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United Kingdom Upper Tribunal (Tax and Chancery Chamber)

You are here: BAILII >> Databases >> United Kingdom Upper Tribunal (Tax and Chancery Chamber) >> Stephen Hoey v Revenue and Customs: [2021] UKUT 82 (TCC) (12 April 2021)
Cite as: [2021] BTC 519, [2021] UKUT 82 (TCC), [2021] STI 1404, [2021] STC 792

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[2021] UKUT 82 (TCC)
Appeal number: UT/2019/0145 & 0138
INCOME TAX­ UK contractor with offshore employer providing services to
UK end-users remunerated through EBT arrangements ­ whether FTT had
jurisdiction to consider whether taxpayer entitled to PAYE credits under
Regulations 185 and 188 of PAYE Regulations for sums end-users liable to
deduct under PAYE -no. Whether FTT erred in finding discovery assessments
valid ­ no. Transfer of Assets Abroad code -whether FTT erred in finding
motive defence did not apply - no ­ whether FTT erred in finding income of
"person abroad" was nil ­ no. Whether TOAA infringed taxpayer's EU law
free movement of capital ­ no. Taxpayer's appeal dismissed, HMRC's cross-
appeal allowed in part.
to HMRC's
in respect of
Sitting in public by way of remote video skype for business hearing treated as taking place
in, London, on 22,23, and 26 October 2020. Written submissions received on 30 October,
3, 9, 11, 16, 23 November, 17, 18 December, 8 January, 19 and 23 February 2021
Rory Mullan, counsel, instructed by RPC for the Appellant, and for the Respondent to
the Commissioners' cross-appeal)
Aparna Nathan QC and Marika Lemos, counsel, instructed by the General Counsel and
Solicitor to HM Revenue & Customs, for the Respondents in Mr Hoey's appeal, and for
the Appellants in the Commissioners' cross-appeal
Table of Contents
Background facts
The PAYE credit and jurisdiction issues: The statutory provisions
PAYE regulations
TMA: Provisions on self-assessment / assessment
PAYE Regulations: Regulations 185 and 188
HMRC exercise 7A discretion
FTT Decision on PAYE and jurisdiction issues
Does the FTT have jurisdiction over Regulation 188/185?
Question of Statutory interpretation
Our explanation of statutory provisions: Points to note about s8 /9/ s31 /s59 TMA and
Regulations 185 and Regulation 188
Regulation 185 ­ only for s59B purposes or wider?
Regulation 188
Jurisdiction to address exercise of HMRC's discretion under s684(7A)(b) ITEPA
Effect of exercise of 684(7A)(b) on availability of Regulation 185 and Regulation 188
PAYE credit
On the assumption the 7A discretion does affect the availability of the Regulation 185,
Regulation 188 PAYE credit, what is its scope?
The Discovery Assessment Validity Issue
1) Discovery
The FTT's findings
Parties' submissions and Discussion:
2) Failure to include income the result of error attributable to Generally Accepted
Practice (s29(2))
Discussion: s29(2) Generally Accepted Practice
3) S29(5) TMA ­ awareness of hypothetical HMRC officer
Discussion on s29(5)
TOAA code issues: HMRC's cross-appeal and appellant's grounds
Overview of cross-appeal and grounds
HMRC Cross-Appeal Ground 1
HMRC Cross-Appeal Ground 2
i) Did the FTT apply the wrong test?
ii) No evidence /Insufficiency of evidence for finding?
HMRC Cross-Appeal Ground 3 ­ motive test ­ FTT wrong to reject additional reasons
for why motive test not satisfied ­ only reasonable conclusion on facts was that neither
limb of motive defence could be relied on
Condition B s737(4)
HMRC's Cross-appeal Ground 4 ­ FTT erred in concluding TOAA breached Free
Movement of Capital
1) No EU law freedoms engaged?
Correct perspective: purpose of legislation or facts of case?
Movement of capital?
Are 1) Additions to EBT 2) Loans out of EBT relevantly restricted?
Mr Hoey able to rely on payment from end user to offshore employer?
2) No infringement of Article 63 free movement of capital because the movements are an
unavoidable consequence of the restriction of another EU law freedom?
Whether HMRC require permission to run an EU law abuse rights argument
3) Even if Art 63 engaged was any restriction justified, suitable and proportionate.
Can the motive defence be construed in a way that conforms to EU law?
Mr Hoey's facts artificial in EU law sense?
Appellant's further points
Disapplication vs conforming construction?
Summary of conclusions
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
, taxable employment income
which was subject to PAYE under the Income Tax (Earnings and Pensions) Act 2003
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
RFC 2012 (in liquidation) v Advocate General for Scotland [2017] UKSC 45
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")
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.
Background facts
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").
Chapter 2 Part 13 Income Tax Act 2007 ("ITA 2007")
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
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.
The PAYE credit and jurisdiction issues: The statutory provisions
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.
The "Disclosure of Tax Avoidance Schemes" legislation contained primarily in the Finance
Act 2004, Part 7 (ss306 to 319 as amended)
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
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
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
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:
" particular, include any such provision as is set out in the following
1. Provision--
(a) for requiring persons making payments of, or on account of, PAYE
income to make, at the relevant time, deductions or repayments of
income tax calculated by reference to tax tables prepared by the
Commissioners for Her Majesty's Revenue and Customs, and
(b) for making persons who are required to make any such deductions
or repayments accountable to or, as the case may be, entitled to
repayment from the Board.
"The relevant time" is­
(b)...the time when the payment is made.
1A. Provision--
(a) for deductions to be made, if and to the extent that the payee does
not object, with a view to securing that income tax payable in respect of
any income of a payee for a tax year which is not PAYE income is
deducted from PAYE income of the payee paid during that year; and
(b) as to the circumstances and manner in which a payee may object to
the making of deductions.
4A. Provision authorising the recovery from the payee rather than the
payer of any amount that an officer of Revenue and Customs considers
should have been deducted by the payer.
8. Provision for the making of decisions by Her Majesty's Revenue and
Customs as to any matter required to be decided for the purposes of the
regulations and for appeals against such decisions.
9. Provision for appeals with respect to matters arising under the
regulations which would otherwise not be the subject of an appeal.
10. Different provision for different cases or classes of case.
11. Any incidental, consequential, supplementary and transitional
provision which appears to the Board to be expedient...
Further subsections in s684 provide:
(5) PAYE regulations must not affect any right of appeal to the General
or Special Commissioners which a person would have apart from the
(6) It does not matter for the purposes of PAYE regulations that income
is wholly or partly income for a tax year other than that in which the
payment is made.
(7) PAYE regulations have effect despite anything in the Income Tax
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
(7A) Nothing in PAYE regulations may be read--
(a) as preventing the making of arrangements for the collection of
tax in such manner as may be agreed by, or on behalf of, the payer
and an officer of Revenue and Customs, or
(b) as requiring the payer to comply with the regulations in
circumstances in which the Inland Revenue is satisfied that it is
unnecessary or not appropriate for the payer to do so.
(7B) References in this section and section 685 to income tax in respect
of PAYE income are references to income tax in respect of that income
if reasonable assumptions are (when necessary) made about other
(7C) In this section and section 685--
"payer" means any person paying PAYE income and "payee" means
any person in receipt of such income;
"specified" means specified in PAYE regulations.
(8) In this Act and any other enactment (whenever passed) "PAYE
regulations" means regulations under this section.
PAYE regulations
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
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
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.
TMA: Provisions on self-assessment / assessment
Section 8 sets out the obligation on a taxpayer to file a personal return:
8.-- Personal return.
(1) For the purpose of establishing the amounts in which a person is
chargeable to income tax and capital gains tax for a year of
assessment, and the amount payable by him by way of income tax
for that year, he may be required by a notice given to him by an officer
of the Board--
(a) to make and deliver to the officer, a return containing such
information as may reasonably be required in pursuance of the notice,
(b) to deliver with the return such accounts, statements and documents,
relating to information contained in the return, as may reasonably be so
(1AA) For the purposes of subsection (1) above--
(a) the amounts in which a person is chargeable to income tax and
capital gains tax are net amounts, that is to say, amounts which take into
account any relief or allowance a claim for which is included in the
return; and
(b) the amount payable by a person by way of income tax is the
difference between the amount in which he is chargeable to income tax
and the aggregate amount of any income tax deducted at source and any
tax credits to which section 397(1) or 397A(2) of ITTOIA 2005 applies.
(5) In this section and sections 8A, 9 and 12AA of this Act, any reference
to income tax deducted at source is a reference to income tax deducted
or treated as deducted from any income or treated as paid on any income.
Section 9 provides:
9.-- Returns to include self-assessment.
(1) Subject to [subsections (1A) and (2)]3 below, every return under
section 8 or 8A of this Act shall include a self-assessment, that is to
(a) an assessment of the amounts in which, on the basis of the
information contained in the return and taking into account any relief or
allowance a claim for which is included in the return, the person making
the return is chargeable to income tax and capital gains tax for the year
of assessment; and
(b) an assessment of the amount payable by him by way of income
tax, that is to say, the difference between the amount in which he is
assessed to income tax under paragraph (a) above and the aggregate
amount of any income tax deducted at source and any tax credits to
which section 397(1) or 397A(2) of ITTOIA 2005 applies.
but nothing in this subsection shall enable a self-assessment to show as
repayable any income tax treated as deducted or paid by virtue of section
246D(1) of the principal Act, section 626 of ITEPA 2003 or section
399(2), 400(2), 414(1), 421(1) or 530(1) of ITTOIA 2005.
Section 28A deals with closure notices and s29 with discovery assessments. The
provision giving a right of appeal is s31 which provides as follows:
31 Appeals: right of appeal
(1) An appeal may be brought against­
(a) any amendment of a self-assessment under section 9C of this Act
(amendment by Revenue during enquiry to prevent loss of tax),
(b) any conclusion stated or amendment made by a closure notice under
section 28A or 28B of this Act (amendment by Revenue on completion
of enquiry into return),
(c.... or
(d) any assessment to tax which is not a self-assessment.
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:
59B.-- Payment of income tax and capital gains tax.
(1) Subject to subsection (2) below, the difference between--
(a) the amount of income tax and capital gains tax contained in a
person's self-assessment under section 9 of this Act for any year of
assessment, and
(b) the aggregate of any payments on account made by him in
respect of that year (whether under section 59A of this Act or
otherwise) and any income tax which in respect of that year has been
deducted at source, shall be payable by him or (as the case may be)
repayable to him as mentioned in subsection (3) or (4) below but nothing
in this subsection shall require the repayment of any income tax treated
as deducted or paid by virtue of section 246D(1) of the principal Act,
section 626 of ITEPA 2003 or section 399(2), 400(2), 414(1), 421(1) or
530(1) of ITTOIA 2005.
(2) The following, namely--
(a) any amount which, in the year of assessment, is deducted at source
under PAYE regulations in respect of a previous year, and
(b) any amount which, in respect of the year of assessment, is to be
deducted at source under PAYE regulations in a subsequent year, or is a
tax credit to which section 397(1) or 397A(2) of ITTOIA 2005 applies,
shall be respectively deducted from and added to the aggregate
mentioned in subsection (1)(b) above.
PAYE Regulations: Regulations 185 and 188
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
Regulation 185 provides:
185.-- Adjusting total net tax deducted for purposes of sections
59A(1), 59B(1) and 59BA(2) TMA
(1) This regulation applies for the purpose of determining­
(a) the excess mentioned in section 59A(1) of TMA (payments on
account of income tax: income tax assessed exceeds amount deducted at
(b) the difference mentioned in section 59B(1) of TMA (payments
of income tax and capital gains tax: difference between tax
contained in self-assessment and aggregate of payments on account
or deducted at source), and
(c) the difference mentioned in section 59BA(2) of TMA (payments of
income tax and capital gains tax: difference between tax contained in
simple assessment and aggregate of payments on account or deducted at
(2) For those purposes, the amount of income tax deducted at source
under these Regulations is the total net tax deducted during the
relevant tax year ("A") after making any additions or subtractions
required by paragraphs (3) to (5).
(3) Subtract from A any repayments of A which are made before the
taxpayer's return and self-assessment is made under section 8 or 8A of
TMA7 (personal return and trustee's return).
(4) Add to A any overpayment of tax from a previous tax year, to the
extent that it was taken into account in determining the taxpayer's code
for the relevant tax year.
(5) Add to A any tax treated as deducted, other than any direction
tax, but­
(a) only if there would be an amount payable by the taxpayer under
section 59B(1) of TMA on the assumption that there are no payments on
account and no addition to A under this paragraph, and then
(b) only to a maximum of that amount.
