taxes Management Act (“TMA”) it is convenient to deal with those TMA provisions first.

Section 8 sets out the obligation on a taxpayer to file a personal return:

Section 9 provides:

Section 28A deals with closure notices and s29 with discovery assessments. The provision giving a right of appeal is s31 which provides as follows:

Under s49D the taxpayer may notify the appeal to the tribunal. Section 50(6) sets out the powers of the tribunal to reduce or increase the assessment.

Section 59A deals with payments on account of income tax making provision, for two payments on account before 31 January and 31 July in the year of assessment where the amount of tax assessed exceeds that deducted by reference to a proportion specified in regulations.

Section 59B is key to the issues in the appeal. It provides:

Regulation 185 deals with self-assessment (so is relevant to closure notice for 2010-11). Regulation 188 is relevant to discovery assessments (appeals for 2008-9 and 2009-10).

Regulation 185 provides:

Regulation 188 provides:

Turning back to how the above regulations affected Mr Hoey, the effect of Regulations 185(6) and 188(3) was that the amount of tax Mr Hoey was required to pay was reduced to reflect the PAYE tax which the end user was liable to pay. This is the amount which we refer to as the PAYE credit.

On 13 October 2017, HMRC wrote to Mr Hoey setting out its view that for the relevant tax years, Penfolds and Hamilton Trust were not within the territorial scope of PAYE and that it was therefore a possibility that s689 ITEPA might require the end user of his services to comply with the PAYE regulations and account for the tax on his employment income. The letter explained:

“HMRC retain a discretion under section 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 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”

In dealing with the issues raised in relation to that the s684(7A) discretion, the FTT considered whether it had jurisdiction 1) to consider whether HMRC had exercised the discretion legally, and 2) whether the FTT had jurisdiction to consider the application of the PAYE Regulations (which we understand to mean the question of whether a PAYE credit was due under Regulations 185 and 188).

The FTT noted (at [122]) that Regulation 185 was only expressed to apply to ss59A and 59B TMA; it did not accordingly apply for the purposes of ss8 and 9 TMA. It set out some of the parties’ submissions (which we deal in more detail below) and then concluded (at [128]) that the FTT did not have general jurisdiction to consider matters of public law and, in particular, the operation of the PAYE regulations. Nor was it a case where it was necessary to consider public law points in order to be able to consider those of the issues which were properly within its jurisdiction. It could not therefore deal with the issue of whether “HMRC exercised any discretion…under s684(7A) correctly, legally or reasonably”. As to scope, and the appellant’s argument that, in accordance with the principle of interpretation, the specific should override the general, and so the general 7A discretion had to give way to the specific “redirection regulations” (PAYE Regulations 72 etc.), it found the 7A discretion overlapped with those redirection regulations. There was therefore no conflict, and no need to apply the principle for the specific to override the general ([132]). There was nothing in the wide words to restrict the use of the 7A discretion to situations not covered by “redirection regulations” ([138]). HMRC had the discretion they said they had, and the FTT did not have jurisdiction over whether it was properly exercised ([139]).

Following the FTT’s decision, holding that it lacked jurisdiction, Mr Hoey initiated judicial review proceedings on a protective basis. His application for judicial review was refused by Andrews J, as she then was, on 1 May 2020. Mr Hoey’s appeal against that refusal, to the Court of Appeal, has been stayed by that court pending the outcome of the appeal before us.

The context in which this issue arises is as follows: Mr Hoey ultimately wishes to argue 1) the scope of the s684(7A)(b) discretion makes no difference to the application of Regulations 185 and 188, 2) even if it does, the legality of the exercise of that discretion may be determined even though it raises public law issues. This is on the basis that it goes directly to the issue raised in the appeal: the amount of tax payable by Mr Hoey. However, before Mr Hoey’s case could reach those points, the FTT found it fell at a jurisdictional hurdle, that had been raised by HMRC. The FTT agreed with HMRC, that the question of whether Mr Hoey was entitled to a PAYE credit under Regulations 185 and 188, was not a matter falling within the FTT’s jurisdiction on an appeal against closure notice or an appeal against a discovery assessment.

Mr Hoey’s first ground is that the FTT erred in law to the extent it addressed that issue.

Mr Mullan’s core submission, on behalf of Mr Hoey, was straightforward: the amount of tax a taxpayer has to pay is a fundamental question and one which lies at the centre of the FTT’s function. Where, under the PAYE code, the primary liability falls on the employer, but the employee is assessed to for the same tax, the question of who, as between the employer and employee, must pay the tax is of considerable practical importance. Regulations 185 and 188 arrive at the amount a taxpayer must pay.

Ms Nathan QC, for HMRC, says this argument wrongly elides two distinct concepts: the establishment of the amounts in which a person is chargeable to income tax (comprised in the taxpayer’s assessment) on the one hand, and the amounts that must be paid over to/collected by HMRC on the other (which is not comprised in the assessment). The question of whether a debt is due, in the amount sought, is one which is subject to challenge in enforcement proceedings. Section 59B TMA (which Regulation 185 is explicitly stated to be for the purposes of) is concerned with the collection of tax.

We deal first with Mr Mullan’s submission regarding the central importance of a tax assessment stating the amount of tax the taxpayer must pay. Two authorities were advanced in support.

The first was Hallamshire Industrial Finance Trust Ltd v IRC [1979] 1 WLR 620. That was a decision of the High Court decision concerning whether the first instance tribunal (the Special Commissioners) had determined the s29 TMA 1970 assessments under appeal to them. The taxpayer argued the Special Commissioners had not, because they had just set out the income assessable to tax, not the amount of tax payable. It was common ground that the computation of tax actually payable in that case, which involved the application of the appropriate rate of tax to the income, was purely mathematical (at 623H). The Revenue argued that the assessment function could be discharged by merely stating the facts which would enable someone skilled in tax matters to compute the tax which would subsequently be demanded. The court (Browne-Wilkinson J as he then was) began (at 625F) by noting that “As everyone knows, the form of notice of assessment served by the revenue, is in every case the same: first, a statement of taxable income, then a statement of allowance, and finally a computation of the net tax payable”.

The court rejected the Revenue’s argument in no uncertain terms. If correct, it suggested the possibility of a taxpayer being liable to pay an amount the taxpayer had not been notified of before the tax had been demanded (and it noted that such demand would probably not be made until after the time for appealing against the assessment had expired). The majority of taxpayers, on receiving an assessment, looked only to the amount of tax payable “having neither the time nor ability – without professional advice – to discover whether that sums is correct”. In Browne-Wilkinson J’s judgment, the words of the statute would need to be very clear to force the court to conclude the Revenue view was correct.

The second authority was the Court of Appeal’s decision in R(Archer) v Revenue and Customs Comrs [2017] EWCA Civ 1962. The taxpayer sought judicial review of decisions contained in an HMRC letter which had set out the taxpayer’s indebtedness. This was on the basis that HMRC’s earlier closure notices had failed to set out the amount of tax the revenue claimed was due. The taxpayer referred to the Hallamshire decision for support. HMRC had not therefore amended the taxpayer’s returns pursuant to the s28A(2)(b) TMA requirement (to make amendments to give effect to HMRC officer’s conclusions in closure notice). The Administrative Court found in his favour on this point but dismissed his application for other reasons. On appeal to the Court of Appeal, the Court of Appeal agreed the Administrative Court was right to uphold the taxpayer’s argument on the point. The judgment given by Lewison LJ (with whom Asplin and Longmore LJJ agreed) explained at [22]:

“…The self-assessment that the taxpayer is required to file as part of his return must state the amount of tax for which the taxpayer is liable. One would naturally expect that an amendment to that assessment must likewise state the amended amount of tax for which he is liable…”

HMRC highlighted, as they did before us, that Hallamshire was decided before the introduction of the self-assessment regime and therefore at a time when all assessments were made by the Revenue. However, it is clear Lewison LJ did not consider Hallamshire should be limited in this way. At [26] he explained:

“It is true that the self-assessment regime places the burden on the taxpayer, at least in the first instance, to work out the amount of tax for which he is liable and to state it in his return. It is also true that for some purposes, including time limits, an amendment to a self-assessment is not an assessment. But in functional terms an amended self-assessment is still a variety of assessment (even if preceded by the prefix “self”). Where it is HMRC that makes the amendment, I do not consider that the onus lies on the taxpayer to work out his liability all over again.”

We agree Hallamshire and Archer establish that, where the Revenue makes an assessment (including where it amends a self-assessment), the assessment has to set out an amount of tax payable. However, that proposition must be viewed in the context of the facts and issues raised in those cases. Properly understood, both cases were about situations where further work needed to be carried out to ascertain an amount of tax payable. The underlying issue was who should do that work. Where assessments were made by the revenue, or by parity or reasoning, self-assessments were amended by the revenue, the judgment was that it was the revenue who should do that work. More fundamentally, the cases do not deal with the question of what, precisely, the amount of tax payable should be comprised of in any given case. In particular, they do not deal with the question of whether that amount should reflect any credit for PAYE that ought to have been deducted, but which was not, or for that matter, payments made on account. That question can only be answered by reference to considering the scope of s31 TMA, which gives rise to the FTT’s jurisdiction, as informed by the return and self-assessment provisions in ss8 and 9 TMA.

