In Stephen Hoey & Ors v HMRC [2022] EWCA Civ 656, the Court of Appeal agreed that no PAYE credit was available for payments made to an Employee Benefit Trust. The courts had no jurisdiction to challenge HMRC’s discretion in not pursuing a deemed employer for PAYE and the appellant’s judicial review claim failed.

Mr Hoey participated in two contractor loan schemes, whereby he received loans from offshore Employee Benefit Trusts (EBTs).

  • Both schemes were notified to HMRC under the Disclosure Of Tax Avoidance Scheme (DOTAS) rules and Mr Hoey partially disclosed the schemes and loans on his tax returns.
  • HMRC issued Discovery Assessments and a Closure notice. They exercised their discretion under s.687(7A)(b) ITEPA 2003 in not pursuing the end-users (as deemed employers), for whom Mr Hoey worked, for PAYE on the amounts paid to the EBTs. They instead transferred the PAYE obligations to Mr Hoey.
  • Mr Hoey accepted that the original payments to the EBTs were taxable as his employment income but claimed credit for notional payments of PAYE which he said should be treated as made by the End Users as they were obliged to pay the PAYE tax due.
  • He contended that HMRC has no general discretion to waive the obligation to pay PAYE tax, the only circumstance where the credit would cease to be available was where HMRC made a relevant direction under the express provisions of the PAYE Regulations and they had not.

The First Tier Tribunal (FTT) and Upper Tribunal (UT) both dismissed Mr Hoey’s appeals. The FTT said it did not have jurisdiction to interfere with whether or not HMRC had property exercised their discretion, and the UT agreed.

Mr Hoey appealed the decision of the UT and also issued a claim for judicial review of HMRC’s decision not to collect tax on his employment earnings from the End Users.

The Court of Appeal (CoA) dismissed My Hoey’s appeals.

  • On judicial review: HMRC had the power to decide not to pursue the End Users for PAYE. They exercised it lawfully and there was no breach of any Legitimate expectation that a PAYE credit would be due.
  • There is no express right of appeal in relation to the exercise of HMRC’s powers under s.687(7A). The only right of appeal is under s.31 TMA 1970 which deals with assessments and closure notices.
    • The discovery assessments issued to Mr Hoey did not include any PAYE credit, nor did his Self Assessment returns, so the s.31 right of appeal could not apply to the PAYE credit he was claiming.
    • This meant that the FTT correctly decided that it did not have jurisdiction to decide about the availability of the PAYE credit and the UT correctly upheld this decision.

HMRC had alternatively sought to tax Mr Hoey under the Transfer of Assets Abroad (TOAA) legislation.

  • The FTT had failed to deal with this which the UT ruled was an error in law however the UT held that as the FTT had found that the relevant income under these rules would have been nil, the error had no effect.
  • HMRC issued a cross-appeal to the Court of Appeal on grounds that the UT had itself erred in law by failing to correct the errors made by the FTT.

The Court of Appeal agreed with the UT. There was no income for the purposes of the ToA rules which Mr Hoey could in principle have had the power to enjoy.

On the cross-appeal, the CoA also agreed with the UT finding that the FTT was entitled to reach the conclusion that it and they could find no material error of law in its approach or reasoning.

The UT had found, agreeing with HMRC, that any charge under the ToA legislation would take priority over any liability to tax under the employment income provisions of ITEPA. The CoA could not see on what basis HMRC made this assertion stating that it would be an extraordinary position to reach given the highly complex and potentially penal provisions of the ToA code and the possibility that it would result in double taxation. Since HMRC conceded this point during the CoA hearing the court did not have to conclude on the matter.

Useful guides on this topic

DOTAS: Disclosure of tax avoidance schemes
What are the 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?

Disguised Remuneration Zone
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. 

How to appeal a decision of HMRC
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

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

External link

Stephen Hoey & Ors v HMRC [2022] EWCA Civ 656 


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