Court of Appeal: transfer of assets abroad tax rules should be ‘kept in reserve’

The comments, in a recent judgment, will be welcomed by taxpayers, said tax expert Josie Hills of Pinsent Masons. The case, concerning IT contractor Stephen Hoey, considers, among other things, the application of the TOAA. There are a number of cases group going through all levels of the UK tax tribunals and courts currently regarding elements of the TOAA regime.

Hoey was employed by two offshore entities, who contracted to provide his services to third party businesses in the UK. Those businesses paid the employers for the services provided. Hoey received a minimum wage from the offshore employers, who also made a contribution to an employee benefit trust (EBT), which in turn made a loan to Mr Hoey.

HMRC pursued Hoey for tax on the amount of the loans on the basis that it was either employment income or that income of the employer should be attributed to Hoey under the TOAA.

In response, Hoey had asserted the right to be credited for income tax which should have been deducted through pay as you earn (PAYE). HMRC had responded to that by purporting to exercise a discretion so that the PAYE regulations were disapplied in his case, with the consequence that the credit was not available.

Following the original first-tier tribunal (FTT) decision in his case, Hoey had also started judicial review proceedings challenging HMRC’s exercise of its discretion regarding the PAYE credit. Appeals against the statutory appeals and the judicial review were all heard together by the Court of Appeal.

Both the first-tier and upper tribunals had concluded that they did not have jurisdiction to consider the application of the PAYE credit by HMRC. The Court of Appeal agreed with that conclusion. Under the judicial review, the Court of Appeal decided that HMRC had exercised its power lawfully and that there was no PAYE credit available for Hoey.

On the application of TOAA, the Court of Appeal did not disturb the decision of the FTT, which had already been upheld by the upper tribunal (UT), that there was no ‘income’ of the employers’ trade which could be treated as arising to Hoey. This was on the basis that the contributions to the EBTs were deductible as expenses incurred wholly and exclusively for the purposes of the employers’ trades.

Josie Hills said: “While recognising that there is a high bar for an appellate court to disturb a conclusion based on a question of fact, the Court of Appeal did consider the question in reasonable depth, noting that even if the employers had an “ulterior motive”  of helping Mr Hoey to avoid tax, it could not amount to a separate object of the payments, such as to give the payments a duality of purpose.”

Because it had made this decision, the Court of Appeal declined to consider the question of whether Hoey would have had the ‘power to enjoy’ the income had there been any, or his statutory ‘motive defence’. However, they did feel the need to pass comment on HMRC’s suggestion that the TOAA rules should take precedence over the normal employment income provisions in the 2003 Income Tax (Earnings and Pensions) Act (ITEPA).

The Court of Appeal discouraged HMRC from pursuing this argument in fairly strong terms, stating that it would be an “extraordinary position” which would raise the “unwelcome spectre” of economic double taxation. While recognising that the courts cannot be prescriptive on matters of policy, the Court of Appeal “respectfully suggest[ed]” that the TOAA rules should be “kept in reserve for deployment in cases of tax avoidance which cannot effectively be countered in any other way”.

This issue had been discussed at the hearing and HMRC had conceded the point. However, it had also made an undertaking, through its counsel, that it would not seek to impose a double charge to tax in the event that both sets of provisions applied, albeit that it was not in a position to confirm how it would ensure that happened.

“This will be a welcome clarification for taxpayers, given HMRC’s increasing tendency to seek to apply the TOAA rules,” said Hills.

Finally, the Court of Appeal declined to consider a point of EU law which would have been ‘live’ if the TOAA rules had been in point and which had been decided differently by the FTT and UT, on the grounds that it was unnecessary.

“Interestingly, the Court of Appeal expressly stated that the UK’s departure from the EU was another reason not to deal with the point unless they had to,” said Hills.