The appellant’s solicitors also drew our attention in their letter, subsequent to the hearing of 19 February 2021, to the Court of Appeal’s decision in HMRC v MCX Dunlin (UK) Ltd [2021] EWCA Civ 186 which was handed down after Mr Hoey’s hearing on 17 February 2021. It was suggested that Newey LJ’s analysis (at [50] to [56] and in particular at [55]) regarding what an appeal “against an assessment” could entail (which Baker and Underhill LJJ agreed with) was relevant to the appellant’s argument that an appeal against an assessment includes an appeal against the amount of tax payable. We do not consider this case relevant to the point before us.The Court of Appeal’s analysis concerned the composition of refunds made by HMRC as between whether those were entirely of Petroleum Revenue Tax (“PRT”) under the Oil Taxation Act 1975 or whether the refunds represented a mixture of PRT and Advance Petroleum Revenue Tax (which was introduced by Finance Act 1982). The context for its analysis regarding what was comprised in an appeal against an assessment were the different provisions of the petroleum revenue taxation legislation particular to that case. The legislation there applied, with modifications, certain provisions of the TMA (listed in Schedule 2 para 1(1) of the Oil Taxation Act 1975). However, it did not apply the return and assessment sections 8 and 9 TMA. It is those provisions which primarily inform the scope of appeal in Mr Hoey’s appeal.

We therefore reject Mr Mullan’s primary argument, that by virtue of a principle that an assessment should make clear the amount, the applicability of the PAYE credit for amounts that ought to have been but were not deducted, is encompassed within an appeal against an assessment or closure notice amendment.

The question raised by this ground is essentially one of statutory interpretation. There is no disagreement that, if jurisdiction arises, then this must be found on the basis of appeal against closure notice amendment / discovery assessment provisions in s31 TMA 1970 (above at [38]). The scope of that turns on the construction of s8 and s9 TMA and specifically whether the references to income tax deducted at source (which, by virtue of s8(5), refers to income tax treated as deducted from any income) includes amounts treated as deducted under Regulations 185 and 188. That in turn involves looking at the scope of Regulations 185 and 188 and whether they have an effect which reaches into s8 and s9 TMA without recourse to s59B TMA.

Standing back, it appears to us there are two main issues of interpretation which are relevant to resolve:

There are a number of cases, all at FTT level, which grapple with the construction of the above provisions and which rehearse much of the same arguments that were before us. Before dealing with those, we should address Burton v [2010] UKUT 252 (TCC), as an example of a case where the Upper Tribunal (“UT”) engaged with similar issues, without any concern over whether it lacked jurisdiction. The issuethere concerned whether the Revenue could still pursue an employee for tax where it was said the employer had not complied with the PAYE Regulations. The UT considered the relevant regulations (these were the predecessor regulations in the 1993 PAYE Regulations – Regulations 101A and 101). At [13], it described the net effect as being that, when determining the amount of income tax recoverable under self-assessment under s59B(1) TMA, the amount treated as deducted at source under PAYE was the amount that should have been deducted. That was so that an employee was not penalised if an employer failed to deduct the tax it ought to have. The regulations required there to be a difference between what the employer was liable to deduct, and what the employer did deduct. Crucially on the facts in that case, there was no such difference.

Mr Mullan, for the appellant, is correct to note, that the UT seems to have assumed that the FTT did have jurisdiction, in the context of an appeal against assessments and an appeal against amendment to self-assessments, to consider the effect of PAYE regulations giving a credit. However, as the point on jurisdiction was not specifically argued, we agree with Ms Nathan the case cannot be viewed as authoritative on this point.

We turn then to the FTT cases which are directly relevant, and which analyse, in varying degrees of detail, the legal issues which are before us. On the one hand Gayen v HMRC [2013] UFTT 127 (TC), Gray v HMRC [2017] UKFTT 0275 (TC), and Lancashire point in favour of the appellant’s interpretation although there was no detailed discussion of jurisdiction in Gayen and Gray and accordingly, we do not mention those further. Paul Szymusik v HMRC [2020] UKFTT 00154 (TC) and Philip Higgs and others v HMRC [2020] UKFTT 117 (TC)support HMRC’s interpretation.

Szymusik, dealt, amongst other matters, with the question of whether, if the taxpayer’s employer should have deducted tax under PAYE when paying him salary, that amount should be set against any liability to tax. Having considered the legislation, the FTT identified (at [92]) the uncertainty over the meaning of the words “income tax …contained in a person’s self-assessment” in paragraph 59B(1) arising from the fact that s9(1) TMA spoke of, as the FTT put it, two assessments: the “tax chargeable” assessment and the “tax payable” assessment. It considered that s59B(1)(a) had to refer to the “tax chargeable” assessment because, if it referred to the “tax payable” assessment, deductions for “income deducted at source” would be double counted. In the FTT’s judgment the TMA provisions: discovery assessment (s29), closure notice (s28A), appeal provisions (s31) and powers of the tribunal on appeal (s50(6)) embraced both the tax chargeable assessment and tax payable assessments.

At [104], the FTT alighted upon the same issue before us: whether “income tax treated as deducted” within s8(5) TMA includes “tax treated as deducted” within the meaning of regulation 185(6). In favour of the deemed deduction in that regulation being taken account of in s9 TMA was the fact that the amount payable under 9(1)(b) TMA would then correspond to the s59B(1) TMA amount. On the other hand, the FTT noted Regulation 185 applied only for the purposes of s59B and not more generally. That was in contrast to another deemed deduction section – section 710(6) ITEPA which was not so restricted. The FTT concluded (at [107]) “with some hesitation” that tax treated as deducted under Regulation 185 was not deductible for the purposes of s9 TMA. Instead, it was relevant to s59B, which the FTT considered was relevant to collection proceedings.

In summary, the FTT considered the scope of Regulation 185 was limited to s59B purposes (a section the FTT considered dealt with matters of collection) because of the way other deemed deductions provisions had been expressed. The credit envisaged by Regulation 185 was thus not deductible for the purposes of s9 TMA (it was not included under s8(5) TMA). In so finding, it appears to us that the FTT assumed s59B was a sequentially separate step that took place after assessment rather than a step that was integral to arriving at the “tax payable” amount in s9 TMA. The FTT also clearly thought Regulation 185 had limited scope. There was no discussion in relation to Regulation 188.

In Higgs, the FTT adopted HMRC’s submissions as to why s8(5) TMA did not include the Regulation 185 and Regulation 188 PAYE regulation amounts.

Regarding Regulation 185, these were that:

Regarding Regulation 188 HMRC’s submissions were recorded as:

In Lancashire the FTT again identified the question of statutory construction: the interpretation of “income tax treated as deducted from any income” in s9(1)(b) TMA. It subjected the question to a carefully considered and detailed analysis (at [171] onwards).

The FTT considered s9 drew a distinction between income tax which the taxpayer is chargeable (in principle liable for) and income tax that is payable (the income tax which the taxpayer actually has to hand over to HMRC) (at [161]). Although it did not refer to it in such terms, that conception very much resonates with the appellant’s arguments regarding the principles it says should be taken from Hallamshire and Archer. It is also clear the FTT in Lancashire saw s59B as, in effect, a step which was nested within s9, but that it also served a function; that of imposing a payment obligation and of making further adjustments. It saw Regulation 185’s role as further fleshing out the calculation of what was to be deducted at source.

The FTT noted the difficulty (at [165(2)]) that s59B(1)(a) did not distinguish between 9(1)(a) and 9(1)(b) but considered in the context of the overall provision the only sensible interpretation was that it referred to s9(1)(a). This was also a point the FTT in Symusik picked up on and resolved in the same way.

At [172], the FTT set out its views on why the cross reference in Regulation 185 to s59B did not affect ordinary meaning of “income tax treated as deducted” in s9(1)(b). The FTT noted there was no limitation to the term “treated as deducted” which could refer to any provision in tax legislation. So, the term was broad enough to catch income tax falling under Regulation 185(6). For a number of reasons, the FTT was not persuaded that, the fact Regulation 185 was stated to apply for purposes of s59B, and that 9(1)(b) did not refer to s59B, meant the term “income tax treated as deducted” in s9(1)(b) should not bear its natural and ordinary meaning:

The FTT in Lancashire distinguished the UT’s decision in Walker v HMRC [2016] UKUT 32 (TCC), which was a case that we were also referred to. That case concerned a Construction Industry Scheme deduction at source under Finance Act provisions which were accepted to be factored into the s8/s9 TMA calculation. The result of factual findings which the FTT made meant the figure the taxpayer was entitled to by way of repayment, while smaller than the one actually made to him (following his self-assessment under s9 TMA), was larger than the amount due to him on the amended self-assessment which HMRC had made. The FTT in Walker considered that s50(6) and (7) did not give it power to amend the assessment: it thought that where tax deducted at source exceeded the tax chargeable there was not any amount “charged”. However, the UT (at [37]) considered a taxpayer could be “overcharged” within s50(6)(a) by reference to the amount “payable” by way of income tax in s9(1)(b). The FTT’s reasoning, that the fact that effect to the repayable sum was given by s59B TMA, which was non justiciable (a view which HMRC rely on before us) was irrelevant:

“39.