(6) In this regulation­
"direction tax" means any amount of tax which is the subject of a
direction made under regulation 72(5), regulation 72F or regulation
81(4) in relation to the taxpayer in respect of one or more tax periods
falling within the relevant tax year;
"relevant tax year" means­
(a) in relation to section 59A(1) of TMA, the immediately preceding
year referred to in that subsection;
(b) in relation to section 59B(1) of TMA, the tax year for which the self-
assessment referred to in that subsection is made;
(c) in relation to section 59BA(2) of TMA the tax year for which the
simple assessment referred to in that subsection is made;
"tax treated as deducted" means any tax which in relation to
relevant payments made by an employer to the taxpayer in the
relevant tax year­
(a) the employer was liable to deduct from payments but failed to
do so, or
(b) the employer was liable to account for in accordance with
regulation 62(5) (notional payments) but failed to do so;
"the taxpayer" means the person referred to in section 59A(1) of TMA
or the person whose self-assessment is referred to in section 59B(1) of
TMA or the person whose simple assessment is referred to in section
59BA(2) of TMA (as the case may be).
Regulation 188 provides:
188.-- Assessments other than self-assessments
(1) In this regulation, "assessment" means an assessment other than one
under section 9 of TMA (self-assessment).
(2) The tax payable by the employee is­
A - (B - C)
A is the tax payable under the assessment;
B is the total net tax deducted in relation to the employee's relevant
payments during the tax year for which the assessment is made,
adjusted as required by paragraph (3); and C is so much, if any, of
B as is subsequently repaid
(3) For the purpose of determining the tax payable by the employee,
and subject to paragraphs (4) and (5)­
(a) add to B any tax which­
(i) the employer was liable to deduct from relevant payments but
failed to do so, or
(ii) the employer was liable to account for in accordance with
regulation 62(5) (notional payments) but failed to do so;
(b) make any necessary adjustment to B in respect of any tax overpaid
or remaining unpaid for any tax year; and
(c) make any necessary adjustment to B in respect of any amount to be
recovered as if it were unpaid tax under section30(1) of TMA (recovery
of overpayment of tax etc) to the extent that­
(i) HMRC took that amount into account in determining the employee's
code, and
(ii) the total net tax deducted was in consequence greater than it would
otherwise have been.
(4) No direction tax is to be included in calculating the amount of tax
referred to in paragraph (3)(a).
(5) If a direction is made after the making of the assessment, the amount
(if any) shown in the notice of assessment as a deduction from, or a
credit against, the tax payable under the assessment is to be taken as
reduced by so much of the direction tax as was included in calculating
the amount of tax referred to in paragraph (3)(a).
(6) Instead of requiring payment by the employee, HMRC may take
the tax payable by the employee into account in
determining the employee's code for a subsequent tax year.
(7) In this regulation­
"direction" means a direction made under regulation 72(5), regulation
72F or 81(4) in relation to the employee in respect of one or more tax
periods falling within the tax year in question;
"direction tax" means any amount of tax which is the subject of a
"tax payable under the assessment" means the amount of tax shown
in the assessment as payable without regard to any amount shown
in the notice of assessment as a deduction from, or a credit against,
the amount of tax payable.
HMRC exercise 7A discretion
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"
FTT Decision on PAYE and jurisdiction issues
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.
Does the FTT have jurisdiction over Regulation 188/185?
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
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.
Question of Statutory interpretation
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:
the relationship between s59B and the provisions in s8 and 9 TMA 1970.
Are the steps in s59B to be viewed as integral or parallel to arriving at the
"tax payable" amount in the assessment? This point is entailed in the
appellant's position insofar as it relies on the analysis of the FTT's decision
in Lancashire & Ors v HMRC [2020] UKFTT 407 (TC) ­ which we come
to discuss shortly. Or, as HMRC's position assumes, are the steps in s59B
a separate sequential stage carried out after the assessment stage?
The relationship between ss8,9 and 31 TMA and Regulations 185 and
188 - The appellant argues, so far as Regulation 185 is concerned, that the
deeming (that PAYE which ought to have been deducted is treated as
deducted) is not restricted to the operation of s59B but is relevant to the
assessment machinery and jurisdictional provisions set out in sections 8,9,
and 31 TMA. Moreover, Regulation 188 is not even constrained by a cross-
reference to s59B and is also clearly relevant to sections 8,9, and 31. HMRC
say regulation 185 is only relevant for the purposes of s59B (which is a
separate stage).
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 issue there
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
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
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 154 (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:
The Regulation only applied to s59A and s59B.
Section 59A dealt with payments on account of income tax (logically
that came after establishing liability).
Section 59B dealt with payments of income tax "in the case of
assessments...". The amount "to be paid" was different from the amount
"chargeable" and amount "payable" in s8 and s9. This was supported by
s684(5) ITEPA which preserved the employee's right of appeal to the
tribunal irrespective of any provision in PAYE regulations. Those
regulations did not disturb liability to tax, which had already been imposed
by the time at which PAYE become relevant.
Regarding Regulation 188 HMRC's submissions were recorded as:
"A" in the formula is amount fixed a person's liability under s8 and 9
Regulation 188(7) expressly excluded from "tax payable under the
assessment" deductions from / credits against amount payable.
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]
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 term was drawn widely; there was no cross reference to any
provision whether under PAYE or otherwise.
There was nothing which indicated a distinction was sought to be drawn
between a 59B(1) deduction from tax chargeable and other deductions:
In both cases under s59B the sums counted as "income tax
which has been deducted" ­ they reduced the overall tax payable.
The focus in 9(1)b) was on assessment of the amount the
taxpayer actually had to pay to HMRC. That contrasted with the
assessment required under 9(1)(a), which the FTT described as
the assessment for the tax which the taxpayer "is chargeable or
for which taxpayers are liable in principle".
It accorded with the intention of what the taxpayer should
take account of under the self-assessment tax code. The FTT
explained "in effect s59B(1), s59B(2) and s59B(8) provide the
absolute measure of "income tax deducted at source" which the
taxpayer had to self-assess..."
In light of the clear purpose of 9(1)(b) the greater specificity
of those provisions (which we understand to mean s59B) as to
"income tax deducted at source" did not indicate the 9(1)(b)
assessment was made on a different or more limited basis.
It would be very odd if significant matters such as availability and
amount of tax credit were dealt with outside the scheme of assessment and
appeals which was intended "to provide a comprehensive scheme for the
calculation and payment of tax including an appeals process".
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
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.
Our explanation of statutory provisions: Points to note about s8 /9/ s31 /s59B TMA
and Regulations 185 and Regulation 188
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
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?
While Mr Mullan referred us to passages from McCullough (Inspector of Taxes) v Ahluwalia
[2004] EWCA Civ 889 we did not consider the case to be on point. The county court would have no
jurisdiction to challenge or question matters which fell to be determined in an appeal against assessments
before the FTT or its predecessor bodies. But that would not present an obstacle if the conclusion was
that the FTT lacked jurisdiction in relation to the PAYE credit in the context of such an appeal.
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
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 sequential step 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:
This is consistent with the structure of TMA, which works through the
provisions on assessment, then what HMRC can do with the assessment,
and then the FTT powers. Section 59B sits in a separate section on
payments, which comes after the parts on assessment and appeals, but
before the section on collection and recovery.
There is no cross reference to s59B in ss8 and 9 as one might expect if
s59B were to be incorporated or rolled up into the s8/s9 adjustments. In
contrast s59B refers back to s8/9 concepts which suggests the steps in s8/s9
have already taken place.
Section 59B takes the assessment as a starting point which assumes the
assessment function has already taken place.
That s59A is a further step, showing an actual amount payable "bottom
line figure", is not the same as what is in the assessment, is consistent with
the view taken by the UT in Walker although this point should not be
overstated as there was not any specific reasoning explaining that view (see
[79] above).
It is consistent with the reference to s59B(1) TMA in the explanatory
notes to the Income Tax Act 2007 when describing what the calculation of
income tax liability deals with. Those notes state under the heading "Chapter
3: calculation of income tax liability" that : "The calculation does not deal
with amounts of tax suffered (eg under PAYE or by way of deduction at
source) as these are set off against a person's liability rather than deducted
in arriving at it. See section 59B(1) of TMA". This is supportive of our view,
but its importance should not be overstated.
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.
Regulation 185 ­ only for s59B purposes or wider?
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:
The broad reference cannot capture provisions which are expressed not
to fall within it such as Regulation 185 which is only for the purposes of
points b) and c) take as their starting point the assumption that s8/s9 is
about a "bottom line payable figure". That assumes the question in issue.
Following our analysis above that s59B is a sequential step, we do not agree
s8/s9 stipulate a "bottom line payable figure".
The oddity point pre-judges the question of statutory construction as to
where jurisdiction over the PAYE credit lies. While from a policy viewpoint
we can see the desirability of the issue being litigated in the FTT, we must
be guided by the words of the statute.
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
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.
Jurisdiction to address exercise of HMRC's discretion under s684(7A)(b) ITEPA
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
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.
Effect of exercise of 684(7A)(b) on availability of Regulation 185 and Regulation 188
PAYE credit
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.
The liability on the end user stems from s710 ITEPA. That is not in the
PAYE Regulations so the discretion cannot switch such liability off.
Under the scheme of legislation, only one person is liable to account
(there is no choice unless specifically prescribed by the redirection
regulations, Regulations 72,72F, 81). If no such direction is made, then the
employee can treat PAYE tax as having been paid by the employer. 7A
refers to "...requiring the payer to comply with the regulations". That
relieves the payer from obligation to comply with regulations; it cannot alter
the application of the PAYE regulations to another person. The 7A
discretion cannot be used to impose regulations on others.
While Regulations 185 and 188, exclude "direction tax" that exclusion
does not refer to the exercise of discretion under s684(7A)(b).
Our view on these is as follows:
As HMRC point out, s710 is expressly subject to PAYE regulations, so
must also envisage any 7A disapplication of those. (Mr Mullan's point in
reply, that if the regulations are switched off the words "in accordance with
PAYE regulations" in s710 have nothing to bite on, does not look at s710 in
conjunction with 7A; the clear legislative intent is that s710 incorporates
whatever is said to apply under the PAYE Regulations. That must also take
account however that those regulations may be disapplied as regards a
particular payer under 7A).
The observation is correct as far as it goes. The discretion can of course
only switch off the PAYE regulation obligations on the payer. But, it does
not answer the question of what, if any, impact that has on Mr Hoey's
position. To the extent the underlying point is whether such consequence
means 7A ought not to be interpreted as allowing the deduction obligation
to be switched off, we come on to that shortly.
If 7A can switch off the liability to deduct in the first place, then there
is no need to clarify that credit should not be given, because the sum will
already be accounted for.
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:
The plain reading of the language is that it has prospective effect. (This
in essence is the point that was made by the FTT in Lancashire at [254] and
[255] of its decision).
So construed, the direction results in adverse retrospective effects.
Those adverse effects do not of course fall on the subject of the direction:
where the deduction obligation is removed after the event, the employer, or
person treated as employer for PAYE purposes will be relieved. It is the
employee who suffers from the removal of the deduction obligation after it
has arisen. Tax that, under the law as it stood at the time, ought to have been
deducted was not. Tax, which therefore the employee was not expecting to
be liable to pay for, becomes liable. That is not through a direction made on
the employee, with notice, and satisifying certain pre-conditions. If HMRC
are right, it is as a result of a direction to the person, who in the first instance
had been liable to pay the tax over.This is not of course a point about liability
at the earnings stage being imposed retrospectively. Rather it concerns
liability at the "who is liable ­ given the PAYE system ­ to pay the tax"
stage being altered after the liability accrued. But the broader point of
objection is nevertheless that a person's liability position under the law as it
stood is later altered adversely.
The statutory scheme makes no provision for notice, and imposes no
conditions ­ in contrast to the direction regulations. Those show that where
legislation alters the default PAYE framework, it does so on a conditioned
basis and with protections. The employee direction provisions by their
nature (and drafting) operate after the event ­they provide for pre-conditions
and appeals. While they do not necessarily support the view that a 7A
discretion cannot have prospective effect (because 7A operates to remove
deduction liability and therefore does not require an expectation to be made
to the PAYE credit regulations) they show that when the "who should pay
the tax" position is altered after payment, conditions and protections are put
in place around that.
If 7A were to have this retrospective effect one would expect clear
words. In fact, the statutory language is consistent with prospective effect.
Even if 7A could apply retrospectively one would expect to see that
Regulation 185 and Regulation 188 would explain that do they not apply
where the obligation to deduct has subsequently been relieved by exercise
of the 7A discretion.
