Stephen Hoey & Ors. v Commissioners for HMRC

HMRC’s power under section 684(7A)(b) of the Income Tax (Earnings and Pensions) Act 2003 permits it to relieve an actual or deemed employer from complying with PAYE Regulations. The power is wide, overlaps with the statutory redirection provisions and may operate prospectively or retrospectively. Its exercise leaves the employee’s underlying income tax liability intact and removes any contingent credit for PAYE which the employer should have accounted for.

A challenge to the exercise of that power lies in judicial review. A tax tribunal cannot determine the availability of the PAYE credit because regulations 185 and 188 operate at the collection stage, outside an appeal against an assessment or closure notice.

For transfer-of-assets-abroad purposes, a trader’s income is its taxable profit, not its gross receipts. Reasonable employee remuneration is ordinarily deductible where paid wholly and exclusively for the trade.

An IT contractor participated in arrangements under which offshore employers contributed most of his remuneration to employee benefit trusts. Equivalent sums were advanced to him as interest-free loans. Following the Supreme Court’s decision in RFC 2012 plc v Advocate General for Scotland [2017] UKSC 45, he accepted that the contributions were taxable employment income.

HMRC exercised section 684(7A)(b) of the Income Tax (Earnings and Pensions) Act 2003 to relieve the UK end users, treated as deemed employers, from their PAYE accounting obligations. The contractor sought judicial review and pursued statutory appeals, asserting a PAYE credit and challenging a fallback charge under the transfer-of-assets-abroad provisions.

The First-tier Tribunal dismissed his appeal but found that the offshore employers had no relevant trading profit. The Upper Tribunal, in Hoey v HMRC [2021] UKUT 0082, upheld the jurisdictional and profit findings but considered the section 684 power prospective only. The Court of Appeal determined the power’s scope and legality, tribunal jurisdiction and HMRC’s cross-appeal concerning the employers’ profits.

1. The appeal, cross-appeal and judicial review claim were dismissed. Section 684(7A)(b) of the Income Tax (Earnings and Pensions) Act 2003 confers a wide, free-standing power. It permits HMRC to decide that compliance with the PAYE Regulations by an actual or deemed employer is unnecessary or inappropriate. It overlaps with the redirection regulations and is not confined to prospective operation.

2. The power neither imposes nor transfers liability to income tax. Primary legislation makes the employee liable for tax on employment income. Exercising the power merely permits collection from that employee instead of the payer. A PAYE credit under regulations 185 or 188 is contingent rather than vested. Relieving the payer of its obligation to account under regulation 62(5) therefore prevents the employee from setting off a notional deduction.

3. The decisions to exercise the power were lawful. The officers considered whether the end users knew, or through reasonable diligence should have known, about the avoidance arrangements. The claimants were invited to provide evidence but supplied none. The officers considered relevant matters, disregarded no material consideration and reached rational decisions. HMRC’s published guidance contained no clear and unqualified promise that only regulations 72, 72F or 81 would be used. No procedural legitimate expectation arose.

4. The First-tier Tribunal has no inherent supervisory jurisdiction. Regulations 185 and 188 adjust the amount collected after assessment; they do not alter the tax chargeable or payable under the assessment itself. Consequently, entitlement to the PAYE credit is outside an appeal under section 31 of the Taxes Management Act 1970. The legality of an exercise of section 684(7A)(b) must be challenged by judicial review.

5. For the transfer-of-assets-abroad provisions, trading receipts are not themselves income. The relevant income of the offshore employers was their taxable trading profit after allowable expenses. The First-tier Tribunal was entitled to find that contributions to the employee benefit trusts formed part of the contractor’s remuneration and were incurred wholly and exclusively for the employers’ trades. Any tax-avoidance benefit was consequential and incidental to their object of remunerating the employee. The employers therefore had no relevant profit, and no separate transfer-of-assets-abroad liability arose.

6. HMRC properly conceded that the employment-income charge takes priority and that the transfer-of-assets-abroad provisions serve only as a fallback. It was unnecessary to determine the motive defence, power to enjoy income or EU free-movement questions.

• Court of Appeal: Dismissed the statutory appeal, HMRC’s cross-appeal and the judicial review claim: [2022] EWCA Civ 656.
• Upper Tribunal: Dismissed the taxpayer’s appeal on jurisdiction and upheld the finding that the employers’ relevant income was nil, but held obiter that section 684(7A)(b) operated only prospectively: Hoey v HMRC [2021] UKUT 0082, [2021] STC 792.
• First-tier Tribunal: Dismissed the statutory appeal but found that the employers’ income was nil because the trust contributions were deductible: Hoey v HMRC [2019] UKFTT 489 (TC).
• Administrative Court: Andrews J refused permission to seek judicial review. The Court of Appeal subsequently granted permission and heard the claim with the statutory appeals.