It is, of course, correct that section 59B is not justiciable before the FTT, being concerned with matters of collection and enforcement. But that is beside the point. The appeal in the present case was against the conclusions of the closure notice and the issue is whether the FTT’s findings of fact can be given effect by an amendment to the self-assessment return. The impact of such an amendment on the parties’ respective rights and obligations under section 59B as a result of such an amendment is an entirely separate, and subsequent, matter.”

The core of the UT’s reasoning in Walker was that the FTT was wrong to assume the amount “repayable” was something which derived from s59B; the term “payable” in 9(1)(b) also encompassed amounts “repayable” by HMRC. As the UT said at [40], if a taxpayer receives less by way of repayment than the taxpayer is entitled to receive, the taxpayer can be described as having been overcharged. Also, it was a repayment of tax, and even if was not tax (in the sense that the amount on proper analysis not fall to be taxed), then 50(6)(a) referred simply to overcharge by self-assessment.

Our view is that Walker did not have anything to say, one way or the other, on the question of whether “treated as deducted” amounts captured PAYE credits. However, it is on the whole more supportive, in the assumptions it makes, of HMRC’s conception of the structure of the legislation under which s59B is a sequential step which applies only once the assessment process is carried out, and one that is concerned with the amounts that are to be collected (see [44]). However, that support should not be overstated as there was no real argument, it appears, on the function of s59B, and in any case Mr Hoey’s case does not rely on s59B being justiciable but on the PAYE credit being taken account of in s8/s9 TMA, an issue which Walker does not deal with.

It is also of note that, at [43] and in its conclusion at [47], it was accepted by the UT that no account was to be taken in the amendment of an amount of £6,040 that the taxpayer was originally repaid by HMRC. That reasoning is consistent with the assessment not being the same as a “bottom line” figure that a taxpayer actually has to pay over to HMRC, implying that that bottom line figure must be reckoned somewhere else. The UT’s view of how the legislation operated is again, in that respect, more consistent with the HMRC’s conception of how the legislation fits together than with the appellant’s.

In Whitney v IRC [1926] AC 37 Lord Dunedin described three stages in the imposition of tax: 1) liability, 2) assessment, 3) methods of recovery if the person taxed does not pay voluntarily. Lord Dunedin explained that liability did not depend on assessment as

“…that ex hypothesi, had already been fixed. But assessment particularizes the exact sum which a person liable has to pay.”

The parties’ rival submissions amount, in essence, to a dispute about which stage the PAYE credit is relevant to. The appellant says it is in the assessment stage whereas HMRC say it is at the collection stage. However, while that may, in simple terms, describe the consequence of the parties’ submissions, neither party suggests that it supplants the need for a close analysis of the relevant statutory provisions to see at what stage the PAYE credit is taken account of, and whether at that point, it is a matter falling within the FTT’s jurisdiction or that of another court.

Plainly, some matters are clearly envisaged to fall within the assessment stage, whereas some concern the collection of sums due, and accordingly do not fall within the FTT’s jurisdiction relating to amendments to self-assessments and assessments. While PAYE is often, and uncontroversially, described as a collection mechanism, matters concerning PAYE can, and do, end up being litigated in the FTT. Having said that, many of such cases concerning PAYE income, arrive at the tribunal’s door by virtue of a specific appeal jurisdiction accorded under the PAYE Regulations (Rangers for instance concerned appeals against determinations made under Regulation 80 of the PAYE Regulations in relation to which a specific appeal right is granted). The very structure and ordering of the TMA, discloses the difficulty of deciding which camp to assign the PAYE credit provisions to: the calculations in s59B are located in between the assessment provisions and the recovery (collection) provisions.

Part of Mr Hoey’s case emphasised that it would be absurd if the legislation were construed in such a way so as to exclude the FTT from jurisdiction to decide the amount of tax to be paid (relying on Autologic Holdings plc v IRC [2005] 3 WLR 339 at [11] to [15], [62] and [84] to [85], and R (oao Glencore Energy UK Ltd) v HMRC [2017] EWCA Civ 1716 at [57] and [58]). Mr Mullan, on behalf of the appellant, also reminded us that Mr Hoey was refused permission to bring a judicial review, in which points regarding the construction of Regulations 185 and 188 were sought to be raised. Mr Mullan submits the FTT’s interpretation, that it lacked jurisdiction, should not be countenanced as it denied Mr Hoey his right to access to the courts to determine his legal rights: a basic right fundamental to the rule of law:(R (on the application of UNISON) v Lord Chancellor [2017] 4 All ER 903 at [66].)

The above points do not, in our judgment, advance Mr Hoey’s case. Both Autologic and Glencore dealt with the role of judicial review given the existence of a statutory system of tax appeals and in doing so described, in general terms, the function of establishing a taxpayer’s liability. However, none of the passages relied on suggest that as a matter of statutory interpretation, which is ultimately what matters of jurisdiction come down to as far as the FTT is concerned, a more expansive view should be taken of the FTT’s jurisdiction, when considering the precise boundaries of what is in the tribunals’ remit.

There is also no issue regarding access to justice, simply the forum where justice on the particular issue is to be accessed. If the conclusion was that the FTT did not have jurisdiction then there was no provision or authority (Footnote: ⁴) we were taken to which persuaded us Mr Hoey would not be able to raise the point by way of defence in any collection proceedings. He would not therefore be left without a remedy.

With the benefit of the case-law, we return to the statutory provisions starting with s8 TMA. As noted in Szymusik, Lancashire and Walker, there are two components referred to in relation to assessment: a) amount chargeable, and b) amount payable.

Under s8(1AA) TMA the (b) “amount payable” amount is the difference between the amount chargeable and aggregate of income tax deducted at source. Under s8(5) TMA the amount deducted at source includes income tax treated as deducted from any income. Section 9 TMA on self-assessment echoes the self-assessment return provisions of s8 TMA. The self-assessment comprises a) the amount chargeable to income tax and b) the amount payable (i.e. the difference between para a) amount and aggregate of income tax deducted at source). Because the expansion in s8(5) TMA of “treated as deducted” also applying to s9 TMA, s9, in essence reflects what is in the return.

Some way later in TMA under the heading “Payment of income tax and capital gains tax”, s59B specifies the amount payable by the taxpayer. That would suggest to us it is seeking to arrive at a figure which is different from the “tax payable” figure in s8(1) and s9(1)(b) payable amounts, otherwise what would be the point in it. While it is correct the function of this section is to impose an obligation to pay (s8 and s9 do envisage such obligation but do not actually impose a payment obligation) that could be achieved without any further calculation and simply stating the obligation to pay was in relation to the tax payable amount. On any view however the amount payable under s59B is explicitly different from the 8(1) and 9(1)(a) “payable amount” because it looks to see if there is a difference the s9 amount and payments on account under s59A and any income tax in respect of that year that has been deducted at source.

Under s 59B there is therefore a new concept of “amount of income tax…contained in a person’s self-assessment”. This is ambiguous. What does it cover? Tax pre – deductions at source or post deductions at source?

In agreement with the analysis of the FTT in Szymusik, and Lancashire and the UT in Walker we consider s59B(1)(a) must refer to the 8(1) and 9(1)(a) “tax chargeable” amount. Otherwise, the sum would reflect two lots of the same deduction for no reason: there would be a deduction at 8(1)/9(1)(a), but also again at s59B. By way of example, HMRC, in arguing that the reference to s9(1)(b) “deducted at source” serves a function which does not rely on PAYE deductions referred to various ITA deductions. If s59B(1)(a) took as its starting point that net 9(1)(b) figure there is nothing on the face of the legislation to exclude that deduction being taken account of again for no apparent reason.

Resolving this question, of whether “amount of tax…contained in a person’s self-assessment” means the 9(1)(a) chargeable amount or the 9(1)(b) amount payable does not however take us any further on whether the PAYE credit is captured by the reference to “deducted at source”.

Turning then to the disputed issues, the first question can be described in terms of whether Section 59B operates as a sequentialstep to the s8/s9 TMA provisions or as an integral or parallel step which is rolled up into the application of those provisions.

The appellant’s position must entail that the s59B “difference” is not an additional step (except in so far as it concerns payments of account under s59A). Rather, s59B replicates the difference calculated in s8(1) and 9(1)(b) TMA. It might be said that that would not leave s59B without a purpose because it still factors in payments made on account under s59A. The section also fulfils a function in imposing the payment obligation. This is the role the FTT in Lancashire conceived of for s59B.

