In John Lancashire, Timothy Lee, Mark Johnson v HMRC [2020] TC7884, the First Tier Tribunal (FTT) rejected a claim to take credit for the PAYE that should have been deducted by an employer against income Tax assessments made in respect of a failed tax scheme. The Transfer of Assets abroad provisions trumped the PAYE rules and HMRC's assessments were valid.

  • The appellants were contractors were UK taxpayers mainly engaged as freelancers by city financial institutions and banks.
  • They were all participants in failed tax schemes designed by Montpelier that aimed to circumvent the 'Off-Payroll Working rules': IR35.
  • Under the scheme, each taxpayer formed Isle of Man Offshore trust which formed a Partnership to hire out their services. 
  • They claimed that their income would escape UK tax by virtue of the UK/Isle of Man double tax agreement.
  • The schemes were entered into between 2002 and 2008. All these types of schemes were defeated when the UK passed legislation with retrospective effect, see Huitson, R v HMRC [2011] EWCA Civ 893.

HMRC had raised Income Tax assessments on the basis that the tax scheme income were taxable earnings and the appellant’s original grounds of appeal were all similar to those pursued by Mr Huitson.

When the contractors notified their appeals to the Tribunal in 2015, they relied on further grounds.

  • They claimed that as their income was earnings it actually fell within PAYE and HMRC’s assessment were excessive in that they failed to allow a credit for PAYE that should have been deducted at source.
  • If subject to PAYE their clients should have deducted PAYE and they were entitled to claim a credit for that, even if it the PAYE had never been so deducted.

The FTT decided that it had jurisdiction to allow the PAYE arguments.

It explored whether credit should be allowed for the PAYE that the deemed employer/agency should have deducted and decided that it could be. It noted that HMRC was now out of time to raise Regulation 80 and 72 determinations to collect PAYE from the persons deemed to be employers in the scheme chain, or from the contractors themselves.  

It then examined the Transfer of Assets Abroad rules (TOAA) rules and decided that the scheme fell clearly within those.

Looking at which taxing provision takes precedence over the next, the FTT arrived at the conclusion that the anti-avoidance provisions trumped PAYE.

The appeals were dismissed.


As these were lead cases for a large number of appeals and the detailed judgment was over 100 pages long there may well be some scope for appeal. Several other recent cases have looked at the issue of HMRC's failure to allow a credit for PAYE when raising income tax assessments and one is being heard by the Upper Tribunal today.

UPDATE: the case has been appealed and will be heard by the Upper Tribunal in March 2023.


IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

Transfer of assets abroad (TOA)
What are the ToA rules? When do they apply? Is there any defence against the rules?

Non-resident trusts 
How do you tax an offshore trust? What are the consequences of setting up a trust? What are the issues for settlors?

Disclosure of tax avoidance schemes (DOTAS)
What are rules on Disclosure of tax avoidance schemes (DOTAS)? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?

What type of partnerships are there? How are partnerships taxed? How do create a partnership.

External links

John Lancashire, Timothy Lee, Mark Johnson v HMRC [2020] TC7884