Stephen Hoey v The Commissioners for HMRC

A PAYE credit under Regulations 185 and 188 is relevant to the later collection and enforcement stage. It does not alter the amount assessed under sections 8 and 9 of the Taxes Management Act 1970. Accordingly, the First-tier Tribunal has no jurisdiction in an appeal against an assessment or closure notice to determine entitlement to that credit.

A discovery assessment was valid where an officer first identified an insufficiency through the prescribed review process and the taxpayer’s disclosures would not have made a hypothetical competent officer aware of an actual insufficiency. The statutory defence for generally prevailing practice requires an established practice accepted by HMRC and advisers alike. On the facts, the Transfer of Assets Abroad provisions did not engage free movement of capital.

Stephen Hoey v HMRC concerned a UK-based IT contractor employed by offshore employers. UK end-users received his services. The employers contributed sums to employee benefit trusts, from which he received interest-free loans.

Following his concession that the trust contributions were taxable employment income, the dispute concerned PAYE credits, discovery assessments for 2008–09 and 2009–10, a closure notice for 2010–11, and an alternative charge under the Transfer of Assets Abroad code. Mr Hoey appealed from the First-tier Tribunal’s decision, [2019] UKFTT 489 (TC). HMRC cross-appealed on aspects of the Transfer of Assets Abroad analysis.

The central issues were whether the tribunal had jurisdiction to determine PAYE credits, whether the discovery assessments were valid, and whether the alternative Transfer of Assets Abroad charge was displaced by the motive defence or EU free movement of capital.

1. Mr Hoey’s appeal was dismissed and HMRC’s cross-appeal was allowed in part. The First-tier Tribunal had correctly held that it lacked jurisdiction to determine whether a PAYE credit was available under Regulations 185 and 188. Sections 8 and 9 of the Taxes Management Act 1970 concern the assessed amount. Section 59B and the Regulations make later adjustments concerned with payment, collection and enforcement. The credit therefore had to be pursued elsewhere.

2. The Upper Tribunal upheld the discovery assessments. A discovery occurs when an officer honestly and reasonably forms the new view that there is an insufficiency. The officer need not quantify the tax as a legal prerequisite. The taxpayer’s returns, loan disclosures and scheme reference information did not require a hypothetical competent officer to be aware of an actual insufficiency before the enquiry window closed.

3. The generally prevailing practice defence in section 29(2) was unavailable. First-instance decisions concerning employee benefit trust arrangements did not establish a settled legal position or a practice accepted by HMRC. The taxpayer had not established the necessary long-established and mutually accepted practice.

4. On the Transfer of Assets Abroad issues, the Upper Tribunal held that the First-tier Tribunal should have determined the alternative charge rather than treating it as obiter. It nevertheless upheld the finding that the offshore employers’ relevant income was nil because the employee benefit trust contributions were deductible remuneration. The statutory motive defence remained unavailable because the arrangements included transactions designed more than incidentally to avoid tax.

5. The First-tier Tribunal erred in holding that the facts engaged Article 63. Entering an employment contract was not a movement of capital. Although trust contributions and loans could be capital movements, any restrictive effect was an unavoidable consequence of other freedoms which did not extend to the third-country circumstances. The EU-law challenge therefore failed.

6. Obiter, if the PAYE-credit issue had been within the tribunal’s jurisdiction, section 684(7A)(b) of the Income Tax (Earnings and Pensions) Act 2003 would operate prospectively and could not retrospectively remove a credit which had already crystallised.

• Upper Tribunal (Tax and Chancery Chamber): Mr Hoey’s appeal was dismissed and HMRC’s cross-appeal was allowed in part: [2021] UKUT 82 (TCC).
• First-tier Tribunal (Tax Chamber): Decision appealed from: [2019] UKFTT 489 (TC). It upheld the discovery assessments, rejected the PAYE-credit jurisdiction argument, and addressed the Transfer of Assets Abroad issues.