In our view the better view however is that s59B is a further sequential step:

We acknowledge that an oddity in the sequential role of s59B described above is that it might be asked why s59B does not take as its starting point the tax payable 9(1)(b) amount. At least with regards to actual PAYE deductions (which HMRC say are taken account of here, as opposed to deemed ones), and various ITA deductions, the deductions made by 59B repeat the step of deduction. (There is no problem with the same amount being deducted twice over because those deductions are made from the same starting point). But equally, it could be said, that the drafting in s59B is odd to start off with in that it does not marry up explicitly to either the “tax chargeable amount” or the “tax payable amount” referred to in s8 / s9 TMA. So, no great significance should be attached to how the provisions might otherwise have been drafted.

The next issue is the scope of the PAYE credit in Regulation 185. The cross reference in Regulation 185 clearly ties the provision to s59B – it explains in more detail what is meant by tax deducted at source (but does not throw any light on what is meant by “tax contained in self-assessment”). It includes in its steps “tax treated as deducted” which is the PAYE credit issue. “Direction tax” needs to be specifically excluded from the credit because it is a subset of tax that the employer should have deducted but did not but which nevertheless, because of such direction, the employee is on the hook for.

We agree with HMRC that the specific reference to s59B in Regulation 185 means it does not have a reach outside of s59B.

We acknowledge that the FTT in Lancashire did not consider that an issue for various reasons. However, none of these (at [172] – set out at [76] above) in our view persuade us the specific words referencing s59B may be ignored:

Mr Mullan submits that the heading to Part 9 to PAYE regulations is “Assessment and self-assessment”. That, he submits, is consistent with his interpretation that Regulation 185 has a wider reach beyond s59B. In our view that is inconclusive. The part also contains regulations dealing with changes to the PAYE code regarding recovery and repayment. Those provisions also refer to s59B and, for the reasons above, we consider s59B to be sequential to s8/s9. Also, the heading to the Part is equally consistent with regulations which are consequential on assessment rather than specifically geared towards the content of the assessment.

The appellant also argues the whole point of Regulations 185 and 188 is that an employee does not have to worry about whether tax has been paid over to HMRC. But it is not clear to us that the employee does have to worry about this. The employee just needs to know whether sums were deducted or not. If they are not told sums are deducted, then they would assume none were deducted. If the employee thought there was nevertheless an obligation on the part of the employer to deduct, the employee could defend enforcement and argue for the PAYE credit in the county court.

Regulation 188 (1) and (2) highlights there are two different notions of tax payable – that referred to under A: “tax payable under the assessment” and the end result of A-(B-C) which is the tax payable by the employee. The PAYE credit in issue here is added to “B” – showing it is something which is not considered to be part of the tax payable under the assessment.

Regulation 188 does not say it is for the purposes of a particular section but that may simply reflect the variety of assessments that may be made that are not self-assessments (or that such assessments which are not self-assessments are not referred to elsewhere by section number but are described by reference to not being self-assessment assessments). Regulation 188 does not refer to s59B because, apart from stipulating the due date for payment, 59B does not deal with assessments which are not self-assessments (“non-SA assessments”).

Regulation 188 is functionally similar to Regulation 185. It fulfils a similar adjustment function to the tax payable amount in a non-SA assessment. It similarly takes the act of assessment as a given. It appears in the same part as Regulation 185 in the PAYE regulations. We see no reason to make a distinction between Regulation 188 and Regulation 185, and to say that, despite Regulation 185 not affecting s9 self-assessments, that Regulation 188 has reach into the tax payable amount under a non-SA assessment.

As to the wide general wording of the deeming, regarding tax deducted at source, in sections 8 and 9, it might be argued why then does the reference to tax treated as deducted not exclude the tax treated as deducted under Reg 185? The answer is that it does not need to. Regulation 185 is restricted to the purpose of 59B. The adjustments in s59B take place at a later stage to s9(1)(b) /s8. So, as at the stage where s8/9 TMA is considered, there is no Regulation 185 deemed deduction that has at that point been established and therefore no need for it to be excluded at that stage.

As mentioned above, HMRC point out the reference in s8(5) to tax “treated as deducted” has a clear function without needing to encompass PAYE treated as deducted – HMRC gave the example of two provisions in the Income Tax (Trading and Other Income) Act 2005: s414 in the chapter imposing a tax charge for stock dividend income, and s530 in the chapter imposing a tax charge to gains from contracts of life insurance, under which a person liable to tax was treated as having paid income.

We conclude the PAYE credits under Regulations 185 do not affect the amount of tax payable with which sections 8 and 9 are concerned. Similarly, we conclude Regulation 188 does not affect the amount of tax payable with which an assessment under s29 TMA is concerned. As those self-assessment and assessment provisions are the only relevant sources of the FTT’s jurisdiction, the effect of the PAYE credit is not something which falls within the FTT’s jurisdiction.

In the course of the hearing, HMRC explained actual PAYE deductions were factored into the tax payable figures in the self-assessment. We agree with the appellant that has the apparently odd result that actual PAYE deductions are in the FTT’s jurisdiction but deemed ones are not. However, in the end this does not persuade us the interpretation we have adopted is wrong. As is clear from the fact that the s59A amounts of payments made on account of tax, are factored in under s59B, the amount which the taxpayer is ultimately obliged to pay over to HMRC is not necessarily the same as that which is set out in the assessment. Once that link is broken, meaning that some amounts are taken account of in the assessment and some outside of that, and that accordingly some issues are litigated in the FTT and others by way of defence to enforcement proceedings, the apparent oddity becomes simply a reflection of where the legislation has drawn the dividing lines on jurisdiction. Ultimately what falls within the FTT jurisdiction is a matter of statutory interpretation. Our view, for the reasons given, is that the PAYE credit does not fall within the FTT’s jurisdiction. The attractive simplicity of the FTT being a “one stop shop” for all issues concerning the amount a taxpayer should pay over to HMRC does not alter that. As the facts of HMRC v Cotter [2013] UKSC 69, which Ms Nathan referred us to,illustrate, complex issues (in that case, where employment loss relief was accounted for, and in which year), may well arise outside of FTT proceedings if that is what the limitations of the statutory jurisdiction of the FTT dictates. There is no reason to suppose the amount of the PAYE credit cannot be litigated in collection proceedings.

The conclusion above, that the consideration of the PAYE credit was not within the FTT’s jurisdiction, disposes of the appeal in respect of the PAYE credit and jurisdiction issues. However, on the basis we heard full argument on the remaining issues, and in case we are wrong in our above conclusion, we will go on to deal with those.

The FTT’s starting point was that it did not have jurisdiction to consider matters of public law, and the operation of the PAYE regulations, and also that consideration of such issues was not necessary for the matters within its jurisdiction. So, the FTT could not consider whether the 7A discretion was exercised correctly, legally or reasonably ([128]). It went on to express the obiter view that the 7A discretion was not restricted as Mr Hoey argued. It operated in the way HMRC maintained it did ([139]).

By way of preliminary observation, although we refer throughout to a 7A discretion, the wording of the provision is not a conventional grant of power in that it says that nothing in the regulations should be regarded as preventing certain matters. Nothing appears to turn on this point because 7A circumscribes the limits of the power, however it does appear to imply the source of the power arises somewhere else.

The appellant’s primary argument is that the exercise of the 684(7A)(b) discretion to relieve the end user of its liability to account for PAYE tax has, as a matter of legal construction, no effect on the appellant’s liability to pay tax. HMRC say the reasons Mr Hoey relies on fail to appreciate that the 7A discretion relieves the end user of the liability to deduct. That in turn means the credit provisions in Regulation 185 and Regulation 188 have no application as they are premised on the employer /payer being liable to deduct an amount. The PAYE credit in those regulations is not an absolute right but is qualified, not only by the “re-direction regulations” (Regulation 72 etc. (see [34]), but also the application of the discretion under 684(7A).

On the assumption we are wrong on the issue of whether the FTT had jurisdiction over the PAYE credit, we consider this question of statutory interpretation is within our jurisdiction. It is not an argument the FTT addressed, and although that is, in itself, a source of complaint by the appellant, he is content not to press that point as a separate ground on the basis we will consider the issue.

The appellant argues the 7A discretion has no effect for a number of reasons.

Our view on these is as follows:

There is also no real question that the primary liability to tax is Mr Hoey’s. That is not to say the obligation to pay that liability may fall on someone else. This is described by Andrews J in Hoey (JR permission refusal) and also by the Court of Appeal in McCarthy v McCarthy and Stone plc [2007] EWCA Civ 664. The issue is who should pay it, and in particular whether Mr Hoey is entitled to the PAYE credit, in view of the disapplication under 7A of the employer’s obligation to deduct tax.

