In Stephen Hoey v HMRC [2019] TC07292, the First Tier Tribunal (FTT) held that discovery assessments on EBT loans that had been disclosed by the taxpayer were valid and HMRC could decide to transfer the tax due from the employer to the employee.
This decision was appealed by the taxpayer with a cross-appeal by HMRC. The taxpayers's appeal was dismissed by the Upper Tribunal in a judgement in April 2021 and HMRC's cross-appeal partly upheld.
Under s.29 TMA 1970, HMRC may make a Discovery Assessment if they find an incomplete or inaccurate disclosure leading to a loss of tax.
- S.29(2) provides that no discovery can be made where the return in question was prepared under the practice generally prevailing at the time.
Under s.684(7A) ITEPA 2003, HMRC can use their discretion to disapply the PAYE regulations in respect of the taxation of employment income in circumstances where they consider it 'unnecessary or not appropriate' to pursue the employer.
Mr Hoey was an IT specialist who participated in two contractor loan schemes, Penfolds and Hamilton, whereby he received loans from offshore employee benefit trusts (EBTs).
- Penfolds/Hamilton were his employers. He was paid a basic salary taxed under PAYE and received interest-free loans from the EBTs which were repayable on demand.
- Both schemes were notified to HMRC under the Disclosure Of Tax Avoidance Scheme (DOTAS) rules.
- Mr Hoey disclosed, on his tax returns, the DOTAS numbers for one year and the benefit in kind on his interest-free loans for all years in question. The loans were clearly described as coming from employee benefit trusts.
- HMRC issued discovery assessments for 2008-09 and 2009-10 and a closure notice for 2010-11. In doing so they exercised their discretion under s.687(7A) to transfer the PAYE tax burden from the employers to Mr Hoey.
HMRC’s case for the tribunal put forward an alternative argument that a charge to tax arose under the provisions of Chapter 2, Part 13, ITA 2007, the Transfer of Assets Abroad legislation (ToA).
Prior to the case being heard, it was established that Mr Hoey accepted the reasoning in the Rangers case and therefore HMRC’s argument that the original payments to the EBTs were taxable as his employment income.
The FTT dismissed the appeal and found:
- The discovery assessments were validly made; the information provided in Mr Hoey’s tax returns was not sufficient to alert the hypothetical reasonably competent officer to an insufficiency of tax so as to prohibit the making of an assessment under s29, and he did not complete his tax returns in a manner in accordance with generally prevailing practice at that time as required by s29(2).
- s684(7A) ITEPA did give HMRC the discretion to transfer the PAYE tax burden from the employers to Mr Hoey but the FTT does not have the jurisdiction to interfere with whether or not that discretion was properly exercised.
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The discovery assessments were incorrect as they assessed Mr Hoey on his interest-free loans whilst at the same time assessing them as employment income, that is the same income was being assessed twice.
Comment
Both schemes here were standard EBT schemes that were disclosed to HMRC in a manner not dissimilar to many other such schemes. Scheme users and their advisers may have thought that by entering the DOTAS number and declaring their interest free loans on their tax returns they could avoid the application of the discovery provisions; this decision suggests otherwise but as an FTT decision is not binding precedent and was made despite the 2012 decision in Charlton where the Upper Tribunal ruled that the presence of a DOTAS scheme reference number on a return should be enough for an officer of HMRC to be reasonably expected to be aware of an insufficiency of tax.
The decision includes details about how HMRC set up an entirely new team to consider the application of the ToA rules to EBT’s with offshore employers. The FTT judge did agree that the ToA rules could apply; the creation of the employment contracts between Mr Hoey and Penfolds/Hamilton constituted the transfer of an asset by Mr Hoey, a UK resident, to Penfolds/Hamilton, who were not resident in the UK, and were, therefore, persons abroad. However, he concluded that the correct amount of income assessable under the provisions was nil as deductions were due for the contributions made to the trusts.
The judge's conclusion on the application of the ToA rules, thought not case precedent as an FTT case, is not fact-specific and could therefore apply to many disguised remuneration schemes. This means unless a different view is taken in any future tribunal cases, and in particular by a higher court, that HMRC’s plan to attack such EBT's using the ToA rules may have failed. Of course, it is possible and perhaps expected, that this decision itself may be appealed to a higher court.
Useful guides on this topic
Disguised remuneration
How to settle up with HMRC in respect of any pay that has been disguised as loans 'disguised remuneration' and includes contractor loans and Employee Benefit Trust loans.
Disguised Remuneration final settlement opportunity
What are your options now?
Transfer of Assets Abroad
What are the ToA rules? When do they apply? Is there any defence against the rules?
Regulation 80 and 72 assessment for PAYE
When HMRC can assess a company or its owners for failure to deduct PAYE and NICs
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