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
On the assumption the 7A discretion does affect the availability of the Regulation 185,
Regulation 188 PAYE credit, what is its scope?
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 Discovery Assessment Validity Issue
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:
there was a discovery (s29(1) TMA).
the insufficiency of tax was attributable to an error as to how his liability
ought to have been calculated which was based on the practice generally
prevailing at the time (s29(2) TMA).
an HMRC officer, given the relevant information the appellants had
provided, would not reasonably have been aware, by the time the enquiry
window for the return had closed, of the insufficiency to tax (s29(5).
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."
(1) Discovery
The FTT's findings
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.
Parties' submissions and Discussion:
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
We can deal with the legal principles briefly as they were not in contention. Starting
with Charlton, at the passage cited by the FTT:
37. In our judgment, no new information, of fact or law, is required for
there to be a discovery. All that is required is that it has newly appeared
to an officer, acting honestly and reasonably, that there is an
insufficiency in an assessment. That can be for any reason, including a
change of view, change of opinion, or correction of an oversight."
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
"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
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
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
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 Durkin HMIT [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.
2) 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
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
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.
Discussion: s29(2) Generally Accepted Practice
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
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.
3) 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
The relevant legal principles are conveniently summarised by reference to the
authorities in Patten LJ's judgment in Sanderson v HMRC [2016] EWCA Civ 19 at
[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 then to 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)
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:
An Isle of Man company is established which will be resident
in the Isle of Man for tax purposes and will not trade in the UK
The Isle of Man company will employ contractors to deliver IT,
financial and specific project consultancy services for clients in
the UK and Europe
Employees will receive a salary equivalent to approximately
25% of the contracted sum direct from the client.
PAYE and NIC will be operated in respect of any salary paid in
respect of services in the UK
The company will make payments out of the contractual sums
into an EBT establishment in the Isle of Man
The EBT will provide benefits such as loans to the employees
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.
Discussion on s29(5)
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
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
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.
TOAA code issues: HMRC's cross-appeal and appellant's grounds
Overview of cross-appeal and grounds
HMRC's cross appeal concerns the FTT's treatment of the applicability of the
TOAA code. In broad summary, that imposes a charge where: a relevant transfer of
assets is made by a UK resident to a person abroad such that income becomes payable
to that person abroad, the UK resident has "power to enjoy" the income, and the income
would be chargeable to income tax if received by the individual in the UK. The charge
does not apply where a taxpayer can make out a defence based on the motives for the
transaction, in broad terms, where there was no tax avoidance motive.
The FTT (at [141] to [142]) accepted the creation of the employment contracts
between Mr Hoey and respectively Penfolds/Hamilton Trust, constituted a "transfer of
assets" by Mr Hoey, a UK resident to Penfolds/Hamilton Trust. (The term "assets"
includes "rights" (s717(1) ITA 2007) and "transfer" is defined to include the "creation
of rights" (s716(2) ITA)). Penfolds/Hamiton Trust were not resident in the UK, and
were therefore "persons abroad" for the purposes of the TOAA code.
The FTT did not consider it was required to decide on the applicability of the
TOAA charge, because of the concession which Mr Hoey had made regarding the tax
liability under the employment income charge. HMRC say that was an error of law on
the FTT's part. The nature of the TOAA charge was that it was an alternative charge.
There was still a live issue remaining between the parties for determination. This issue
is HMRC's Cross-Appeal Ground 1.
The FTT went on to deal with the TOAA charge issues on an obiter basis. In short,
the FTT upheld the charge but held the quantum of the income payable to the person
abroad was nil. In essence that was because, in the light of the earning income charge
concession Mr Hoey had made, the FTT considered the additions to the EBT were the
redirected salary of Mr Hoey. When those salary payments out were deducted from the
payments received from the End Users the result was nil. The FTT also considered the
motive defence did not apply; while one of the two necessary conditions for that
defence to apply were made out, the other was not. It accepted the appellant's further
argument that TOAA infringed his EU law rights but considered the restriction on his
rights was justified and proportionate. It therefore rejected his argument that the TOAA
restriction on free movement of capital was unlawful under EU law.
HMRC say the FTT made a number of errors in finding the income was nil (Cross-
Appeal Ground 2). In addition, HMRC submits it ought to have accepted there was an
additional reason for the motive defence not applying and also that the "arms' length
bargain" test in s737(5) was not satisfied (Cross-Appeal Ground 3). HMRC also say
the FTT made several errors of law in holding that on the facts of the case the TOAA
infringed the free movement of capital (Cross-Appeal Ground 4). For his part, Mr
Hoey appeals against the FTT's findings that the motive defence in s737 did not apply,
and the finding the TOAA provision did not unlawfully restrict the free movement of
We deal with the parties' respective grounds of appeal at the relevant stage of the
Cross-Appeal Ground 1:
HMRC argue the FTT was wrong to considering that it was not necessary to deal
with the TOAA charge in order to dispose of the appeal. They emphasise s743(4) ITA,
the mechanism for relieving potential double taxation, operates to give priority to a
charge under the TOAA provisions. If, as was submitted, the TOAA charge arose upon
Mr Hoey entering into the employment contract with Penfold/Hamilton, then that was
prior to when the employment income tax charge arose. If the TOAA charge applied,
the effect of Mr Hoey's employment charge would be disapplied by s727(4) ITA. The
applicability of the TOAA charge remained a live issue between the parties and the
FTT ought to have considered it necessary to determine it.
Mr Hoey's arguments, as set out in his written response to HMRC's appeal, are
simply that the FTT found the income was nil, and that even if the TOAA charge
applied he would still be entitled to the PAYE credit. However, neither of these
arguments, which go to the materiality of any error, address whether there was an error
of law in the first place.
We consider there was an error, for the reasons HMRC give which means we have
discretion to set aside and remake the FTT's decision. We note the FTT dealt with the
TOAA issues anyway, holding ultimately that while the charge applied, the income was
nil, and that even though it infringed EU law it did not do so unlawfully. We consider
the appropriate way to deal with such error would be for us to remake the decision but
without changing its substance, and only so as reflect that the issues the FTT determined
were not on an obiter basis. Should we agree, however with either of the parties' other
grounds that the FTT made errors in this part of its decision we will of course need to
consider whether to set aside the decision and remake some or all of its substance.
HMRC Cross-Appeal Ground 2
This ground centres around the income Penfold/Hamilton received for the purposes
of the TOAA provisions, and whether 1) deductions of intermediary's fees from the
amounts Penfold/Hamilton received, and 2) the payments Penfold/Hamilton made into
the EBTs, were not properly deductible. HMRC argue these amounts were not
deductible as they were not wholly and exclusively for the purposes of
Pensfold/Hamilton's trade, the payments being made for other purposes.
The FTT's reasoning (at [162] to [169]) was as follows. The parties were agreed
the "income" for TOAA purposes was the profits of Penfolds / Hamilton, the "person
abroad". There was however no evidence such as a profit and loss account. Such
evidence as there was, suggested that fees were received from the intermediary for Mr
Hoey's services. The fees Pensfolds/Hamilton received were net of the fees payable to
the promoters and facilitators and the FTT's assumption was the fees payable to the
promoters and facilitators were in fact paid by Mr Hoey. That meant there was no issue,
as HMRC had argued, that the fees were not deductible because of any duality of
Thus, Penfold/Hamilton's profit was the net fees, less salaries (these were the small
amounts of salary paid at national minimum wage level), and less payments into the
trusts. The small salary paid was clearly deductible. On an analysis of Rangers, the
payments into the Trusts were "nothing more or less than" additional payments of salary
and fell "properly" to be deducted. That meant, the FTT concluded, the income was nil.
HMRC's grounds in summary are that i) the FTT applied the wrong test, ii) it
wrongly found the appellant had met the burden on it to show the deductions were
wholly and exclusively for the trade, and iii) it wrongly made findings in the absence
of evidence. In particular, the FTT wrongly relied on facts from the "Statement of
Common Facts and Issues" document. That was only relevant for the purposes of
making a Rule 18 lead case direction and should not have been treated as a statement
of agreed findings of fact.
i)Did the FTT apply the wrong test?
HMRC say the FTT's analysis fell short because after finding the sums paid to the
EBT were remuneration the FTT failed to then consider whether the sums were
remuneration which was wholly and exclusively for the purposes of the payer's trade
(s34 Income Tax (Trading and Other Income) Act 2005; s54 Corporation tax Act 2009).
The key legal propositions concerning whether sums are "wholly and exclusively
for the purposes of" the payer's trade are not in dispute. The ones concerning the general
approach were helpfully summarised in the Upper Tribunal's decision in Scotts Atlantic
Management Limited v HMRC [2015[ UKUT 66 (at [47] onwards). For our purposes
it is sufficient to note the following:
The "wholly and exclusively" issue is to be determined by the object of
the taxpayer in incurring the expense.
The question of what the taxpayer's object was is one of fact to be
assessed by the FTT observing a number of principles;
The FTT needs to look into the taxpayer's mind at the
moment the expenditure is made (save in cases which speak for
The object of the expenditure should be distinguished from
its effect. If the sole object of the expenditure was the promotion
of the business, the expenditure is deductible, even though it
necessarily involves other consequences. The FTT must not
conclude that merely because there was an effect, that effect was
an object. However, some results "are so inevitably and
inextricably involved in particular activities that they cannot but
be said to be a purpose of the activity" and as a result the
taxpayer's conscious motive is not decisive.
The way in which the expense is incurred is not
determinative but may be one of the circumstances to be taken
into account in determining its purpose.
Where the payment has duality of purpose (i.e. the expenses are partly for a trade
purpose and partly for a non-trade purpose) it is well established that those expenses
are not deductible (Vodafone Cellular v Shaw [1997] STC 734 and Interfish Ltd v
HMRC [2014] EWCA Civ 876). A purpose to avoid tax may constitute such a non-
trade purpose (Scotts Atlantic). However, the UT in Scotts Atlantic also noted (at [55])
that the mere fact a choice to achieve an end which is exclusively for the benefit of the
trade may be influenced or indeed wholly determined by the consequences of each
choice does not necessarily mean there is duality of purpose.
The authority underpinning HMRC's submission, that the FTT missed a crucial
step in its analysis, is the High Court's decision is Copeman (Inspector of Taxes) v
William Flood & Sons ltd [1941] 1 KB 202. The facts concerned remuneration paid to
family member directors which did not reflect the directors' duties in respect of the
trade. The first instance tribunal said the salary was deductible; the salary amount was
an internal matter for the company to decide. The High Court's decision, which was
applied in the context of payments to another scheme involving an EBT (Always Sheet
Metal v HMRC [2017] UKFTT 198), makes clear that it does not follow from the fact
that sums are paid as remuneration that they wholly and exclusively for the purposes of
the trade.
That must be an uncontroversial proposition. There are plainly other situations
where a person could be employed by the trade, but the costs of employment are not
wholly and exclusively for the trade, where for instance the role is for the personal
benefit of the director as opposed to business benefit of the trade. Equally, and perhaps
more commonplace employees will be employed wholly and exclusively for the trade.
But whether that is the case is a question of fact.
Returning to the FTT Decision, the crucial question to determine was whether the
sums paid were wholly and exclusively for the purposes of the trade and thus to
determine what Penfolds/Hamilton's object was for paying the sums. It is correct the
FTT, having concluded the payment was remuneration, did not deal with the issue of
whether the sums paid to the EBT were wholly and exclusively on Mr Hoey's behalf,
as clearly as it should have done. However, reading the relevant section of its decision
as a whole, it appears to us, that the FTT was apprised of the duality issue, that it
considered it in relation to the EBT contributions, but that it concluded it presented no
concern. At [164] the FTT recorded and dealt with HMRC's point regarding duality of
purpose in relation to the promotor fees. When it then referred shortly afterwards at
[166] to the amounts of salary (the minimum wage amounts) being "valid" deductions
that must we think mean deductions which the FTT considered were not excluded by
virtue of having a duality of purpose. The FTT then, regarding the payments into the
trusts, referred to an excerpt from Lord Hodge's judgment in Rangers (which explained
the redirection principle) to indicate [the payments'] "true nature", concluding the
payments "were nothing more or less than additional payments of salary" (emphasis
added). The reference to "more or less" indicates the FTT ruled out the payments being
something other than salary. But the reference to "additional" is consistent with the
FTT considering that such salary bore the same character as the other type of salary, in
relation to which there was no apparent concern around those not being "valid"
deductions. At [168] the FTT concluded "they therefore properly fall to be deducted."