Mr Hoey also argues that the reference in Regulation 185 / Regulation 188 to tax the employer/payer “was liable to deduct” shows there is a distinction drawn between that and amounts the employer/payer is “liable to pay” HMRC (which is what 7A is concerned with). In particular the reference to “was liable to deduct” captures what the payer was liable to deduct at the time payments made to employee. Thus, if the 7A direction forgives the amount the employer was liable to pay HMRC, that has no effect on the amount the employer was liable to deduct at the time the payment was made.

HMRC’s counter-argument emphasises the breadth of the 7A discretion. It refers to relieving the payer’s compliance with any regulation – therefore it can relieve the payer of the obligation to deduct in the first place (by disapplying Regulation 62) thus cutting off Regulation 185 and Regulation 188 at the pass as it were. The argument has prompted us to reflect on the precise scope of the 7A discretion, as it applies to a case such as this, where the direction was made after the point in time when the obligation to make the deduction had already arisen. We can well see that if the obligation to deduct were relieved, before the liability to deduct has occurred, Regulation 185 and Regulation 188, which envisage that there was an obligation to deduct tax, clearly have nothing to bite on. No PAYE credit under those regulations can then arise. But if the 7A disapplication is made after the deduction has been made, Regulation 185 and Regulation 188, and the credit they give rise to, will already have crystallised. That then leads to the question of whether the 7A disapplication must also be regarded as undoing that credit, or in other words rewriting the state of affairs that existed, such that Regulation 185 and Regulation 188 are not to be regarded as ever having operated.

We consider 7A cannot be construed in that way for the following reasons:

Therefore, if we were wrong in finding against Mr Hoey that the FTT lacked jurisdiction to consider the PAYE credit, we consider that, given the scope of the 7A discretion and the fact it only applies prospectively with no indication it can overturn the effect of obligations which have already been incurred, Mr Hoey would be entitled to the PAYE credit as the discretion would be ineffective to remove the PAYE liability from the end-users after those liabilities had been incurred.

HMRC rely on the Court of Appeal’s decision in McCarthy v McCarthy and Stone to emphasise that PAYE does not impose tax liability. We agree it does show that. The case concerned a restitution counterclaim by an employer against an employee, for reimbursement of tax and NICs the employer had paid. The employee argued a payment the employer had made to the Revenue did not discharge the employee’s liability even though it was for the employee’s benefit. The employee relied on various PAYE regulations (68 and 72) to advance the argument the liability was not his. The Court of Appeal (at [42]) confirmed it was ITEPA which imposed liability on the employee not the PAYE regulations. Referring to Part VI and 59A and 59B of the TMA the Court concluded liability was imposed on a taxpayer in respect of income in excess of that from which tax had been deducted at source – the matter was put beyond doubt by s59B that the employee was liable and the sums “payable by” the taxpayer were recoverable by the normal assessment procedures. The court rejected (at [45]) the submission that s59B was about calculation of liability not imposition – the court agreed it provided the mechanics of recovering the sums due in respect of the liabilities imposed by ITEPA but that what it did not show was that an employee was not liable for tax on his employment income.

Thus we note that all the court was saying was that, for restitution purposes, the employee could not say the sum of money the employer paid to HMRC was not a sum in respect of the employee’s tax. Here, no sums were paid over by employer/payer (the end user). In his reply Mr Mullan clarified he was not arguing that Mr Hoey was not liable to tax– he was just saying Mr Hoey was entitled to the tax credit.

In the light of this it may be viewed as surprising if Mr Hoey could escape that liability. However, that would overlook the payer’s obligation to deduct income tax, and assume the outcome of the very point in issue. That is, whether that obligation to deduct can be switched off by 7A. It also overlooks the fact that unless the position is altered by a direction under Regulation 72 etc., the tax need not go unpaid but may be pursued from the payer.

The above arguments show a confusion that can arise because there are two sorts of liability referred to. The first is the liability to the income tax charge (there was no real dispute that this fell on Mr Hoey). The second emerges from a collection stage which imposes obligations on the employer/payer which gives rise to questions, in respect of the employee’s liability, regarding who should pay the employee’s liability. That is why HMRC’s reliance on the preservation of the right of appeal vis a vis the employee’s liability not being disturbed by PAYE regulations (s684(5) ITEPA: at [26] above) does not take the matter further. It confirms the employee can always argue about the first sort of liability. But that does not address or purport to address the question regarding the second sense in which liability to pay arises.

It might also be argued that any retrospective effect on Mr Hoey’s access to a PAYE credit should not be viewed as prejudicing him, or at least not in a way that should elicit concern: the way the scheme was organised was so that no tax on a large part of Mr Hoey’s remuneration was payable; it just happened that following the Rangers case, tax did become payable. However, the point about retrospection is a broader one. It is not tied to Mr Hoey or those in a similar position but arises from the wording of the provision.

HMRC say it would be bizarre if the 7A provision was limited temporally. But that assumes the power is meant to have that sort of wide scope which is the point in issue. The scope of the power is a matter of construction. None of this means it is not possible to provide that the 7A discretion should apply even after deductions have been made. However, in our view, clear words would be needed in the legislation to achieve that effect.

Assuming we are wrong in our above conclusion, and that the availability of the PAYE credit under Regulations 185 and 188 was prevented by the exercise of the 7A discretion, the appellant’s next line of challenge is that HMRC were not able to use the power, because the way they used it, fell outside its proper scope.

If it had become necessary to consider this question, we agree it would be one that was open to us to consider. This is on the basis that the question of whether the 7A discretion applies would (assuming we were wrong on the initial question on jurisdiction, and the interpretation of the effect of 7A) affect the amount of the assessment. It is important to emphasise that the issue of scope involved here entails one of statutory interpretation rather than the reasonableness or rationality of the HMRC officer’s exercise of any discretion. It amounts to saying that the situation in which HMRC have purportedly used the power, is one where, as a matter of statutory construction, HMRC could never consider it necessary or appropriate to relieve the payer. If that is right the discretion was never available for HMRC to exercise in the first place.

The appellant argues 7A’s scope cannot be as wide as HMRC argue because: 1) it would frustrate the carefully constructed statutory scheme providing for directions transferring liability where this is intended, 2) the principle of statutory interpretation that the general should give way to the specific, and 3) it offends the principle of legality; that requires a clear legal basis (such as the PAYE Regulations) before HMRC can levy a charge. Tax cannot be levied by administrative discretion. Mr Mullan also highlighted the legislative background to 7A which was introduced in Finance Act 2003 (“FA2003”). The explanatory notes (for clause 144 of the Finance Bill 2003) explained that the clause complemented the work of the Tax Law Rewrite project to rewrite the PAYE Regulations and that “it modernises the powers for making PAYE regulations and so will enable the rewritten regulations to reflect current practices”. Regarding the 7A discretion, the note said:

“The new Item 7A makes clear that the PAYE regulations may exclude certain payments from PAYE. For example, employers are not required to operate PAYE on certain payments to employees for business expenses. The new Subsection (7A), confirms that the Inland Revenue can agree to different tax collection arrangements being set up that reflect the particular circumstances of a payer. Or alternatively that the payer does not have to follow PAYE regulations, where these would be unnecessary or inappropriate. Currently there are different arrangements covering casual employment and students, for example”

Thus, Mr Mullan argues, the power was concerned to reflect the practices then current. It was intended to deal with minor unfairness around the edges, administrative convenience, and not substantive liability. Moreover, the vires for Regulation 72 was also introduced at the same time. That pointed towards the 7A discretion not having the same effect.

In our view, the arguments on frustration of the statutory scheme, the general giving way to the specific, and the legislative background all lend support to the interpretation taken above that 7A does not have the retrospective effect which we have described. The re-direction regulations are applicable, as observed above, and as HMRC in fact pointed out, once a payment has been made. If 7A has the scope HMRC says it does it appears the effect of such re-direction regulations transferring liability could be achieved without any of the notice and further conditions entailed in the re-direction regulations.

However, if it is accepted that 7A does have such retrospective effect, then there is nothing in the appellant’s arguments which suggests that 7A cannot have the broad scope suggested. The discretion envisages HMRC can, if the officer considers it necessary or appropriate, disapply the PAYE regulations. No other limitation is placed on that. There is no issue of constitutional objection. There would be a clear basis upon which the employee was being made liable, namely the relevant ITEPA provisions, and the lifting envisaged by 7A of the PAYE regulations, subject to the conditions Parliament has set out in 7A.

If it had become necessary to decide this issue, the appellant’s ground would therefore have failed.

The FTT held the discovery assessments that had been raised for 2008/9 and 2009/10 were valid under s29 TMA. Mr Hoey argues the FTT was wrong to do so. He submits it erred in law in holding or being satisfied that:

We deal with each of these points in turn.The relevant legislation is in s29 TMA which provides:

“29 Assessment where loss of tax discovered

(1)

If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment—

(a)

that any income which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or

(b)

that an assessment to tax is or has become insufficient, or

(c)

that any relief which has been given is or has become excessive,

the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.

