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Hoey: credit for PAYE tax not deducted

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The planning undertaken by Stephen Hoey was not particularly intricate. He was an IT specialist who provided his services to end-users through an offshore company established by the promoters of the planning. The company employed him at a modest salary but most of the reward for his services came through the company making contributions to a trust which duly lent the money to Mr Hoey interest-free and without any real expectation of repayment. The planning was sold to him on the basis that he would pay tax only on the salary and on the small ‘benefit in kind’ of the loan. Not that he stood to profit greatly from the scheme: most of the supposed tax saving was absorbed by the charges levied by the promoters.

It had been accepted, even before the case came before the First-tier Tribunal, that, following the decision in Rangers (RFC 2012 Plc (in liquidation) v Advocate General for Scotland [2017] UKSC 45), the contributions to the trust fell to be treated as employment income of Mr Hoey and as taxable on him.

Why, then, did the recent Upper Tribunal judgment in Hoey v HMRC [2021] UKUT 82 (TCC) (reported at page 4) run to 86 pages? And in what sense did HMRC both win and lose the case?

It’s complicated. The case ranges widely over the transfer of assets abroad rules, their interaction with EU law on freedom of movement of capital, and whether HMRC had made a valid ‘discovery’.

But the key point of Mr Hoey’s appeal was very simple: if the payment to the trust was employment income (as it was), then the legislation required tax to have been accounted for under PAYE (albeit, in the circumstances of the case, by the end-user rather than the offshore employer); and Mr Hoey was entitled in his self-assessment to be credited with that tax, regardless of whether it had actually been accounted for by the payer. That, as a general proposition, is undoubtedly correct.

However, HMRC purported to have absolved the end-user from the obligation to operate PAYE. Thus, that aspect of the case resolved itself into the questions: (a) whether HMRC was entitled to do so; and (b) if it was, whether the result was that Mr Hoey ceased to be entitled to the credit.

HMRC won the case in the sense that the Upper Tribunal followed the First-tier Tribunal in declining to afford Mr Hoey the benefit of the tax credit. But this was on the basis that the availability (or not) of the tax credit was, essentially, a question of collection rather than of the assessment of liability; and was thus outwith the jurisdiction of the tribunals. But, as the tribunal said, ‘there is no reason to suppose the amount of the PAYE credit cannot be litigated in collection proceedings’.

And HMRC may yet be in some difficulty when it comes to those proceedings; because rather than stopping at simply saying that it did not have jurisdiction in the matter, the tribunal went on to say what it would have decided if it had had jurisdiction:

‘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.’

The Upper Tribunal’s obiter is not of course binding on a different court in any collection proceedings. But we envisage that HMRC’s battle to collect from Mr Hoey (and the other 15,000 people that HMRC has estimated to be engaged in similar arrangements) may not yet be over. 

Issue: 1528
Categories: In brief