Introduction

The case of Hoey v. Revenue & Customs ([2019] UKFTT 489 (TC)) presents a pivotal examination of HMRC's authority in raising discovery assessments under section 29 of the Taxes Management Act 1970 (TMA 1970). The appellant, Mr. Stephen Hoey, an IT contractor employed by offshore companies Penfolds and Hamilton Trust, challenged the validity of assessments concerning taxable earnings derived from interest-free loans facilitated by employer-established Employee Benefits Trusts (EBTs). This comprehensive commentary delves into the tribunal's findings, the interplay of relevant tax laws, the application of EU principles, and the broader implications for future tax avoidance schemes.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) upheld HMRC's decision to raise two discovery assessments against Mr. Hoey for the tax years 2008-09 and 2009-10. The crux of the case revolved around whether HMRC had the authority to reassess taxable income derived from interest-free loans provided via EBTs, and whether such assessments were justified under existing tax legislation and EU law.

The tribunal concluded that:

• HMRC made valid discoveries of tax insufficiency under s29 TMA 1970.
• Mr. Hoey's tax returns did not align with the generally prevailing practices at the time.
• HMRC possessed and lawfully exercised the discretion under s684(7A) ITEPA 2003 to disapply PAYE regulations.
• The provisions of the Transfer of Assets Abroad Act (TOAA) 2007 applied, and Mr. Hoey could not utilize the motive defense to avoid taxation.
• The application of TOAA legislation was found to infringe EU principles of free movement of capital, but such infringement was justified and proportionate.

Analysis

Precedents Cited

The judgment extensively referenced key cases and legal principles that shaped the tribunal's reasoning:

• Charlton and others v HMRC [2012] UKFTT 770 (TCC): Affirmed that new discoveries of tax insufficiency do not require new factual or legal information if an officer reasonably identifies an insufficiency.
• Burford v Durkin (Inspector of Taxes) [1991] STC 7: Established that while discretionary powers can be delegated, the exercising officer retains ultimate responsibility for the decision.
• Sanderson v Revenue and Customs Commissioners [2016] EWCA 19: Clarified the objective awareness required under s29(5) TMA 1970 for establishing tax insufficiency.
• RFC 2012 (in liquidation) v Advocate General for Scotland [2017] 1 WLR 2767: Influenced HMRC's stance on taxing loans as earnings.
• Vestey v IRC (Nos 1 and 2) [1980] AC 1148: Discussed the constitutional limits of discretionary taxation powers.
• Fisher v HMRC [2014] SFTD 1341: Considered the compatibility of TOAA legislation with EU free movement of capital principles.

Legal Reasoning

The tribunal's legal reasoning unfolded across three primary areas:

1. Discovery Assessments under s29 TMA 1970

The tribunal affirmed that HMRC validly discovered a tax insufficiency in Mr. Hoey's assessments. It emphasized that discoveries need not involve new information but require honest and reasonable identification of tax gaps. The process adhered to the procedural safeguards, with assessments issued promptly to avoid staleness.

2. HMRC's Discretion under s684(7A) ITEPA 2003

The tribunal recognized HMRC's broad discretion to disapply PAYE regulations. It concluded that this discretion was not only possessed by HMRC but also beyond the tribunal's jurisdiction to scrutinize. The statutory provisions were interpreted to grant HMRC significant latitude in tax collection mechanisms.

3. Application of TOAA Legislation

The tribunal analyzed whether Mr. Hoey's employment arrangements triggered TOAA provisions, involving the transfer of assets to offshore trusts. It concluded that:

• The creation of employment contracts with Penfolds/Hamilton constituted asset transfers.
• The taxable income of these offshore entities was effectively nil, as deductions offset income received.
• Mr. Hoey failed to meet the motive defense under s737 ITA 2007, as the arrangements were deemed tax avoidance schemes.
• The TOAA's impact on free movement of capital under EU law was justified as a proportionate response to prevent tax avoidance.

Impact

This judgment reinforces HMRC's authority to conduct thorough discovery assessments and exercise broad discretion in tax collection. It underscores the judiciary's role in upholding anti-avoidance measures, particularly against sophisticated offshore schemes. For future cases, this decision sets a precedent for interpreting the limits of taxpayer defenses against HMRC's retrospective tax claims and the application of EU principles in domestic tax legislation.

Complex Concepts Simplified

Discovery Assessments

Discovery Assessments refer to HMRC's power to reassess a taxpayer's liability when a loss of tax is discovered after the original assessment. This can occur without new information but requires HMRC to act reasonably and promptly upon identifying the insufficiency.

Section 684(7A) ITEPA 2003

This section grants HMRC discretion to override PAYE regulations, shifting the responsibility of tax payment from the employer to the employee in specific circumstances. It broadens HMRC's ability to collect tax directly from individuals when deemed appropriate.

Transfer of Assets Abroad Act (TOAA) 2007

The TOAA is an anti-avoidance measure aimed at preventing UK taxpayers from transferring assets to overseas entities to evade taxes. It imposes tax charges on income enjoyed abroad as a result of asset transfers, counteracting schemes designed to conceal earnings.

Motive Defense

The Motive Defense under s737 ITA allows taxpayers to avoid tax charges if they can prove that the primary purpose of their transactions was not tax avoidance. This requires demonstrating that transactions were genuine commercial activities.

Free Movement of Capital

This EU principle prohibits restrictions on the flow of capital between member states and third countries. In the context of tax legislation like TOAA, any measures that impede this freedom must be justified and proportionate to their tax avoidance objectives.

Conclusion

The Hoey v. Revenue & Customs judgment elucidates the robust mechanisms HMRC possesses to combat tax avoidance through discovery assessments and broad regulatory discretion. By validating the application of s29 TMA 1970 and upholding HMRC's s684(7A) ITEPA 2003 discretion, the tribunal reinforced the authority of tax authorities in retrospective assessments. Additionally, the nuanced handling of the TOAA legislation in alignment with EU free movement principles signifies a balanced approach to anti-avoidance measures. This case serves as a critical reference point for both taxpayers and legal practitioners in navigating the complexities of tax compliance and the evolving landscape of tax avoidance strategies.

Moving forward, taxpayers must exercise heightened diligence in understanding the implications of offshore employment structures and the potential for retrospective tax claims. Legal professionals should note the tribunal's stance on the necessity of genuine commercial transactions and the limited scope of taxpayer defenses against well-founded HMRC investigations.