HMRC highlight the lack of any evidence put forward by Mr Hoey as to the nature
of trade, but as Mr Mullan points out, the "wholly and exclusively" question only arises
if a trade is assumed. It did not appear to be in issue between the parties that for TOAA
purposes, income was to be measured on the basis that Penfold and Hamilton were
carrying on a trade. HMRC, in any event make the fair supposition that the trade was
provision of services (through deployment of their employees) to end users in the UK.
On that basis, it appears entirely consistent that the payments to the trust were for
remuneration from Penfold /Hamilton for work performed for the end users. It is not
irrational either given the other remuneration paid to the employee was deductible for
the purposes of such trade. As Mr Mullan says, this was not a situation similar to that
in Copeland where the money paid was over the odds and for personal use or something
else. In fact, we observe, given the nature of the financial service end users and the type
of IT work Mr Hoey was carrying out for them that it might be considered surprising if
he was content to provide those services for minimum wage. Viewing the additional
payments to the trust as remuneration would be consistent with Mr Hoey commanding
more than minimum wage by way of remuneration for the work he carried out.
ii) No evidence /Insufficiency of evidence for finding?
HMRC say the FTT erred in failing to recognise the burden of proof on the issue
rested with Mr Hoey, and in failing to hold that Mr Hoey had not discharged it. There
was no evidence to reach the conclusion the payments were wholly and exclusively for
the purposes of trade. The finding was unsustainable in view of the evidence at least of
a duality of purpose regarding payments into the EBT. The finding was inconsistent
with other findings made.
Again, as Mr Mullan points out however, the "wholly and exclusively issue" only
arises on an assumption that Penfold/Hamilton were carrying on a trade. We consider,
there was at least some evidence before the FTT, on that assumption, capable of
supporting the FTT's conclusion the EBT sums were properly deductible and to meet
the burden which the appellant accepts lay on him. The FTT heard oral evidence from
trustee, Andy Parr, which covered the operation of Hamilton Trust's activities including
that it was set up to employ contractors and provide their services to third parties, and
that its purposes included remunerating and rewarding those contractors during their
employment. It also heard evidence from Matt Hall, who was employed by the firm
who devised the Penfold arrangements. In addition, there was documentary evidence:
this included contracts between the employer and intermediaries, or between the
intermediaries, employee information and trust information guides, statements in trust
documents and documentation relating to the set-up of the trust referring to the purpose
of incentivising and motivating employees. While not direct evidence they would, when
considered cumulatively, and with the oral evidence, at least enable the FTT to infer
that the nature of Penfold's and Hamilton's trade was supplying contractors such as Mr
Hoey to end users and that the payments into the trust were wholly and exclusively for
the purpose of remunerating Mr Hoey for his employment. That is sufficient to answer
the ground insofar the challenge raised is that the impugned finding was one that was
made without any evidence.
HMRC go further to say there was ample evidence before the FTT of a tax
avoidance or non-trade purpose as regards the EBT payments. They rely on various
excerpts from the oral and written evidence of Mr Hoey and the witnesses called on his
behalf, as well the evidence of HMRC's officer, Mr Finch, as to the higher fees charged
for the arrangements and also evidence and statements in the documentary evidence
including marketing materials.
Having considered these, we can see how they may arguably have sustained an
inference that at least one of Penfold's / Hamilton's motives in making the payments
was to avoid tax. However, in order to identify that the FTT erred in law, HMRC must
go further and show the FTT was unreasonable in making the finding it did in the light
of that evidence, in other words that the FTT's conclusion was one that was not
reasonably open to it. We are not satisfied the evidence HMRC points to crosses that
Many of the points go to the tax-driven nature of the arrangements as a whole: for
instance, Mr Hall's evidence, the FTT's finding that the company was inserted into the
arrangements for tax avoidance reasons (at [153]) or the awareness of tax issues or tax-
related motives of others, in particular Mr Hoey.
The relevance of the evidence of Mr Parr given in cross-examination, which
HMRC suggest means he accepted the purpose of the arrangements was to facilitate the
avoidance of tax, to Hamilton's purpose in making payments to the trust during the
years under appeal is questionable. The particular context in which Mr Parr accepted
moneys were to be to be used by the employee in order to avoid tax liability relate to
so-called "loan-cleansing" arrangements which took place in 2011/12 and whose
purpose (as described at [26] of the FTT Decision) was to reduce the amount of loans
in a way that would not attract tax. The particular arrangements, as described earlier in
the cross-examination, involved borrowing from a third party, lending to employees to
use the proceeds to repay the employee's EBT loans and the transfer of the acquisition
of the creditor rights.
Similarly, the point made regarding Mr Parr's evidence in cross-examination
regarding him simply following the directions of the enforcer without consideration
must be viewed in the context of his wider evidence where he accepted that he would
have had to have approved the provision of employee information to the enforcer and
the funds the trust had received. Arrangements whereby Hamilton sanctioned the
payments to the trust in respect of the employee on the basis that the enforcer would
then implement that with directions as to the specific amounts required to be added to
the trust and whereby the employer then gave little further consideration to such
directions are not inconsistent with those payments being redirected salary of the
employee (which as such would not require Hamilton's further consideration).
Regarding the marketing material referred to, this describes the relevant website
(Probiz) as "the natural home for contractors looking for return without risk". Under
the heading "so if you are contractor concerned about any of the following" there are a
number of bullet points one of which is "keeping enough of what you earn" but other
bullets also mentioned are "current problems of umbrella and composite companies"
and "running your own service company". The text continues "Probiz contracts
provides a perfect solution for you to take home more money and remove the risk".
Again, to the extent it is relevant, it speaks to the arrangements as a whole. To the extent
it is relevant to Penfold's /Hamilton's motive, it is consistent with the payments to the
trust being viewed, from Penfold's /Hamilton's perspective, as part of the remuneration
intended for the employee.
The particular question for determination is what was Penfold / Hamilton's object
in making the payments ­ why did it make the payment? Ultimately, the points HMRC
raise, regarding Penfold/Hamilton being an instrument of tax avoidance, do not require
a finding that Penfold/Hamilton's object in making the EBT purpose was tax avoidance.
They may be relevant to the question or why Penfold / Hamilton was set up, or what
their role was in the arrangements. But those are not the questions in issue.
HMRC must show, that on the evidence before the FTT, the FTT could not have
reasonably reached any finding other than that there was a duality of purpose. We are
not persuaded the evidence they have pointed to does that.
While both parties made submissions regarding the extent to which Mr Hoey
needed to meet the burden of proof on the question of whether the payments were
wholly and exclusively for the purposes of the trade, we do not consider the issue of
burden of proof takes the matter any further and do not deal with those. The ultimate
question was whether there was sufficient evidence for the FTT to reach the conclusion
it did on the issue and whether that was a finding that it was open it to reach on the
evidence. We consider there was sufficient evidence, and it was so open to the FTT to
conclude as it did.
Certainly, as regards the question of fees, there was an inconsistency between the
answers Mr Parr gave in cross-examination which suggested the fees in respect of
services to end users were received (by Hamilton at least), gross rather than net of
intermediary fees. However, we agree with the appellant that even if the facts in the
"Common Statement of Agreed Facts and Issues" were not formally agreed facts that
could, without more, be transposed into the tribunal's findings of fact, the document
nevertheless had some evidential value and that it was therefore open to the FTT to
conclude as it did in the light of that. The FTT might, usefully, in the circumstances,
have elaborated on its reasoning for preferring what was said in the document rather
than on the basis of Mr Parr's evidence but no ground is raised in relation to sufficiency
of reasons, so we need say no more about this.
Before moving on from this ground, we should note that Mr Hoey took issue with
the late stage at which the issue of whether the payments to the trust were wholly and
exclusively for the purposes of the trust was raised. We do not regard that as a live point
before us: the time to deal with that was at the FTT and in the written submissions
handed up during the course of the FTT hearing. We were not referred to anything
which suggested any such objection was made and thus of any error on the FTT's part
in proceeding to deal with the point.
HMRC Cross-Appeal Ground 3 ­ motive test ­ FTT wrong to reject additional
reasons for why motive test not satisfied ­ only reasonable conclusion on facts was
that neither limb of motive defence could be relied on
Section 737 of ITA provides an individual is not liable to income tax under the
TOAA chapter for the tax year by reference to the relevant transactions if the individual
satisfies an HMRC officer that "Condition A is met", or if it is not that "Condition B"
is met. The section goes on to prescribe those conditions as follows:
"(3) Condition A is that it would not be reasonable to draw the
conclusion, from all the circumstances of the case, that the purpose of
avoiding liability to taxation was the purpose, or one of the purposes, for
which the relevant transactions or any of them were effected.
(4) Condition B is that--
(a) all the relevant transactions were genuine commercial transactions
(see section 738), and
(b) it would not be reasonable to draw the conclusion, from all the
circumstances of the case, that any one or more of those transactions was
more than incidentally designed for the purpose of avoiding liability to
(5) In determining the purposes for which the relevant transactions or
any of them were effected, the intentions and purposes of any person
within subsection (6) are to be taken into account.
(6) A person is within this subsection if, whether or not for
consideration, the person--
(a) designs or effects, or
(b) provides advice in relation to,
the relevant transactions or any of them."
The FTT Decision dealt with this issue at [145] to [169] concluding, in summary,
the defence was not available. Condition A was not met. Nor was Condition B (although
the transactions were commercial, Condition B(b) (the transactions not more than
incidentally designed for purpose of avoiding tax) was not satisfied).
The FTT did not specifically identify what "relevant transactions" were in issue.
Section 715 ITA defines a relevant transaction as "a) a relevant transfer, or b) an
associated operation" both terms then being further defined in ITA. Nevertheless, for
the purposes of establishing whether Condition A or B were met all that was necessary
for the s737 defence to be unavailable was that any one of such transactions to fail the
relevant test. In respect of the various aspects of the motive s737 defence neither party,
as part of their challenge against the conditions in relation to which the FTT found
against them, takes issue with the scope of the relevant transactions under
consideration. (So, HMRC do not say the FTT excluded transactions from scope which
it ought to have done, and the appellant does not say the FTT considered transactions
which were not in scope). We therefore assess the FTT's reasoning purely on the basis
of the points raised.
Regarding the issue before it the FTT made the following findings of fact:
"15. Mr Hoey had previously, in around 2004, supplied his services to
End Users via a personal service company but had found the
complexities of running his own company too much for him to deal with.
He had therefore engaged the services of an intermediary, Dynamic
Management Solutions Ltd ("DMS"), and, in 2007-08, they had
introduced him to Penfolds, at which time he entered into employment
with Penfolds. In September 2009 Penfolds suggested he should transfer
his employment to Hamilton Trust, a Guernsey based trust company,
which he duly did.
16. DMS, and a subsequent intermediary, Cascade, were Mr Hoey's
prime points of contact throughout this process. He trusted them totally.
If they recommended a course of action then he believed that that course
of action would be in his best interests. He submitted his time sheets to
them and they in turn submitted invoices to the End Users. Mr Hoey had
very little to do with the other parties to the arrangements although he
clearly signed the various documents which were sent to him.
17. Various publicity material which had been produced by Penfolds and
Hamilton, and which described the benefits of these schemes, was
presented to the tribunal. Mr Hoey could not remember if he had read
this material thoroughly but if he had he did not understand the
implications of what was being suggested to him.
18. His motivation in entering into these schemes was solely to avoid
the complexities of running his own company or his own business.
When considering whether or not to enter the schemes he simply
compared the post-tax cash he would receive under his existing
arrangements, via a UK umbrella company, and the post-tax cash he
would receive under the Penfolds arrangement. The cash which he
would receive under the Penfolds arrangement was slightly better than
he was currently receiving but Mr Hoey did not really understand that
this was because he would be paid in a way which was designed to avoid
paying UK tax on a large part of his earnings.
19. Importantly I note that Mr Hoey did not receive the full benefit of
the absence of UK tax on his earnings because the fees chargeable by
the various intermediaries were between 10% and 18% of his income,
compared to the 1% which might be charged by a simple UK based
umbrella company. A substantial part of the hoped for benefit of
avoiding UK tax was therefore absorbed by the fees being charged by
the promoters and facilitators of the scheme."
At [22] the FTT found the contractors in the schemes did not expect to be required
to repay the loans at any time. While the FTT did not make finding specifically
regarding Mr Hoey's understanding, it obviously considered he was in the same
position as other contractors and we note that Mr Hoey conceded in cross-examination
that he did not consider the loans repayable.
