Hoey & Ors v Revenue & Customs: Defining the Boundaries of Section 684(7A)(b) ITEPA in PAYE Credit Availability

1. Introduction

The case of Hoey & Ors v Revenue & Customs ([2022] EWCA Civ 656) presents a pivotal moment in the interpretation and application of tax legislation in the United Kingdom, specifically concerning the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the Pay As You Earn (PAYE) system. The judgment was delivered by the England and Wales Court of Appeal (Civil Division) on May 13, 2022, with contributions from Lady Justice Simler, Lord Justice Phillips, and Sir Launcelot Henderson.

The core issue revolves around the use of Section 684(7A)(b) of ITEPA, which grants HM Revenue & Customs (HMRC) discretion to relieve certain payers from complying with PAYE obligations under specific circumstances. This decision has significant implications for taxpayers employing contractors through offshore entities and the subsequent tax liabilities arising from such arrangements.

2. Summary of the Judgment

The Court of Appeal addressed multiple facets of the case, beginning with the judicial review of HMRC's decision to exercise the discretionary power under Section 684(7A)(b) ITEPA. The appellants, led by Mr. Hoey, challenged HMRC's refusal to allow PAYE credits, asserting that HMRC's use of the 7A power unlawfully deprived them of accrued tax credits.

The court meticulously examined the statutory provisions, the application of the 7A power, and the intersection with the Transfer of Assets Abroad (TOAA) provisions. It concluded that HMRC's exercise of the 7A power was both within its legal discretion and consistent with the intended purpose of the PAYE system. Consequently, the appellants' claims for judicial review were dismissed, affirming that PAYE credits were not available in their circumstances.

3. Analysis

3.1 Precedents Cited

The judgment extensively references prior case law to elucidate the principles governing PAYE obligations and the discretionary powers of HMRC. Notably:

RFC 2012 plc (formerly Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45: Established that PAYE obligations extend to earnings paid through third parties, confirming that such payments constitute taxable employment income.
Clark (Inspector of Taxes) v Oceanic Contractors Inc [1983] 2 AC 130: Clarified the criteria for determining the presence of a trading establishment in the UK, influencing the interpretation of PAYE obligations.
R (O) v Secretary of State for the Home Department [2022] UKSC 3: Provided guidance on statutory construction, emphasizing the importance of the context and language used by Parliament.
MccArthy v Mccarthy & Stone Plc [2007] EWCA Civ 664: Affirmed that PAYE liability remains with the employee, aligning with the principle that the tax obligation resides based on primary legislation.

These precedents collectively underpin the court's reasoning, reinforcing the legislative intent and the scope of HMRC's powers under ITEPA.

3.2 Legal Reasoning

The court delved into a thorough statutory analysis of Section 684(7A)(b) of ITEPA, which provides HMRC with the discretion to relieve payers from PAYE obligations if deemed "unnecessary" or "not appropriate." The key points of legal reasoning include:

Interpretation of Section 684(7A)(b): The court held that the provision is broad and allows retrospective application, meaning HMRC can apply it even after PAYE obligations have accrued. This interpretation rejects the claimant's argument that the power is limited to prospective use only.
Prima Facie Case: The court emphasized that HMRC is entitled to exercise discretion based on the specific circumstances of each case. In Hoey's scenario, the arrangement involved offshore employers and intermediaries, fitting the criteria under which HMRC may invoke the 7A power.
Consistency with Legislative Intent: Aligning with the principle of legality, the court concluded that HMRC's decision aligns with the statutory framework, ensuring that tax obligations are appropriately assigned and collected.
Jurisdiction of Tax Tribunals: The judgment clarified that tax tribunals, such as the First-tier Tribunal (FTT) and Upper Tribunal (UT), lack jurisdiction to review the lawfulness of HMRC's discretionary exercises under primary legislation like Section 684(7A)(b).

Additionally, the court addressed the Transfer of Assets Abroad (TOAA) provisions, determining that the Employers' profits were nil because the payments to Employee Benefit Trusts (EBTs) were deductible as wholly and exclusively incurred for trade purposes. This assessment negated the applicability of TOAA charges.

3.3 Impact

The decision in Hoey & Ors v Revenue & Customs has far-reaching implications for both employers and employees engaged in offshore contracting arrangements. The key impacts include:

Clarification of HMRC’s Discretion: The judgment solidifies HMRC's broad discretionary powers under Section 684(7A)(b) ITEPA, affirming that it can relieve employers from PAYE obligations even retrospectively.
Limitations on Tribunal Jurisdiction: Tax tribunals are restricted from reviewing HMRC's lawfulness in exercising discretionary powers under primary legislation, emphasizing the separation between administrative decisions and tribunal jurisdictions.
Tax Planning Considerations: Employers must exercise caution when structuring remuneration through offshore entities and EBTs, understanding that HMRC retains significant discretion to override standard PAYE obligations.
Employee PAYE Credits: Employees involved in similar schemes will find that their ability to claim PAYE credits may be severely limited if HMRC opts to relieve their employers from PAYE obligations.

Future cases involving complex remuneration structures will likely reference this judgment to determine the extent of HMRC’s powers and the resulting tax liabilities.

4. Complex Concepts Simplified

4.1 Section 684(7A)(b) ITEPA

This is a provision within the ITEPA that grants HMRC the authority to decide whether certain payers (typically employers or their agents) should be exempted from withholding PAYE taxes on behalf of their employees. If HMRC deems it "unnecessary" or "not appropriate" for the payer to comply with PAYE obligations, it can exercise this discretion, thereby shifting the tax responsibility directly to the employee.

4.2 PAYE Credit

PAYE Credit refers to the tax credit that an employee is entitled to under the PAYE system. It represents the income tax that should have been deducted by the employer but was not. If PAYE is not correctly withheld, employees can claim this credit to offset their tax liabilities.

4.3 Transfer of Assets Abroad (TOAA)

TOAA provisions are anti-avoidance measures designed to prevent UK residents from transferring assets abroad to avoid paying income tax. These rules impose charges on individuals who have the power to enjoy income from assets outside the UK as a result of certain transactions.

4.4 Wholly and Exclusively Rule

This is a principle in UK tax law that allows businesses to deduct expenses from their taxable profits only if the expenses are incurred wholly and exclusively for the purposes of the trade. Any expense not meeting this criterion is non-deductible, thereby increasing the taxable profit.

5. Conclusion

The Court of Appeal's judgment in Hoey & Ors v Revenue & Customs serves as a definitive interpretation of HMRC's discretionary powers under Section 684(7A)(b) of ITEPA. By upholding the broad application and retrospective power of this section, the court has reinforced HMRC's ability to manage complex employment structures involving offshore entities and EBTs.

The dismissal of the appellants' claims underscores the judiciary's deference to administrative discretion in tax matters, particularly when grounded in clear statutory authority. Moreover, the ruling delineates the boundaries of tax tribunal jurisdictions, preventing them from encroaching upon primary legislative powers afforded to HMRC.

For employers and employees alike, the judgment emphasizes the necessity of meticulous compliance with PAYE obligations and the limited recourse available when HMRC opts to exercise its discretionary powers. It also highlights the critical interplay between different facets of tax legislation, such as PAYE and TOAA provisions, in shaping tax liabilities.

Overall, this case not only clarifies the scope of HMRC's discretionary powers but also sets a precedent for future tax disputes involving complex remuneration arrangements and offshore contracting schemes. Stakeholders must now navigate these clarified legal landscapes with an informed understanding of their obligations and the potential limitations imposed by HMRC's broad-reaching discretion.