(2)

Where—

(a)

the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, and

(b)

the situation mentioned in subsection (1) above is attributable to an error or mistake in the return as to the basis on which his liability ought to have been computed, the taxpayer shall not be assessed under that subsection in respect of the year of assessment there mentioned if the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made...

…

Under subsection (4) a discovery assessment cannot be made unless one of two conditions is satisfied, the one relevant here is subsection (5) which provides:

“at the time when an officer of the Board—

(a)

ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment….

the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.”

Discovery

The FTT made various findings about HMRC’s process leading up to the issue of the assessments in the section of its decision at [61] to [79]. It heard evidence from Andy Finch, a senior HMRC officer who had been working for a number of years on contractor loan schemes, and Lesley Stopp, the HMRC officer who led one of the teams responsible for carrying the work forward ([61] and [62]). The FTT described the information received. These were: individual tax returns, P11Ds and P35s from Employers ([66]). It set out that Miss Stopp, and other senior HMRC officers developed a methodology for processing the information to ensure a consistency of approach among the various HMRC teams. This took the form of standard working instructions (“SWIs”) with the process divided into three stages: the first (SWI 1) established the loan figure, the second (SWI 2) calculated the amount of any insufficiency of tax, and the third (SWI 3) covered the making the discovery assessment ([71] and [72])).

The FTT found that for the purposes of s29, the discovery was:

“therefore made by the officer handling the SWI 2 process because this [was] the point at which a calculation showed an insufficiency in respect of the individual taxpayer.” ([73])

Regarding 2008-9, it found the discovery of insufficiency was made on 11 February 2013. For 2009-10 the discovery was made on 5 March 2014 ([93]). At [94], the FTT found that: “The “discovery” of an insufficiency of tax was made by an HMRC officer working through the SWI 2 process.”

At [96] The FTT, having referred to [37] of Charlton v HMRC [2012] UKUT 770 (TCC), which we come on to shortly, explained that there was a need for precise calculation to identify that there was an insufficiency in the case of the particular contractor. In a few cases the contractor had returned the loans as income, but that fact would not be known without carrying out a detailed calculation.

The appellant submits the FTT erred in finding the discovery was made by an “officer carrying out the SWI 2 process”. That did not constitute a proper finding of discovery as it did not identify a particular officer as making the discovery. The FTT also erred in suggesting the “need for a precise calculation to identify there was insufficiency of tax” (at [96]). It was enough to identify an insufficiency. That did not need the quantum to be identified (if it did, that would put HMRC’s practice of issuing protective assessments in difficulty). HMRC submit there was no error in the FTT’s finding.

We can deal with the legal principles briefly as they were not in contention. Starting with Charlton, at the passage cited by the FTT:

The requirements regarding discovery were considered further by the Court of Appeal in HMRC v Tooth [2019] EWCA Civ 826:

“61.

The requirement for the conclusion to have “newly appeared” is implicit in the statutory language “discover”. The discovery must be of one of the matters set out in (a) to (c) of section 29(1). In the present case the officer must have newly discovered that an assessment to tax is insufficient. It is his or her new conclusion that the assessment is insufficient which can trigger a discovery assessment. A discovery assessment is not validly triggered because the officer has found a new reason for contending that an assessment is insufficient …”

In Anderson v HMRC [2018] UKUT 159 (TCC)the Upper Tribunal (at [28]) having reviewed the authorities elaborated on the subjective element of the test as follows:

“The officer must believe that the information available to him points in the direction of there being an insufficiency of tax.” That formulation, in our judgment, acknowledges both that the discovery must be something more than suspicion of an insufficiency of tax and that it need not go so far as a conclusion that an insufficiency of tax is more probable than not.”

In essence, the appellant argues that the FTT, in requiring something (quantification) that was not required, did not make a proper finding of a discovery – the implication being that if the discovery was made, it was made by someone else and it was a discovery that was made earlier on.

We agree with HMRC that this argument rests on a mischaracterisation of the FTT’s decision. The FTT was not proceeding on the assumption that the officer needed to quantify the tax in order for a discovery of insufficiency to be made. It was saying that in circumstances of this case, the discovery was not made at SWI 1, when the loan figure was established, but only at SWI 2. This, as it explained, was because it had to be ruled out that the return had been made on a certain basis (namely that the contractor had returned the loans as income), and that work entailed a calculation. In other words, the “precise calculation”, in the particular circumstances of this case allowed the officer to identify that there was an insufficiency. That is different from the FTT saying that, as a matter of legal principle, the discovery could not be made until the tax had been quantified.

To the extent there is any separate criticism embedded in the appellant’s argument regarding that no officer was identified by name, then there is nothing in that. The FTT identified that an officer – the one carrying out the SWI 2 - made the discovery. That is sufficient to comply with the legislation. No challenge is made to that finding based on the evidence and it was open to the FTT to find the officer had the requisite state of mind.

There is also no difficulty arising from the point the appellant makes in the alternative. The appellant argues that even if the quantum did need to be identified, the FTT erred in finding that an unidentified officer, carrying out a mechanised calculation in which there was no discretion, had discovered anything. At most there was an unlawful delegation of calculation by another officer who in fact made discovery. By way of support Mr Mullan referred to Burford v DurkinHMIT [1991] STC 7.

In that case there was an issue over who, as between two Revenue officers, the one making the decision to assess, and the one who signed the assessment had made an assessment (under Regulation 12(1) of the income Tax (Subcontractor in the Construction Industry Regulations) 1975). That provision conferred a discretion on a Revenue inspector to make an assessment of the amount the contractor was liable to pay under those Regulations. The Court of Appeal endorsed the view that only the official upon whom a discretion was conferred by the statute could exercise it. But once the discretion was exercised the official could delegate “purely ministerial tasks” which flowed from the discretion to someone else. If that was done the carrying out of the task was treated as being carried out by the officer who exercised the discretion.

However, we do not consider those principles are relevant here. The issue of whether a discovery was made entails considering whether an officer had a particular state of mind: namely that the insufficiency newly appeared to him or her. If such an officer has that state of mind, then there is a discovery. There is no discretion conferred, giving rise to the question of whether a function was capable of delegation. The fact that here, the state of mind newly appeared to an officer by virtue of a process the officer was told to carry out, does not make it any the less a valid discovery, or a discovery which was made on the part of someone else.

Failure to include income the result of error attributable to Generally Accepted Practice (s29(2))

The FTT did not deal with this issue as it considered the appellant had conceded the point for the reasons it explained (at [104 to [106]]). It recorded that the appellant accepted HMRC’s view that the ground could only succeed if the only basis for raising the discovery assessment was that the Supreme Court’s decision in Rangers, issued on 5 July 2017, that the redirection of payments from the employers to the trusts constituted taxable earnings, applied. Noting that that decision, and the preceding Court of Session decision in the litigation of 4 November 2015, where HMRC had also been successful, were both decisions which were issued after Mr Hoey filed the relevant returns and after HMRC had issued the discovery assessments,the FTT considered those decisions could not have affected the generally prevailing practice at the time the returns were made. In addition, the discovery assessments had also been raised on the basis HMRC could tax the amount of loans under the TOAA charge. The Rangers decision was therefore not the only basis on which the discovery assessments were issued.

Before us, the appellant argues the FTT was wrong to consider Mr Hoey had conceded the point. All that had been accepted was that if HMRC could justify the assessment on an alternative basis (namely that the TOAA code applied to impose a charge) then the arguments in relation to the generally accepted practice regarding the earnings charge would not be in point. Mr Mullan submits the appellant did not concede, that a basis of assessment, which was in fact found to be wrong, deprived the appellant of his generally prevailing practice defence (the TOAA charge basis of assessment was found to be wrong as the FTT found the income for TOAA purpose was nil).

HMRC say the FTT was right to dismiss the ground as it did, and that the FTT correctly depicted the concession the appellant made. It was consistent, HMRC submit, with what the appellant had said in his skeleton before the FTT and with the transcript references of the discussion which took place.

The generally prevailing practice had to be established in relation to both the earnings and the TOAA charge. Even if the TOAA charge fell away, because of the FTT’s conclusion on nil income, the conclusion that there was an insufficiency of tax could be upheld for reasons different to those upon which HMRC relied in issuing the discovery assessment.

We agree with HMRC that the appellant’s skeleton argument and the transcript references show the FTT, in dealing with the concession, had simply reflected the terms of the concession that had been put to it. The argument in the appellant’s skeleton that the return had been made in accordance with the practice generally prevailing was prefaced with the words “So far as an assessment based on [The Supreme Court’s decision in Rangers] is concerned…”. The transcript showed Mr Mullan addressed the point as follows:

“My learned friend says that we can only succeed on this if we can show that Rangers is the only basis of having an assessment to tax. I am happy to accept that; I think that must follow.”