Regarding Condition A, the FTT concluded from Mr Hoey's evidence that his
motive was purely the avoidance of complexities of running his own company or his
own consultancy. His motivation was not related to tax avoidance ([147]). The FTT
acknowledged the legislation looked more broadly to the motives of anyone who
"designs or effects or provides advice in relation to the relevant transactions of any of
them". The FTT considered it needed to interpret the statutory provisions by reference
to their purpose. In that regard the judge stated:
"152. However, in this case, I cannot believe that Parliament intended
that taxpayers should be able to set up off-shore employers who would
make contributions to a trust which would then make loans to the
employee, who did not expect to be required to repay the loans, and who
would then be taxed on the notional benefit of receiving an interest-free
loan rather than on the benefit of receiving the moneys in a form which
was taxable as income.
153. I therefore regard the basic structure, of Contractors being
employed by an umbrella company which then provides their services
to the End Users, as being a perfectly reasonable commercial
transaction. However, I regard the insertion of additional transactions,
being the setting up of an umbrella company offshore, which makes
payments to a trust, which then makes interest free loans to the
Contractors, with the expectation that those loans are never repaid, as
constituting tax avoidance.
154. I am not required to ignore those transactions in my analysis but,
using a purposive analysis, I find that their purpose was the avoidance
of tax in a way which Parliament did not intend."
While HMRC do not dispute the outcome that Condition A was not met, they say
the FTT made Edwards v Bairstow errors of law in finding facts that were inconsistent
with the evidence before it.
In particular, HMRC submit the FTT disregarded Mr Hoey's own evidence (which
the FTT failed to record) that reduction of liability to tax was a motivation. It
overlooked evidence that Mr Hoey was a serial user of mass-marketed avoidance
schemes between 2004 to 2012. HMRC also say Mr Hoey's lack of understanding was
implausible in the light of the evidence: the FTT failed to take recognise the
significance of: the fee differential charged (10% to 18% of the various intermediaries
vs the 1% for a UK based umbrella company) which reflected the tax advantages, that
Mr Hoey was giving up a lot of earnings for loans that were in principle repayable, the
DOTAS disclosures regarding the scheme in his tax returns, and that Mr Hoey entered
into the "loan cleansing" arrangements subsequently.
At the hearing we asked for further detail regarding what comparison could be
made between Mr Hoey's "take home" pay as between the arrangements he entered
into and a UK umbrella company in an effort to better understand the economics of the
intended operation of the scheme. While this generated a lot of detailed correspondence
and further submissions the calculations provided do not in the end assist us on the issue
before us. They were also not calculations available to the FTT. The key point, that
emerged from HMRC submissions, is that as there was no direct evidence on the
amount of gross fees charged to end users for Mr Hoey's services or in relation to fees
charged by intermediaries in relation to his participation in the arrangements, it was not
possible to say with any certainty exactly what tax savings Mr Hoey achieved.
Returning to HMRC's points on the evidence that was before the FTT, it is
important in our view, in evaluating these, to see them in the context of Mr Hoey's
evidence as a whole. The evidence HMRC point to regarding his motivation was that
use of a Personal Service Company, in the long term, "would have created a large tax
liability" which he would have needed to meet so he was looking for a "different
solution". But the FTT also heard evidence regarding Mr Hoey's concern regarding the
complexities of running his own company or his own business and in the end found that
to be his sole motivation. We have, as invited to do so, considered the transcripts of the
cross-examination. It is plain from those that Mr Hoey was cross-examined thoroughly,
robustly, and at length. Regarding the findings on Mr Hoey's awareness, standing back,
the FTT obviously did not see any conflict between the arrangements he signed up to
and his stated awareness and motivation; it essentially accepted Mr Hoey's evidence to
the effect that he was preoccupied with meeting his day-to-day work for the end users
and was focussed on maintaining his work with them, and signed what was put in front
of him. We cannot rule out that another FTT might well have taken a more sceptical
view, but that is not enough for HMRC to succeed in their challenge. The matters
HMRC refer to might well justify the view that Mr Hoey ought to have understood what
was going on, but they do not go as far as requiring a finding that he had a tax avoidance
motive. We consider it was at least open to the FTT to find as it did. We therefore reject
this ground of HMRC's cross-appeal.
Mr Hoey, in elaborating on his ground of appeal that the FTT was wrong to find
the motive defence did not apply, submits the FTT was wrong to hold that 737(5)
(allowing the purpose of designers /advisers to be taken into account) meant the
question was "whether any of the arrangements fall within the definition of tax
avoidance". That, submits the appellant, shows the FTT failed to recognise a subjective
purpose test was required rather than an objective one. There was also no person
designing arrangements or acting on behalf of Mr Hoey whose purposes were to be
taken into account.
We agree these points lack merit in essence for the reasons HMRC advanced. The
FTT took into account motives of those who designed or effected or provided advice
(it specifically directed itself on this at [148]). It was obvious from the context, the
purpose of the interposed steps (at [156]) was a reference to purpose of persons who
designed and effected the DOTAS schemes ([150] referred to Mr Hoey's advisers).
Condition B s737(4)
The FTT held (at [159]) the transactions were effected in the course of a trade being
carried on by Penfolds/Hamilton and were transactions which "might have been entered
into between persons not connected with each other, since they were in fact entered into
between unconnected parties". (The finding did not affect the outcome, because as
discussed above, it went on to find that Condition B(b) was satisfied because the
interposition of a non-resident employer, a trust, and the making of loans from the trust
were "more than incidentally designed for the purpose of avoiding liability to
HMRC argue the FTT erred in finding that even if the transactions were effected
in course of trade they were not effected for its purposes. Also, the FTT erred in its
approach to the "arms' length" test assuming that because there was no connection
between the parties the bargain was at arm's length. The FTT's reasoning in Nader and
others v HMRC [2018] UKFTT 294 (TC), with regard to similarly worded IHT
provisions, made clear that the lack of connection did not mean there was an arm's
length bargain.
The appellant did not address us on either of these points beyond a general
argument regarding the motive defence in his Respondent's notice to HMRC's cross-
appeal that it was not open to HMRC to challenge the FTT's findings of fact on this
By way of preliminary observation neither of these points appear to have been
raised as specific issues in the parties' skeletons so it is perhaps not surprising the FTT
dealt with the point cursorily. However, both the points go to the FTT's application of
the relevant legal test in circumstances where there was no indication the parties had
agreed that it was not necessary to deal with these aspects of the legal tests. There is
nothing to suggest the FTT considered 1) whether the transactions were effected for the
relevant parties' purposes 2) whether the transactions were at arms' length (we agree it
does not follow that because parties are not connected that that inevitably means the
transaction is at arm's length). These omissions amount to straightforward errors of
For his part, Mr Hoey appeals against the FTT's conclusion that Condition B was
not fulfilled in any event because paragraph b) of Condition B was not satisfied. Mr
Hoey's notice of appeal argues the FTT erred in concluding that the arrangements
amounted to tax avoidance in respect of its approach to ascertaining Parliamentary
intention (specifically at [152] of the FTT Decision : see passage beginning "Parliament
intended that..." at [236] above).
However, Mr Hoey did not then elaborate in his written or oral submissions in what
respect the FTT's approach to establishing Parliament's intention was incorrect. We are
unable therefore to consider that the FTT made an error of law.
Although we have identified an error of law in the FTT's analysis for the first part,
(a) of Condition B (as appears in s737(4) (a)), we do not consider that such error alone
should result in us setting aside the FTT Decision. Given what we have decided above
the FTT's conclusion regarding Condition B(b) remains unchallenged. The conclusion
remains that Mr Hoey did not escape liability for any charge. Setting aside and
remaking or remitting the decision in respect of Condition B(a), even if it led to a
different result on that provision, would not affect the overall outcome that the motive
defence was not available.
HMRC's Cross-appeal Ground 4 ­FTT erred in concluding TOAA breached Free
Movement of Capital
Under this Ground, HMRC submits the FTT made several errors of law in holding,
on the facts of the case, that the TOAA legislation infringed the free movement of
The appellant also raises his own grounds of appeal and points by way of response
to HMRC's cross-appeal in relation to the FTT's reasoning. We deal with these at the
appropriate point as we go through the issues.
The FTT found at [174] that the case was concerned primarily with the transfer of
assets to a person abroad which it considered fell within the ambit of the free movement
of capital (Article 63 of the Treaty on the Functioning of the European Union
1) No EU law freedoms engaged?
HMRC's first sub-ground is that there was no restriction on free movement of
capital capable of falling within Article 63 TFEU. In brief, this is because there is no
"movement of capital". The "asset" which engages the TOAA provisions, namely the
entering into an employment contract, does not involve a "movement of capital" for EU
law purposes. Any other potential movements, even if they are movements of capital
are not relevantly restricted by the TOAA code. The free movement of capital
provisions are not therefore engaged.
Correct perspective: purpose of legislation or facts of case?
Before dealing with that issue, there is a higher level disagreement between the
parties to resolve as to the correct approach to take on whether EU freedoms are
restricted. The appellant approaches it from the perspective of the legislation, the
TOAA code as it applies generally. He highlights that the UT in Fisher v HMRC
[2020] UKUT 62 (TCC) ("Fisher UT") has held the TOAA code to be incompatible with EU
law. In contrast, HMRC say one needs to look at who is relying on EU law rights and
how the TOAA charge arises on the particular facts of the case.
In support of his position, the appellant relies on Gallaher Ltd v HMRC
[2019] UKFTT 207 (TC) at [56] to [66], and the CJEU's decision in Emerging Markets Series
of DFA Investment Trust Company v Dyrektor Izby Skarbowejw Bydgoszczy Case C-
190/12. Gallaher Ltd. has since been heard on appeal in the UT with the UT deciding
to refer a number of matters to the CJEU. Neither party considers however that our
decision need await the CJEU's. We consider that correct taking account of the
propositions that each party relied on the case for.
In our view HMRC's approach is the correct one. The passage the appellant relies
on in Gallaher FTT ([56] to [66]) is a section where the FTT discusses which of the
freedoms as between freedom of establishment and freedom to move capital needed to
be considered. The recourse to the purpose of the legislation was in the context of
deciding which, as between two possible freedoms, was to take priority. This was in a
situation where the relevant case-law (which we consider further below) drew a
distinction on the one hand between legislation concerning groups, where establishment
was the exclusive freedom, and on the other where the national legislation applied more
widely, where both freedom of establishment and free movement of capital could be
considered. The FTT's decision, which in any case can only be of persuasive value,
does not lay down a wider proposition that the starting point is the legislation rather the
factual circumstances of the case.
For the same reason the appellant's reliance on the CJEU's decision and Advocate-
General's opinion in Emerging Markets ([23]-[25] of the CJEU decision and [10]-[23]
of the Advocate General's opinion) also does not help his position. The extracts relied
on show the court's recourse to the purposes of the legislation was regarding whether
free movement of capital, or freedom of establishment was in issue. The Advocate
General examined the subject matter of the legislation to determine which freedom was
applicable ruling out freedom to provide services (because the relevant legislation was
not about conditions of access for the relevant funds but the tax treatment of revenue
from such funds).
Neither case therefore stands for the proposition that an EU freedom can be taken
to apply irrespective of the facts of the case.
We note that the significance of the relevant facts of the case means it is not
sufficient to reason that, because in Fisher UT the TOAA code was found to be
incompatible with EU law, that necessarily means Mr Hoey is not liable to a TOAA
charge. As HMRC pointed out, Fisher UT endorsed (at [211]) the conclusion at [689]
Fisher v HMRC [2014] UKFTT 804 (TC) ("Fisher FTT") that the TOAA should not
be disapplied entirely. There was no need to adopt a conforming construction or to
disapply legislation where the situation does not fall within scope of EU law (per ICI v
Colmer (Case C-264-96) at [34])).
Movement of capital?
Turning then to the facts of Mr Hoey's case, the next question is whether, having
regard to those, HMRC are correct to say there was no movement of capital that was
Article 63 of TFEU provides:
"...all restrictions on the movement of capital between Member States
and between Member States and third countries shall be prohibited."
Annex 1 to Directive 88/361 ("the Nomenclature") indicates movements covered
by the Treaty provision. However, as set out at the start of the annex and as confirmed
in FII 1 (Case C-446/04) at [179]), this is not an exhaustive list.
Firstly, HMRC submit there was not even any movement of capital. The
appellant's argument in response is that, given the range of capital movements to which
TOAA applies, there can be no question that the FTT was correct to find that free
movement of capital was in point. But that point is premised on the view that the starting
point is the purpose of the legislation, not the particular facts, and as we have said
above, we do not agree the authorities advanced support that premise.
