Rangers case precedent still impacts tax cases today
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
4 August 2022
Justine Riccomini sets out the key issues arising from the decision in the Hoey case and wonders whether HMRC will utilise a little-known PAYE regulation to pass the liability on to employees more regularly in future.
A decision released by the Court of Appeal on Friday 13 May 2022 proved unlucky for those involved in disguised contractor loan schemes.
The important test case of Hoey and others v HMRC [2022] EWCCA Civ 656 examined the relationship between Self-Assessment and PAYE legislation, where the taxpayer, a UK resident, was engaged by an offshore umbrella company (OUC) to provide IT consultancy services to several “end user” clients (AXA Investment Managers Ltd, Aviva Investors and Threadneedle Investments) and was remunerated using a loan scheme derived from an Employee Benefit Trust (EBT) which formed the greater part of his income from that source.
Rangers Football Club
The Rangers case decision from July 2017 led to the taxpayer, Mr Hoey, accepting that he had received employment earnings during the three years in question (2008-9, 2009-10 and 2010-11). Those earnings were therefore deemed liable to income tax.
Taxpayer protection
Although one would expect that if a UK based employee earns employment income, they would normally suffer PAYE and NICs deductions on that income at source, the difficulty here was that Mr Hoey’s employer, the OUC, was offshore, and was therefore not required under Section 689 ITEPA 2003 to make PAYE deductions. So HMRC were not able to hand a bill to the OUC for the underpaid liabilities accruing from the loan payments which had been made out of an Employee Benefit Trust (EBT).
The next expected step under the PAYE Regulations at Section 689 would be for the next entity in the chain (in this case, the “end user”) which is situated in the UK to bear the liability. Ordinarily, the employee would thus be protected from having to personally bear any liability in these circumstances because HMRC will usually penalise the employer for not deducting and paying over the PAYE and NICs liabilities, and the employee can claim a credit through the self-assessment regime as if they had paid them personally. Mr Hoey made a claim for this credit entitlement, arguing that in the absence of the OUC being liable for the PAYE and NICs, the end user should be paying them.
Hidden powers
An infrequently used power in the PAYE Regulations at Section 7A of Regulation 684 (The PAYE Regulations are within ITEPA 2003 at Part 11) gives HMRC the discretion not to impose a liability on the payer of the employment earnings where ‘an officer of Revenue and Customs is satisfied that it is unnecessary or not appropriate for the payer to do so’.
HMRC argued in this case that the UK-based end user should not in fact be liable for paying the tax liabilities because they had not made the payments directly to Mr Hoey – the OUC had funded the EBT with payments sent from the end user, and the EBT had then made the payments of the loans to the individual. In dismissing the decisions of the Upper Tribunal, the Court of Appeal agreed with this stance.
HMRC also submitted a secondary argument which was that the provisions relating to the transfer of assets abroad should apply under Chapter 2 of Part 13, ITA 2007. This argument was however rejected by the Court of Appeal because the judiciary considered that HMRC’s primary argument that Regulation 684 should apply in this case was the correct way to go, and this meant that the transfer of assets abroad rules could not have the effect of creating a separate liability.
Due to the above, Mr Hoey was refused a credit through self-assessment because the end user was not required to bear any liability, and that meant the liability would now instead be passed on to Mr Hoey to bear personally.
Judicial Review?
Mr Hoey had requested a judicial review on both the Regulation 684 and the Transfer of Assets Abroad legislation. His request failed on both counts because the Court of Appeal considered that both arguments presented by HMRC were brought using the correct legislation, and the tribunals had not erred in law.
Retrospection – opening the floodgates?
Not only did the judiciary consider that no credit entitlement could apply to Mr Hoey because of the application of Regulation 684, but the Court of Appeal then also overturned the consideration of the Upper Tribunal by agreeing with HMRC that the PAYE Regulations could and should have retrospective effect.
They confirmed there was no time limit associated with the power to absolve an employer of their obligation to deduct and pay over PAYE and NICs, unlike in other situations in which liabilities can be transferred from employer to employee (N.B. the power at Reg.684 can also be used protectively for prospective purposes as well).
This seems to be rather at odds with the fundamental principles of the PAYE regime and not a little concerning that there is no related appeal mechanism against Regulation 684 Section 7A in this context other than for the employee to seek judicial review in the Administrative Court.
One wonders whether this may be the way HMRC wishes to go on tax avoidance cases involving employers and employees in future.