R (Hoey and others) v HMRC: HMRC successful in Court of Appeal

The Court of Appeal has authoritatively determined that the power conferred on officers of HMRC by s.684(7A)(b) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) can be exercised to remove the obligation on UK resident end-users to operate PAYE.

The power was exercised in the context of a ‘contractor loan schemes’, i.e., schemes involving the use of offshore entities through which the UK-based taxpayers like Mr Hoey who were employed by offshore employers provided services to end-users in the UK. Mr Hoey’s various arguments challenging the validity of the exercise of power were firmly rejected by the Court. The Court preferred HMRC’s arguments. For example, it accepted that it was material to the validity of the exercise of the power that there was no evidence that the end-users were aware of the offshore arrangements by which Mr Hoey (and the other Claimants) had sought to avoid tax.

In general, PAYE Regulations place the obligation to collect tax in respect of an employee’s employment income on employers or deemed employers in the first instance; but where HMRC validly exercise the power in s.684(7A)(b) ITEPA, the obligation to pay the tax rests with the employees whose employment income gave rise to the liability in the first place.

In practice, what this means is that, where the s.684(7A)(b) ITEPA power is validly exercised, and provided ordinary time limits and other conditions for valid enquiries and discovery assessments are met, HMRC can proceed to collect the income tax due on employment income from employees.  

The Court of Appeal also held that a challenge to the exercise of the power in s.684(7A)(b) ITEPA is not justiciable in the First-tier Tribunal (FTT) on an appeal against a closure notice or discovery assessment under s.31 of the Taxes Management Act 1970. Accordingly, the exercise of the power will deprive Mr Hoey (and the other Claimants) of the ability to rely on the so-called “PAYE credit” in enforcement proceedings.

As for HMRC’s fall-back argument in relation to a charge under the Transfer of Assets Abroad provisions: the Court of Appeal found that the FTT had applied the correct test to the evidence before it when determining whether payments made by the offshore employers to the EBTs were “wholly and exclusively” incurred for the purpose of the offshore employers’ trades, such that the FTT’s findings could not be disturbed.

Aparna Nathan QC, Marika Lemos, Hitesh Dhorajiwala represented HMRC, together with Sam Grodzinski QC (of Blackstone Chambers) and Raymond Hill (of Monckton Chambers).

To read the full decision, please click here.

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