HMRC submit the relevant trigger for TOAA, (which the FTT found and which
the appellant did not dispute before it (at [143])) was Mr Hoey's entering into a contract
of employment, together with his ability to enjoy the income of the offshore employers
i.e. Penfolds/Hamilton. Even though Article 63 is widely drawn, that, HMRC submits
is not something which amounts to a movement of capital.
The entry into the employment contract, while an "asset" for TOAA purposes is
not capital for EU law purposes. Moreover, argue HMRC, none of the other potential
movements amount to ones which are relevantly restricted. HMRC rely on the Court of
Appeal's judgment in R(aoo Shiner and another) v HMRC [2011] EWCA Civ 892 (per
Mummery LJ at [50]) for the proposition that there has to be a relevant movement of
capital before Article 63 can be in point. None of variously, the payments from end
users to the employer, the additions to the trust, or what HMRC say are the purported
loans to the employee are potentially inhibited by TOAA. They are not "relevant
movements" because on the facts they do not give rise to the charge under the TOAA.
In Shiner the legislation in issue prevented UK resident partners in foreign
partnerships from claiming exemption from income tax on their partnership income
from foreign partnerships. The taxpayer sought a declaration that the legislation was
incompatible with Article 56 TEC (the predecessor to Article 63 TFEU). The only
capital movement relied on was the payment of £10 into an interest in possession trust.
The Court of Appeal accepted HMRC's argument that that movement was not a
movement of capital as it had nothing to do with the funding of the foreign partnership.
We note that, as confirmed in Shiner, the fact that there needs to be a restriction on
the movement of capital does not appear to be in contention. The appellant's argument,
that in that case the court reached its decision because there was no restriction on the
particular facts as regards the payment of £10, does not alter the point of principle that
was applied.
Mr Mullan also relies on the CJEU's decision in Trustees of the BT Pension Scheme
v HMRC (Case C-628/15) where the court rejected the UK's argument that there was
no relevant capital movement. That was a case where the FID (foreign income
dividend) credit legislation operated in a way which restricted free movement of capital.
The issue was whether, BT pension trustees, who were based in the UK could complain
about that when they were investing in UK companies (albeit ones who had foreign
income sources). The UK had argued the situations that the legislation was concerned
with were unrelated to trade between member states. It also argued the relevant factors
relating to the case were confined to factors within the UK. However the CJEU
disagreed (at [42]). In our view, the approach taken in BT Pension Scheme simply
confirms the need to examine not just the legislation but the factors relating to the case.
There can be no real dispute that the TOAA legislation is capable of restricting
movements of capital. However, the definitional gap HMRC point to is that the TOAA
can catch things as "assets" which are not regarded for EU law purposes as capital: the
entering into the employment contract. At the hearing, the appellant pointed out the
overly broad effect this interpretation would have. Anyone employed by a foreign
employer would be caught. That consequence must show HMRC's interpretation was
not one that was intended. However, if that is the effect then it is one that follows from
the High Court's decision in IRC v Brackett [1986] STC 521 which established that
entering into an employment contract created rights. Under the TOAA definition of
"asset", rights and the creation of such rights are caught. The appellant did not argue
that Brackett was wrongly decided on that point. Also, if the TOAA code did apply in
principle to straightforward foreign employment contracts there appears to be no reason
why liability under TOAA would ever arise as the employee would escape liability
under s737 ITA.
We agree with HMRC that the entering into the employment contract does not
constitute "capital" for the purpose of Article 63. It is not mentioned in the
Nomenclature. Although that is not exhaustive, having regard to the type of things
which are mentioned there (which include a heading at XI for "Personal Capital
Movements" covering such general matters as loans, gift and endowments, and specific
matters such as dowries, and settlement of debts by immigrants in their previous
country of residence), the omission of such a generic category such an employment
contracts is conspicuous. Insofar it is the entering into the employment contract that
engages the TOAA charge in relation to the facts relevant to the appellant, no breach of
Article 63 arises because that step does not involve a movement of capital for the
purposes of Article 63.
The appellant submits, contrary to HMRC's position, that in any case there are
various other movements of capital (the transfer from the employer to trust, the loan to
the employee by the trustees, or the payment from the end users to the employers) in
respect of Mr Hoey's services are restricted by the TOAA code.
Are 1) Additions to EBT 2) Loans out of EBT relevantly restricted?
To understand the parties' arguments regarding those first two transactions it is
necessary to go back to the terms of the TOAA code to understand that the code refers
not just to transfers of assets but also to "associated operations" and how those fit in
with the individual subject to the charge having "power to enjoy" the income of the
person abroad as a result of transfer or associated operation(s). The key to the charge,
the appellant submits, is the "power to enjoy" which in turn depends on the additional
trust payments and payments out by way of loan constituting associated operations.
Those associated operations are, says the appellant relevantly restricted. HMRC
disagree. They maintain that while these are mechanisms giving rise to the power to
enjoy and part of the arrangements, it is the entry into the arrangements by the
employment contract and the right to be remunerated under the contract that engage the
TOAA referring to s721, and 723 ITA.
Under s716 ITA a transfer is a "relevant transfer" it is "a) a transfer of assets, and
(b) as a result of i) the transfer, ii) one or more associated operations...income becomes
payable to a person abroad". Section 719 defines "associated operation", "in relation to
any transfer of assets" as an operation of any kind effected by any person "in relation
to ­ a) any of the assets transferred b) any assets directly or indirectly representing any
of the assets transferred...". Section 721 provides that income is treated as arising to
the individual caught by s720 if "the individual has enjoy income of a person
abroad as a result of" a relevant transfer, associated operation(s) or a combination of
the two. Whether a person is treated as having "power to enjoy income of a person
abroad" depends on fulfilling any of the five conditions A-E set out at s723 ITA.
At the hearing before us the appellant disputed that any of the conditions were met.
For present purposes the conditions in contention are A, C and D:
Condition A is that:
"the income is in fact so dealt with by any person as to be calculated at
some time to enure for the benefit of the individual, whether in the form
of income or not".
Condition C is that:
"the individual receives or is entitled to receive at any time any benefit
provided or to be provided out of the income or related money."
Condition D is that:
"the individual may become entitled to the beneficial enjoyment of the
income if one or more powers are exercised or successively exercised."
Mr Hoey argues Condition A was not met because the money stayed in the
company. Conditions C and D were not met because the income of the employer (in so
far as HMRC said it was greater than nil, because the payments to the trust were not
wholly and exclusively deductible) was imaginary income which did not exist and
therefore could not give rise to the provision of benefits or be beneficially enjoyed.
HMRC explained, in its written reply, that conditions A, C and D in s723 ITA were
met. For Condition A, the income of the offshore employer was "in fact dealt with so
as to be calculated at some time to enure for the benefit of the individual". This was
because the appellant received the minimum wage salary and he could receive a loan.
Regarding Condition C the fee income received by the employer was paid to the
appellant as salary and was contributed to the EBT from which payments could be and
were made to him. As for Condition D, the appellant could and did receive loans once
the EBT so resolved
The FTT did not engage with any of these issues (it is not clear to what extent they
were put before for it for resolution). There is no ground of appeal before us that the
FTT was wrong (to the extent it engaged with the TOAA issue) to assume Mr Hoey did
have a power to enjoy. We therefore proceed on the basis that one or other of the
conditions A to D was fulfilled and the TOAA code did therefore apply.
The question of what elements in Mr Hoey's arrangements gave rise to a power to
enjoy, and the relevant sense in which that concept is understood according to domestic
case-law, is however relevant to the EU law arguments concerning whether those
elements are restricted by the TOAA code (see [267] above).
In Fisher UT the UT (at [99]) endorsed the FTT's conclusion in that case (at [238])
to the effect that the relevant authorities meant that that "associated operations" were
relevant only if it 1) meant that, as a result, new income arose to the person abroad, or
2) it gave rise to a new "power to enjoy". (This flowed from the wording of the
legislation, when applied across from the substantively similar predecessor provisions,
which referred to the associated operations being "in relation to any transfer of assets"
(s719) and being ones the individual had power to enjoy "as a result of..." (s720)).
In the light of that, for the associated operation to be relevant to the charge, it
would need to be established that i) new income arose to the employer or ii) the
associated operation gave rise to a new power to enjoy.
Although the appellant raised a procedural objection to the UT considering these points
submitting they were out of scope of HMRC's reply, which was restricted to a reply on the EU law
arguments concerning TOAA we consider it was in scope: it was relevant to the EU law issue because it
was relevant to the touchpoint between the EU law freedoms and domestic legislation restriction as those
arose on the facts; it replied to points the appellant had raised in that context concerning "power to enjoy"
and "associated operations".
HMRC rely on these principles to seek to sidestep the EU law arguments by
arguing the payments into the trust and the loans, even if capital movements, were not
capital movements which the TOAA restricted. The steps after the redirection of Mr
Hoey's remuneration were irrelevant. They did not mean that new income arose to the
employer, or a new "power to enjoy" that income arose, which was not in existence
The difficulty in this position however is revealed by the way HMRC have
described those steps as nevertheless being "mechanisms giving rise to the power to
enjoy and part of the arrangements". Their argument also appears to us to be at odds
with the stance they took before the FTT where it was argued the steps were "associated
operations" and that as a result of the relevant transfer (the entry into the employment
contract) and those associated operations, Mr Hoey had power to enjoy the income
which arose to Penfolds/ Hamilton. Moreover, the position is also difficult to reconcile
with the FTT's consideration of these steps (as set out at [153] of its decision), when
considering the motive defence. That suggests it must have considered them as relevant
transactions (s737 refers to "relevant transactions" defined as the relevant transfer,
associated operations, or a combination of those). No challenge regarding error of law
is made in that respect (see [233] above).
Given the assumptions the FTT made as to what constituted relevant transactions,
we consider we should proceed on the basis that the additions to the EBT and loans
made from it were associated operations which had met either the new income or new
power to enjoy tests. As to whether these transactions are restricted by the TOAA, the
new income, and new power to enjoy tests, only serve to confirm that transactions
which are associated operations are intimately connected with the operation of the
TOAA charge. As already mentioned, associated operations also feature in the motive
defence (as they are "relevant transactions"). The motive defence in turn governs the
ultimate scope of the TOAA charge. The issue of what constitutes associated operations
may also be relevant to the quantum of the charge (as illustrated by the facts in Fisher
­ see [97] onwards of Fisher UT). We therefore agree with the appellant that HMRC
takes too narrow a view regarding the restrictions imposed by the TOAA. As regards
the capital movements involved, namely the additions to the EBT, and payments from
it, those movements do therefore, in our view, need to be analysed further.
Mr Hoey able to rely on payment from end user to offshore employer?
In addition, Mr Hoey relies on the principle in the CJEU's decision in Felixstowe
Dock and Railway Co Ltd and others v HMRC (Case C-80/12) for the proposition that
he can complain about infringement of EU law rights, because he can rely on the
restriction of his employer's rights or the end users' rights. The payments from the end
users to the employer could in principle be capital movements. Felixstowe concerned a
claim for corporation tax relief involving a loss surrender treatment which differed
depending on whether a so-called link company was resident in the UK or another
member state. The claimant had not exercised freedom of establishment, but its tax
position was adversely affected. The court's reasoning was that the legislation would
inhibit the establishment of a link company in another member state, and that to make
the freedom effective, claimants, who were worse off as a result, ought to be able to
invoke rights even though they had not exercised such rights themselves.
For that principle to apply however there must be a restriction on the person whose
exercise of freedom is being relied on such that the restriction then affects the tax
position of the person who has not exercised such rights. We agree with HMRC that
the appellant's difficulty is in identifying the restriction on the end user's or the
employer's free movement of capital. It has not been identified in what way for instance
the end user's free movement of capital (the payment from it to the employer) was
inhibited by the TOAA charge. Similarly, as regards the offshore employer's provision
of services to the end user (even if that is treated as a movement of capital) it has not
been identified how any such right is restricted by the TOAA code.
2) No infringement of Article 63 free movement of capital because the movements
are an unavoidable consequence of the restriction of another EU law freedom?
HMRC argue that even if the TOAA provisions did produce a restrictive effect on
movements of capital, these restrictive effects are unavoidable consequences of other
freedoms. While free movement of capital under Article 63 applies to third countries,
the other freedoms do not. CJEU case-law establishes that the freedom under Article
63 should not be interpreted to indirectly expand the benefits of freedoms that only
apply as between Member States.
That risk was expressed in Test Claimants in the FII Group Litigation (Case C-
35/11), which concerned UK legislation on the tax treatment of foreign dividends, as
"[100] Since the Treaty does not extend freedom of establishment to
third countries, it is important to ensure that the interpretation of article
63(1) TFEU as regards relations with third countries does not enable
economic operators who do not fall within the limits of the territorial
scope of freedom of establishment to profit from that freedom."