Judge Gillett’s decision granting permission to appeal, in explaining why he considered a concession had been made, referred to the written copy of the appellant’s closing submissions, which stated: “The Appellant accepts that HMRC are correct in asserting that this ground can only succeed if the only basis of assessment is that RFC 2012 applied. It is the Appellant’s submission that that is the case.”

In our view, it is important to recognise the distinction between: 1) a basis upon which an assessment is made by HMRC, and 2) the basis on which the assessment is upheld by the tribunal. The oral and written submissions did not make clear which of these bases was meant. It is now clear the appellant had only intended the concession to cover the latter situation. That, as Mr Mullan pointed out would make more sense as, if the matter was considered further, it would be readily apparent the basis professed by HMRC covered the TOAA charge (so the uncertainty conditioning the concession could only have ever been about whether the FTT would uphold the TOAA charge). However, in the context of the oral and later written submissions specifically made to it on the concession, it was open to the FTT to take what was said at face value and not have to unpick whether that made sense from the appellant’s point of view. We cannot see that the FTT erred in law in not dealing with the issue on generally prevailing practice because it misinterpreted the concession that was put to it. The appellant’s defence accordingly turned on whether it was accepted that the Rangers clarification, that payments into the trust were earnings, was the only basis for the assessment HMRC made. If there was another basis, as the FTT found there was, then the appellant’s concession applied disposing of the ground.

In case we are wrong on the FTT’s treatment of the appellant’s concession, and as we heard full argument on the point, we go on however to deal with the substantive ground of appeal on the issue.

Mr Hoey argues the FTT erred in finding that the failure to return income on the basis of the analysis in Rangers was an error resulting from the generally accepted practice at the time. Rangers did not reflect the settled view of the law. Dextra Accessories Ltd & Ors v Inspector of Taxes [2002] STC (SCD) 413 and Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062) found that arrangements, such as the appellant’s, did not result in a tax charge. The revenue did not appeal these decisions at the time. There was no tax charge at the relevant time under the law as understood according to those cases on payments into the EBT (the step which gave rise to the loss of tax here). Consistent with that, later legislation (part 7A ITEPA and Schedule 24 FA 2003) was introduced on the basis that contributions to EBT were not emoluments. Also, recommendations made by the Morse Loan Charge Review, which were accepted by the government, and which had noted the leading cases at the time had decided against HMRC’s position had resulted in retrospective amendment of law through Finance Act 2020.

HMRC highlight that it is for the appellant to establish the generally accepted practice defence. He failed to do so regarding TOAA, where no error was identified, and failed to adduce evidence to show an established accepted practice per HMRC v Household Agents [2007] EWHC 1684 (Ch). Even in relation to the employment income charge, Mr Hoey was unable to show that the asserted practice was accepted by HMRC, in other words that HMRC accepted that payments to, and loans from, EBTs were not taxable earnings. HMRC say the Morse review excerpt actually supports HMRC’s non-acceptance of the asserted practice.

Turning then to the legal principles we were referred to: In Household Agents at [58] Henderson J, as he then was, noted the burden was on the taxpayer to establish both the operative mistake in the return and the practice generally prevailing at the relevant time. In that case, the taxpayer’s submission alleged “the profession’s view” without any supporting evidence, or evidence to support that HMRC took the same view. Henderson J then explained:

“Without attempting to give an exhaustive definition, it seems to me that a practice may be so described only if it is relatively long-established, readily ascertainable by interested parties, and accepted by HMRC and taxpayers’ advisers alike: compare the decision of the Special Commissioners (Dr A N Brice and Mr John Walters QC) in Rafferty v HMRC [2005] STC (SCD) 484 at paragraph 114.”

In Rafferty the Special Commissioners agreed “that a practice generally prevailing had to be a practice, or agreement, or acceptance over a long period whereby the Revenue agreed or accepted a certain treatment of sums in particular circumstances”.

Mr Mullan’s response emphasises that the court’s description in Household Agents is just an example of one type of generally accepted practice. He submits that, in Mr Hoey’s case, the practice derived from the decision of the courts coupled with the practice of HMRC to abide by decisions of the courts even though HMRC were not happy with the decision.

The relevant point in time to ascertain whether there was a practice generally prevailing, regarding the non-taxability of the treatment of payments into an EBT, was when the returns were made: (the FTT said at [57] these were filed no later than the statutory time limits so the relevant dates are 31 January 2010 for 2008/9 and 31 January 2011 for 2009/10).

The Morse Independent Loan Charge Review was published in December 2019. The appellant referred us to the following in the review:

“At the time of the 2011 legislation being enacted the courts had not supported HMRC’s view about the taxable nature of the loan schemes. Indeed the leading cases from the time had consistently been decided against HMRC’s position.”

We were also referred to excerpts to the government’s response to the review. That stated (at 2.10):

“HMRC have always maintained these schemes did not work, and tax was due. The legislation introduced in 2011 put the matter beyond doubt…”

In our view, all this confirms is that there is a dispute, which post-dates the relevant time we need to consider, around the position that was being maintained by HMRC. It does not tell us what the position was at the relevant time. For the appellant’s purposes, it does not provide the necessary evidence for them to meet their burden. In so far as the report is relevant, it lends support to the idea that HMRC had a view which was different to that set out by the court decisions referred to.

The appellant’s argument does not however rest on evidence but on:1) the state of the law at the time, based on Sempra and Dextra, 2) the assumption that HMRC will abide by the court’s decisions even if the case is against HMRC’s position.

Regarding Sempra and Dextra, HMRC highlight Sempra was settled before HMRC could appeal (as recorded in Judge Poon’s dissenting judgment in the FTT’s decision in Rangers at [210]). In any case HMRC say no authority is advanced for the proposition that, because a case goes against a party and the party does not appeal, the party is content with the outcome such that it forms part of the generally prevailing practice. HMRC litigated Sempra after the loss in Dextra. The position HMRC adopted in Rangers showed that at no point had HMRC accepted Sempra and Dextra.

In our judgment, the appellant’s case falls at the first hurdle regarding the state of the law. As Ms Nathan, for HMRC, pointed out, both Sempra and Dextra were first instance decisions which did not create a precedent. Although those decisions would have accordingly been of persuasive value, there could not be said to be a settled view of the law. The further point the appellant makes which is that it ought to be assumed that HMRC will abide with the law is consistent with Henderson J’s point that the practice also needs to be accepted by HMRC. However, there was no evidence we were referred to, suggesting that HMRC did accept the persuasive value of Sempra and Dextra for other taxpayers’ cases. In fact, the subsequent conduct in litigation points to HMRC not accepting that those cases were of persuasive value. Thus, there was no foundation in the case-law, or on the evidence, for a practice generally prevailing.

In conclusion, the appellant’s ground on this issue fails. That is because there was no error of law in the FTT finding that the appellant had conceded the point. However, for the reasons set out above, even if the FTT was wrong in its interpretation of the concession, there was no error of law in the FTT not accepting the s29(2) TMA defence would have been satisfied.

S29(5) TMA– awareness of hypothetical HMRC officer

The issue in relation to this ground, is whether, at the time the enquiry windows shut for 2008-9 and 2009-10, an HMRC officer (who, as established in the relevant case-law is a hypothetical inspector) could not reasonably have been expected to be aware of the insufficiency.

The FTT concluded, in HMRC’s favour, that the condition in s29(5) TMA was met. The appellant argues the FTT erred in law in so concluding. He submits the only conclusion the FTT could have drawn, in view of the information in the returns and, the information whose existence and relevance could be inferred from the returns, was that the hypothetical inspector would have been aware of the insufficiency of tax such that the condition in s29(5) was not satisfied. The discovery assessment was therefore invalid.

The relevant legal principles are conveniently summarised by reference to the authorities in Patten LJ’s judgment in Sanderson v HMRC [2016] EWCA Civ 19at [17]. The FTT set these out fully at [108] of its decision. From those it is clear: 1) the officer is a hypothetical officer, 2) that officer has the characteristics of an officer of general competence, knowledge or skill which include a reasonable knowledge and understanding of the law, 3) where the law is complex, even adequate disclosure by the taxpayer may not make it reasonable for the officer to have discovered the insufficiency on the basis of the information disclosed at the time, 4) what the hypothetical officer must have been reasonably expected to be aware of is an actual insufficiency (the test is concerned not with what the officer reasonably could have been expected to do, but with what the officer could have reasonably been expected to be aware of), and 5) the test falls to be determined on the basis of the types of available information specified in 29(6) TMA. Those are the only sources of information to be taken into account.

There is little dispute about the core of these principles, although each party emphasises different aspects of them. So, for their part HMRC emphasise that s29(5) is concerned with the quality of the taxpayer’s disclosure and the focus on that alerting the officer to an insufficiency. Thus, at [25] of Sanderson, Patten LJ described the purpose of the condition as being “to test the adequacy of the taxpayer’s disclosure, not to prescribe the circumstances which would justify the real officer in exercising the s29(1) power”.