However, in the particular circumstances of that case, the court concluded there
was no such risk in relation to subversion of freedom of establishment. That was
because the legislation did not "...relate to the conditions for access of a company from
that member state to the market in a third country or of a company from a third country
to the market in that member state". The relevance of such risk and also the
circumstances when such risk did not arise was confirmed again in the Emerging
Markets case.
No real dispute can arise, in our view, regarding the existence of the principle
HMRC advance. The point of difference between the parties is on whether the analysis,
regarding which of two possible rights should apply, stops once the purpose of the
legislation is considered, as the appellant argues, or whether one must go on to consider
the facts as HMRC argue. Thus, the appellant submits, given the clear purpose of
TOAA concerns transfers of capital, that is enough to conclude free movement of
capital is engaged.
The backdrop to FII was a case law distinction between holdings giving decisive
influence, where the relevant freedom was establishment, and where the holdings did
not, where free movement of capital was relevant. The legislation did not distinguish
between situations where the member state company held a controlling stake in the third
country company. The question arose whether the member state company could
complain that such legislation was inconsistent with free movement of capital.
The court's recourse to the purpose of the legislation, arose in the particular context
explained as follows:
"95. It was thus that, in para 37 of its judgment in FII (No 1), the court
established that the cases chosen as test cases in the proceedings before
the referring court concerned United Kingdom-resident companies
which received dividends from companies established in other member
states that were wholly owned by them. As the nature of the interest in
question would confer on the holder definite influence over the decisions
of the company paying the dividends and allow it to determine the
company's activities, the court held that the Treaty provisions on
freedom of establishment would apply in those test cases.
96. However, in a context such as that at issue in the main proceedings
which relates to the tax treatment of dividends originating in a third
country, it is sufficient to examine the purpose of national legislation in
order to determine whether the tax treatment of such dividends falls
within the scope of the Treaty provisions on the free movement of
The wording of [96] and its reference to "sufficient" suggests to us that recourse
to purpose was the endpoint in that particular case as the legislation there was not to do
with market access but the tax treatment of dividends. The tax treatment of foreign
source dividends (even though it applied where the recipient member state company
had decisive influence and therefore engaged freedom of establishment) did not affect
market access. So, the CJEU was not laying down any general principle that it was
unnecessary to look at the factual circumstances but saying in that case, it was enough
to look at the legislation.
The court had explained earlier, citing a number of its previous decisions, at [94],
that where the purpose of the legislation could not determine which freedom was
predominant (there freedom of establishment and free movement of capital with
respect to movements between member states) "the court takes account of the facts of
the cases in point in order to determine whether the situation to which the dispute in the
main proceedings relates falls within one or other of those provisions".
As regards the TOAA's purposes it is clearly, as HMRC point out, capable of
applying to all sorts of different situations and transactions which may engage other
freedoms apart from free movement of capital. This is demonstrated by its very wide
definition of assets, so as to include the creation of rights which in turn means it may
apply to matters, such as entering into employment contracts, which do not amount to
capital. Recourse to the TOAA's purpose does not resolve the question in the way the
tax treatment of dividends purpose did in FII.
It is therefore necessary to look at the factual circumstances in which the relevant
capital movements are said to be restricted. These narrow down to the payments into
the EBT and loans out of it to consider whether it is justified to examine them under
Article 63 or not (because in so doing it enables Mr Hoey to profit from a freedom
which would not apply because of such freedom's limitations regarding third
HMRC highlight the income derived from Mr Hoey's activities under the terms of
his contract of employment with the third country employer. The freedom that would
have been in point (if his employer was not a third country entity) would either be
freedom to receive services (Article 56), or in respect of the remuneration for providing
his services as a worker, the free movement of workers (Article 45). (Article 45
provides that: "1. Freedom of movement of workers shall be secured within the Union.
2. Such freedom shall entail the abolition of any discrimination based on nationality
between workers of the Member States as regards employment, remuneration and other
conditions of work and employment"). Allowing Mr Hoey to rely on Article 63 would
indirectly, and contrary to the Treaty, permit those who do not fall within the territorial
scope of such freedoms to access the internal market.
Viewed in the abstract, we can see how it might be argued that a situation where
an employee decides to invest his or her remuneration in a third country entity, or where
a third country entity (the EBT) makes a cross border loan to a person in a Member
State are just what was intended to fall within Article 63. But that would not reflect the
facts here. Mr Hoey's concession entails that the additions to the trust are part of his
remuneration. The interest free loans made to him were also a form of benefit arising
to him through his employment status. We consider any infringements would thus fall
under the scope of the protection of free movement of workers under Article 45 TFEU,
which also includes the protection of rights to receive remuneration. But, because there
is no restriction, as HMRC point out, on Mr Hoey's right to receive remuneration based
on his nationality, that Article does not apply.
We consider that means, although on the face of it there are movements of capital
within the arrangements Mr Hoey entered into which are restricted by the TOAA, they
do not justify an independent examination of the Article 63 free movement of capital.
The result of the above is that we disagree that the facts of this appeal engage any
EU law arguments regarding the TOAA charge. The entry into the employment contract
is not a movement of capital. The payment from the end-users to Penfold/ Hamilton,
while a movement of capital, is not restricted by the TOAA code and does not enable
Mr Hoey to complain about those rights under the free movement of capital. The
additions to the EBT and loans therefrom, while on their face capital movements
restricted by the TOAA code, do not justify an independent examination of Article 63
because they result from the exercise of other rights.
For that reason, HMRC's cross-appeal on the EU law points is allowed. It follows
our analysis above that the FTT was wrong to conclude, at [178] of its decision, that
the TOAA restricted Mr Hoey's freedom to transfer capital. We will therefore set aside
the FTT decision and remake it so as to incorporate our reasoning above and so as to
conclude that there was no restriction on the facts of the case which justified an
examination of the free movement of capital.
Whether HMRC require permission to run an EU law abuse rights argument
It is convenient to mention at this point that shortly before the hearing before us,
an issue arose as to whether HMRC needed permission to advance a ground relating to
the doctrine of abuse of rights under EU law, and if they did, whether such permission
should be granted. The appellant objected to HMRC raising arguments on abuse of
process emphasising that the issue was only raised for the first time in HMRC's
skeleton argument before the UT. HMRC's response is that the point cannot be
regarded as new when the issue before the UT is whether domestic legislation infringes
free movement of capital. They maintain it was a point that was raised before the FTT.
We note HMRC's references in its FTT skeleton to "wholly artificial
arrangements" and "out of scope" come right at the end of its EU law analysis. The
references were relied on at the point when it discussed the proposition that a
conforming interpretation was not necessary where the situation was not in scope of
EU law. Similarly, that is the context in which it was discussed in HMRC's note on
TOAA which was provided to the FTT. HMRC refer to the FTT's finding at [182] but
the FTT made that in the context of considering arguments concerning whether any
infringement was justified or proportional, not regarding whether EU rights were not
engaged in the first place due to the abuse of rights. None of the points raised address
use of the EU case-law on abuse of rights, as a means of saying EU law was not engaged
before any analysis of justification, proportionality or conforming interpretation.
We therefore reject HMRC's argument that the point (in the way it is now argued
as relevant at an earlier stage in the analysis) was raised in advance. We also do not
consider that it was, in that respect, a point available in reply as part of the case that the
appellant is unable to rely on EU law freedoms. The FTT found there was clearly a
restriction on Mr Hoey's freedom to transfer capital. We note HMRC raised a number
of points in its grounds of appeal as to why that was incorrect. If abuse of rights was
sought to be put forward as another reason why that conclusion was correct then
permission to add it as a new ground ought properly to have been applied for.
To the extent, however, that the doctrine of abuse of rights was relevant in the later
stages of the EU law analysis (regarding justification and proportionality), we cannot
see that the appellant has been prejudiced. The appellant said very little in its grounds
of appeal regarding those later stages and by outlining its position HMRC were in
essence disclosing in advance what they might otherwise have left to a reply. We
therefore consider we could have engaged with the abuse of rights arguments, if it had
become necessary, but only in so far as relevant to the issue of whether any restriction
on free movement of capital rights was justified or proportionate.
3) Even if Art 63 engaged was any restriction justified, suitable and proportionate.
Can the motive defence be construed in a way that conforms to EU law?
The remaining sections of our decision proceed on the premise that we are wrong
in the above conclusions, and that one or more variously of, the entering into the
employment contract, additions to the EBT, the loan from the EBT, and movements
between the end user and the offshore employer, are relevantly restricted by the TOAA
provisions, and do not engage other freedoms with the effect that Mr Hoey's free
movement of capital rights are infringed.
The FTT's analysis: The FTT considered there was a restriction on Mr Hoey's
freedom to transfer his capital (his contract of employment in that the TOAA was
triggered where this was to a company in third country but not if the company was
resident in the UK ([178]). It then considered whether the aim (preventing the transfer
of UK taxable income abroad by transferring the assets which gives rise to that income)
was justified ([180]). Referring to the CJEU's discussion of what constituted "wholly
artificial arrangements" in XGmbh v Finanzamt Stuttgart ­ Korperschaften (Case C-
135/17), the FTT concluded, although it did not say so in terms, that Mr Hoey's
arrangements were such arrangements. Thus, while the TOAA legislation did infringe
free movement of capital, it was "a reasonable and proportionate response to achieve
its objectives of preventing the transfer of income abroad from the UK" ([183]).
The appellant submits the FTT was wrong to find (at [182]) that the TOAA
provision did not unlawfully restrict free movement of capital. He submits the issues of
justification and proportionality were dealt with in Fisher UT. The UT confirmed the
charge under the TOAA code is inconsistent with EU law. The need to take a
conforming interpretation means the motive defence (s737 ITA) must be read widely
so that it applies unless the arrangements are "wholly artificial" in the EU law sense.
Mr Hoey's arrangements were not. Accordingly, Mr Hoey submits, he falls within that
conforming interpretation and can avail himself of EU law.
HMRC argue that, insofar as TOAA applies to the facts of this appeal, the TOAA
provisions are targeted anti-avoidance provisions. Their purpose is to prevent UK
resident individuals avoiding liability to income tax by means of a relevant transfer
where the motive defence is not satisfied. They are justified by the public interest in
preventing the avoidance of tax and do not go further than is strictly necessary to
achieve their purpose. They are justified and proportionate because they include a
motive defence that is capable of being construed as thwarting only "wholly artificial
arrangements". Even if they are not, they are capable of being construed in conformity
with EU law such that charge on Mr Hoey under the TOAA provisions is not disapplied.
It appears to us both parties accept that tax avoidance may in principle provide a
justification and that the concept of tax avoidance has a particular meaning under
European law. But they differ as to the extent of what is caught by the definition, and
on whether Mr Hoey's facts fall within such definition.
In the context of Freedom of Establishment, the European court in Cadbury
Schweppes (Case C-196/04) (at [55]) explained:
"the specific objective of such a restriction must be to prevent conduct
involving the creation of wholly artificial arrangements which do not
reflect economic reality, with a view to escaping the tax normally due
on the profits generated by activities carried out on national territory."
The CJEU in X Gmbh clarified the concept of "wholly artificial arrangement" was
not limited to establishment of a company which did not reflect economic reality (e.g
letterbox companies). The FTT referred (at [181]) to X Gmbh where the CJEU held:
"[84] ... in the context of the free movement of capital, the concept of
`wholly artificial arrangements' cannot necessarily be limited to merely
the indications referred to in paragraphs 67 and 68 of the judgment of
12 September 2006, Cadbury Schweppes and Cadbury Schweppes
Overseas (C-196/04, EU:C:544), that the establishment of a company
does not reflect economic reality, since the artificial creation of the
conditions required in order to escape taxation in a Member State
improperly or enjoy a tax advantage in that Member State improperly
can take several forms as regards cross-border movements of capital.
Indeed, those indications may also amount to evidence of the existence
of a wholly artificial arrangement for the purposes of applying the rules
on the free movement of capital, in particular when it proves necessary
to assess the commercial justification of acquiring shares in a company
that does not pursue any economic activities of its own. However, that
concept is also capable of covering, in the context of the free
movement of capital, any scheme which has as its primary objective
or one of its primary objectives the artificial transfer of profits
made by way of activities carried out in the territory of a Member
State to third countries with a low tax rate." (FTT's emphasis)
The appellant's arguments appear to simply apply the formulation in XGmbh. That
is too narrow a view. From the court's reasoning it is plain that, because capital
movements may take many forms, the concept of wholly artificial arrangements might
encompass "any scheme which has as its primary objective or one of its primary
objectives the artificial transfer of profits made by way of activities carried out in the
territory of a Member State to third countries with a low tax rate". That formulation
was clearly one example (and we note the UT in Fisher described it on those terms (at
HMRC submit that in the context of Free Movement of Capital (where against their
view ­ entering into employment contract is a movement of capital) it must follow that
any scheme which has as its primary or one of its primary objectives the artificial
transfer of the source of employment income from a Member State to third country with
a low tax rate is abusive in the relevant sense.
They say the authorities make clear taxpayers cannot rely on treaty freedoms where
wholly artificial arrangements are involved i.e. where domestic rules are abused for
wholly artificial purposes. (As explained above at [303] we deal with this point in the
context of justification rather than earlier on in the analysis). HMRC highlight that a
scheme that seeks to circumvent national law (here the UK's employment income tax
provisions) is considered abusive under the European case-law.
We consider however that HMRC formulate the EU concept of wholly artificial
arrangements too broadly. Their formulation misses out further constraints to the
concept implicit in the court's definition: the artificial arrangements must seek to
achieve the effect that the activity in the member state is taxed in the third country at a
lower rate. In other words, it is not enough that there are artificial arrangements which
happen to involve a third country which has lower tax rates.
For their proposition HMRC rely on Cadbury Schweppes (at [55]) XGmbH ([80] ­
[84]) and Itelcar Automoveis de Aluger Lida v Fazenda Publica (Case C-282/12) (at
[34] - [35]). Each of the cases relied on echo the idea that measures restricting free
movement of capital may be justified where the legislation "specifically targets wholly
artificial arrangements which do not reflect economic reality and the sole purpose of
which is to avoid the tax normally payable on the profits generated by activities carried
out on the national territory" (Itelcar [34])). The context in each makes it clear the
artificiality contemplated is one which purports to make out that the relevant activity,
otherwise taxable in the member state, is taxed at a lower rate somewhere else. The
reference to "transfer" in XGmbH is also consistent with that idea of an inter-state
movement. The cases are therefore not talking about tax avoidance generally but a
particular kind of tax avoidance.
Thus, in Cadbury Schweppes where the factual context was the UK's Controlled
Foreign Corporation (CFC) legislation it was the incorporation of CFCs in third
countries with lower tax rates which was material. In Itelcar the national rule at issue
concerned the arbitrary transfer of taxable revenues from that member state to a third
country, which meant the profits were not taxed in the state in which the profits had
been generated. XGmbH concerned legislation which attributed to a member state
company, income of the third country company, in which the member state company
held a shareholding, in proportion to that shareholding irrespective of whether a
distribution had been made. HMRC also refers to N Luxembourg1 and others (Case C
115/16) (at [109]) but it is notable the reference to "designed to circumvent the
application of the legislation of the Member State concerned" is prefaced with the
explanation "Whilst the pursuit by a taxpayer of the tax regime most favourable for him
cannot, as such, set up a general presumption of fraud or abuse..."[emphasis added].
As the approach in X GmBH makes clear, artificiality may take different forms.
What is objectionable is where someone seeks to escape a member state's taxation by
being taxed lower in a third country, but where that does not reflect that the economic
location of the activity takes place in the member state. Moreover, if the artificial
arrangements concept was just about avoiding national taxes per se, it is difficult to see
why the case-law would need to refer to transfers to jurisdictions with low tax rates.
HMRC emphasise the above cases refer to abuse of EU law rights and part of the
wider doctrine of abuse of rights. It is correct that Cadbury-Schweppes (at [64]) does
cite Halifax and Others (Case C-255/02) [74] and [75] - there the court sets out the
conditions: these concern the accrual of tax advantage that would be contrary to the
purposes of the provision (there the VAT Sixth Directive) and the need for objective
factors showing the essential aim is to obtain a tax advantage as opposed to there being
some other explanation. The foundation for those conditions follows however from
what the court said earlier at [69] that the application of community legislation cannot
be used to cover abusive practices by economic operators, that is to say transactions
carried out not in the context of normal commercial operations, but solely for the
purpose of wrongfully obtaining advantages provided for by Community law (referring
to Emsland-Starke at [51]). So, the wider point is one about not allowing European
legislation to be used for purposes which run contrary to the purposes underlying the
European legislation.
In summary we would have concluded, if it became necessary, that the definition
of wholly artificial transactions is thus wider than transfers of company profits (because
capital movements are varied) but not as wide as HMRC suggest.
Before applying the above to the facts there is a prior question as to whether the
TOAA legislation does target such artificiality. As is clear from Fisher UT it does not.
That is because the means by which one escapes liability ­ the motive defence - catches
arrangements which are not artificial in the EU law sense. The restriction is not
therefore justified and must be read in a conforming way so as to allow, where a person
is within scope of EU law, the motive defence to apply unless the person engaged in
wholly artificial arrangements as that term is understood in EU law. The relevance of
looking at the facts is that, if on the facts, Mr Hoey's case were to fall within the EU
definition of wholly artificial arrangements, then even if such a conforming
interpretation were taken it would not help him.
Mr Hoey's facts artificial in EU law sense?
HMRC say the FTT clearly found the arrangements fell within this definition of
artificial (which is also termed abusive). In addition to the findings, HMRC refer to the
fact it is accepted the arrangements were similar to the arrangements described by Lord
Hodge in Rangers as "a tax avoidance scheme". Mr Hoey entered into a tax avoidance
scheme designed to circumvent the UK's employment income tax provisions.
In any case Mr Hoey argues this was not a wholly artificial in that there was a
genuine operation in the Isle of Man and Guernsey, genuine transactions and no transfer
of profits. All the profits were taxed in the UK.
While HMRC rely on the FTT's findings at [153], [160] and [182] to support the
case the arrangements were wholly artificial none of these, individually or taken would
support the EU law definition we have described above.
All the FTT stated, at [182], was that:
"It seems to me, therefore, in the context of this very recent case, that "the
artificial transfer of profits made by way of activities carried out in the
[UK] to third countries with a low tax rate" is very much the sort of anti-
avoidance objective which the CJEU might have in mind".
FTT [182] is not, therefore in terms, a finding but an acknowledgement of the
broader test in XGmbH. To the extent, when read in context with the conclusion in
[183], it is thought that the FTT considered that broader test was fulfilled, as regards
Mr Hoey's facts, then we fail to see what basis there would be for that in the underlying
findings of fact. That, in itself tends to reinforce the view the FTT was making a generic
statement about the TOAA legislation rather than saying anything specifically about
the particular facts of Mr Hoey's case. (While the appellant, in his written grounds,
challenges the finding as inconsistent with the finding that Penfold/Hamilton had nil
income for TOAA purposes, we do not consider there is such an inconsistency. A
transaction which was determined to have the consequence of nil income would not
preclude a finding regarding the objective of the transaction.)
As regards the avoidance of employment tax, FTT [153] does not explain what it
is about setting the umbrella company offshore which avoids tax (as Mr Hoey points
out that company did deduct tax on some of the earnings). Moreover, there is no finding
the tax rates were lower. The payment into a trust, which then makes interest free loans,
with the expectation those are not paid does not explain how any offshore element
involving a jurisdiction with lower taxes was relevant. Similarly, the finding at FTT
[160] that some of the transactions: the interposition of a non-resident employer, a trust,
and the making of the loans from the trust, were "more than incidentally designed for
the purpose of avoiding liability to taxation" does not account for the relevance of the
offshore elements exploiting lower tax rates in a third country.
To the extent that the EU law definition of wholly artificial arrangements can be
extended, as HMRC argue, to artificial arrangements involving employment source
income, such extension by analogy would also have to incorporate the narrower basis
of the exception for artificial arrangements we have described. Rangers might show
how the arrangements could be viewed domestically as a tax avoidance scheme, but
that would not mean it necessarily fell within the EU law definition of wholly artificial
If it became necessary to consider whether any restriction was justified we would
therefore conclude the FTT erred in law in finding the restrictions were justified and
that the decision be set aside and remade on the basis of the reasoning set out above.
Appellant's further points
In view of this, it would not have been necessary to deal with the appellant's point,
that the burden lay on HMRC to establish that the transaction was wholly artificial and
also that it was not open to HMRC to refer to the transactions being wholly artificial as
this was not pleaded. But if it were, we would not have considered it necessary to deal
with these points. The appropriate time to take these points was before the FTT made
its determination. Moreover, no error of law regarding these points was alleged in the
grounds before the UT.
The appellant's written grounds criticise the FTT for failing to address the issue of
proportionality separately from question of justification. On this, while HMRC accept
these questions are separate matters they submit this does not mean that the FTT needed
to address them separately. It was clear the FTT found the provisions both justified and
proportionate. This point was not pursued in oral submissions and we do not consider
it further.
Disapplication vs conforming construction?
Again, this part of our decision is only relevant to the extent we are wrong in our
view that there was no relevant restriction of the free movement of capital.
As we explained above (see [259]), we disagree with the appellant that Fisher UT
confirms that the TOAA must be disapplied across the board. The effect of Fisher UT
is fact-sensitive in that the motive defence is available to someone within scope of EU
law who is not carrying out wholly artificial arrangements in the sense described in the
However, assuming we got this far in the analysis, and agreed the TOAA restricted
Mr Hoey's free movement of capital, then we would have held the TOAA restricted the
capital movements in a way which was not justified, and which required a conforming
construction to be taken. That would entail applying the motive defence so as to apply,
except where there were wholly artificial arrangements in the EU law sense. For the
reasons explained above, we do not consider the facts found by the FTT to establish
that Mr Hoey's arrangements were artificial in that sense. So, he did not fall within EU
law exception to the motive defence. Thus, the TOAA charge, interpreted to take
account of free movement of capital, would not apply to him.
Summary of conclusions
We summarise the conclusions reached insofar as is necessary for the purposes of
disposing of the appeal and cross appeal.
In respect of Mr Hoey's appeal, we conclude the FTT did not err in law in deciding:
Mr Hoey's entitlement to a PAYE credit under PAYE Regulation 185
and Regulation 188 was not within its jurisdiction.
The discovery assessments were valid.
Regarding the TOAA charge, that a) the motive defence was not
available b) the TOAA charge was not unlawful under EU law.
The appellant's appeal is therefore dismissed.
In respect of HMRC's cross-appeal, concerning the TOAA charge, we conclude:
The FTT erred in law:
In concluding it was not necessary for it to deal with the
TOAA charge issue;
In its analysis of the motive defence (Condition B(a) ­
whether the relevant transactions were genuine commercial
transactions); and
In concluding the TOAA charge restricted free movement of
The FTT did not err in law:
In concluding the quantum of the income of the "person
abroad" was nil.
In analysing the facts regarding Condition A of the motive
defence, in particular in finding that Mr Hoey's motivation was
not related to tax avoidance.
HMRC's cross-appeal in relation to the TOAA issues is therefore allowed in part.
It is allowed in relation to Cross-Appeal Grounds 1, 3 (in part), and 4 and dismissed in
relation to Cross-Appeal Grounds 2 and 3 (in part).
As we have identified errors of law in the FTT Decision we can, and consider we
should, set it aside. However, taking account that the errors do not undermine the
underlying findings of fact made, we consider we should remake the decision rather
than remit it to the FTT. Taking account that the underlying facts remain intact, and
that the error regarding Condition B(b) of the motive defence is immaterial to the
outcome, we consider the remade decision should reflect the FTT decision but with the
following changes. The part of the FTT Decision dealing with the domestic application
of the TOAA charge is not to be regarded as obiter (see [206] above). The part of the
FTT decision dealing with the EU law arguments in relation to TOAA issues
(paragraphs [170] to [183]) is replaced so as to incorporate our reasoning that the
TOAA did not infringe EU law because the free movement of capital was not engaged
on the facts of the case (as set out at [253] to [298]).
The outcome, for Mr Hoey, is that the appeals against the discovery assessments
for 2008-9 (in the amount of £40,437.15) and for 2009-10 (for £2,334,20) and the
amendments to his 2010-11 self-assessment (for £36,810.20), which HMRC made, are
dismissed. If he wishes to challenge the amount of tax which he should pay by virtue
of any entitlement to a PAYE credit under Regulations 185 and 188 that must be argued
The TOAA charge basis of assessment remains, as the FTT concluded, at nil. Mr
Hoey's argument that the charge unlawfully breached EU free movement of capital
rights is rejected.
The appellant's appeal is dismissed. HMRC's cross-appeal is allowed in part. The
overall result is that the appellant's appeals against the discovery assessments for
2008-9 and 2009-10 and the appeal against the closure notice for 2010-11 are
Signed on Original
RELEASE DATE: 12 April 2021

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