For his part, the appellant highlights the discussion around the bar at which the awareness of insufficiency is set. Patten LJ discussed the differing approaches taken to this in the case-law, referring to judgments of the Chancellor and Moses LJ in the Court of Appeal’s decision in HMRC v Lansdowne Partners LP [2012] STC 544(at [21] onwards). There the Chancellor explained that the inspector was not required to resolve points of law: “it was enough that the information made available to [the hypothetical inspector] justifies the amendment to the tax return [the inspector] then seeks to make. Any disputes of fact or law can then be resolved by the usual processes”. Moses LJ made the same point and went on to state:

“the question is whether the taxpayer has provided sufficient information to an officer, with such understanding as [the officer] might reasonably be expected to have, to justify the exercise of the power to raise the assessment to make good the insufficiency.”

Patten LJ (at [23] of Sanderson) viewed Lansdowne as confirming:

“the officer was not required to resolve (or even be able to assess) every question of law (particularly in complex cases) but that where, as Moses LJ expressed it, the points were not complex or difficult he was required to apply his knowledge of the law to the facts disclosed and to form a view as to whether an insufficiency existed. That is a matter of judgment rather than the application of any particular standard of proof.

We turn thento how the FTT applied those principles to the facts and the specific information regarded as having been made available to HMRC by virtue of s29(6) TMA.

That subsection defines what is considered information available to an HMRC officer. In summary, as relevant to Mr Hoey’s case this was: the information in his tax return and accompanying documents, information contained in documents produced for the purposes of the enquiry or “… information the existence of which, and the relevance of which, as regards the situation mentioned in subsection (1) above [the insufficiency of tax]”… “could reasonably be expected to be inferred” by an HMRC officer from information in the above mentioned categories (i.e. the return, accompanying documents, enquiry documents).

The FTT made findings at [50] to [60] of its decision setting out the contents of the returns. For both years, the returns showed the amount of salary paid by the employer plus a taxable benefit of the interest free loans. In the “white space” area for box 19 it was explained the figures in box 15 of the employment page related to interest free sterling loans provided by the EBT and that the loans were repayable on demand. For the 2009-10 return there was also a scheme reference number, in box 14, under the DOTAS regulations for the Hamilton scheme and the Penfolds scheme.

The appellant argues the relevant information included the existence of loans and, for 2009/10, DOTAS scheme reference numbers (“SRNs”). Regarding the information whose existence and relevance “could reasonably be expected to be inferred” that was: a) the loan was interest free and repayable on demand, b) the P11D disclosed details of the loan, c) the existence of EBT, d) that the employment with was with the Isle of Man company, e) that the EBT loaned an amount which was more than the employment earnings and f) the 2009/10 DOTAs disclosure. HMRC’s internal note “Spotlight 5” of 5 August 2010 which indicated HMRC’s belief that, at the time funds were allocated to the employee or their beneficiaries, that PAYE and NICs were due.

The DOTAS disclosure which was before the FTT (but not recorded by FTT Decision) was as follows.

The title given was “The use of Isle of Man EBT and loans as a remuneration structure”. The summary of proposal or arrangements was:

“An Isle of Man company is established which will provide contractors (employed by the Isle of Man company) to deliver IT, financial and specifical project consultancy services to companies in the UK and Europe. The Isle of Man company establishes an employee benefit trust and benefits, in particular loans are awarded to employees.”

The explanation given “for each element in the proposal or arrangements from which the expected tax advantage arises” was:

The FTT rejected the appellants’ argument that the combination of the existence of the SRNs (for 2009-10), the Spotlight 5 note and the returns should have been sufficient to alert the officer to an insufficiency of tax (at [114] to [116]). It did this by reference to Patten LJ’s statement that the purpose of the statutory provision concerned adequacy of disclosure. The FTT thought they were “factors which indicate that something might be wrong and that perhaps the hypothetical officer should make further enquiries”. However, the provision was not concerned with what the officer could reasonably have been expected to do but with what the officer could reasonably have been expected to be aware of. The inference the officer should perhaps have carried out further enquiries was not enough.

The appellant argues the FTT’s conclusion, that the information was not enough to identify an insufficiency of tax was unsustainable. He submits it is impossible to identify what further information was required for 2009-10 (this was the year with DOTAS disclosure). For 2008-9 he accepts the position is less clear but submits any inspector of reasonable competence would have realised the appellant was obtaining a loan from an EBT and, that on HMRC’s analysis, this resulted in a liability to tax by reference to the amount of the loan.

HMRC reiterated the issue concerned the quality of the disclosure the taxpayer made emphasising that the disclosures for both years did not indicate that the purported loans, when made, would be non-repayable That was something which was highly relevant to the tax analysis. Nor was that point addressed in the DOTAS disclosure for 2009-10. As regards payments into the trust, it was important to remember that, at the relevant time, the Rangers analysis on “redirection” was not known; there were multiple potential tax bases. At the time the arguments around taxability tended to focus on the chargeability of the payments out of the trust under a Ramsey analysis rather than on the payments into the trust. The case-law confirmed the hypothetical officer was not required to determine complex points of law.

The appellant’s ground is principally, a challenge to the way in which the FTT applied the relevant legal principles to the materials before it. However, Mr Mullan’s point in essence also suggests that the FTT misdirected itself by applying too high a threshold of awareness. The question was whether there was enough information to justify making an assessment and if HMRC thought the schemes did not work then that was enough.

We consider the FTT directed itself as to the correct principles and reached a decision which it was open to it to reach. The FTT set out at length the summary of the relevant legal principles. Ultimately as the authorities point out, the level of awareness is a matter of judgment. (In passing we note that it is not clear that the FTT’s reference (at [114]) to a “possible insufficiency” of tax reflected the precise way the submission had been put, or the legal principles the FTT had discussed. To the extent it did not, there was no disadvantage to the appellant in so far as it would be easier for the appellant to show the officer should reasonably have been aware of a possible insufficiency as compared to an actual insufficiency.)

We conclude, that for both years, it was open to the FTT to find the 29(5) condition was met. The information regarded as made available was such that the officer could not have been reasonably expected, to be aware of the insufficiency so as to justify raising an assessment.

Regarding the appellant’s disclosure of facts, these only went as far as saying there was an interest free loan in relation to which tax was charged. (As Ms Nathan submitted, given tax was assessed on the benefit of the loan, the view might very well have been taken that there was thus no insufficiency). The appellant’s response, that this was irrelevant to the taxability of contribution to the EBT does not help. At the relevant time the reasoning and outcome in Rangers was not known.

Both parties pointed out the apparent inconsistency of the position maintained regarding 29(2) with the position on 29(5). In particular, the appellant highlighted the government’s response to the Morse Review and the statements there (at 2.10) that HMRC had always maintained the schemes did not work and tax was due. But the fact the appellant had not discharged the burden to show there was a generally prevailing practice that payments into the EBT were taxable does not mean HMRC must be taken to have adopted a position that all such cases involving EBTs were taxable. As a generic statement it says nothing about the level of information that would have needed to have been provided to reach the level of awareness justifying the making of an assessment. (In other words, the absence of a generally prevailing practice confirming the non-taxability of certain sums might very well be consistent with a position that those sums are taxable. But it does not require the view that assessment in respect of such sums is justified).

To the extent the Revenue were maintaining the chargeability of tax on sums going into the EBT, that depended on characterising what was paid in as remuneration which would be dependent on the facts. It did not follow that because the sums were paid into an EBT that those were necessarily remuneration. Also, the relevant legal position supporting a tax charge, at that time, whether on payments in under a redirection argument, or whether on payments out, was not established to any degree of certainty.

The Spotlight statement does not add anything to the analysis. It refers to “allocation to the employee or their beneficiary”. It is not clear from the summary of the scheme that this step of allocation occurred – the disclosure referred to an EBT (which could have been an EBT fund for the benefit of a class of persons that went beyond the employee and their beneficiary) and the EBT then providing benefits.

Regarding the point that the FTT’s decision was irreconcilable with [82] of Charlton regarding DOTAS disclosures, we note that part of the judgement is concerned with whether the existence and relevance of the DOTAS disclosure could be inferred from the SRN disclosure and therefore the contents of the disclosure. Here, there is no indication the FTT did not consider the contents of the form, even if it did not recite it in its decision. The FTT’s reasoning was that the s29(5) condition was met for 2009-10 despite that form. Although in Charlton the tribunal explained it was not necessary to explain precisely how a scheme works for any claimed tax treatment to arise (at [89]), or that there was any overriding requirement to explain how the scheme worked (at [93]), it is clear each case will turn on its facts and an evaluation of the particular disclosures made in conjunction with the skills and abilities attributed to the officer.

We consider the FTT’s judgment on whether the condition had been met was well within the bounds of what was open to it given the particular information put forward.

There was no error of law and this ground fails.

JUDGE SWAMI RAGHAVAN