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  • Two Wrongs Don’t Make a Right

    14 January 2021

    Alexander Wilson

    Right? Wrong (sometimes).

    We wait for the UT decision in the taxpayer’s appeal in the case of Hoey, which is due to be published imminently.

    If the UT follows the reasoning of the recent FTT case of Lancashire, a significant number of taxpayers facing a charge to income tax as a result of the disguised remuneration legislation could find a welcome reprieve.

    The curious feature of Lancashire is that the taxpayer argued that the agency legislation (s.44 ITEPA 2003) applied in his case. It is surprising to see a taxpayer advancing that a form of disguised employment legislation does apply to him, however in Lancashire, the FTT found that on the facts presented there that the disguised employment rules interacted with the disguised remuneration legislation to largely negate the additional tax the taxpayer was being asked to pay by HMRC.

    In anticipation of the UT decision in Hoey, we present an overview of three recent FTT decisions; Hoey, Higgs and Lancashire. All three cases were lead appeals in a larger number of cases and all of them related to taxpayer workers who had used disguised remuneration loan schemes of various types. Each taxpayer had provided services and received payments on which no income tax had been paid.


    In the Hoey case, HMRC claimed to have exercised their discretion under the PAYE regulations to absolve the deemed employer of their obligation to account for PAYE. 

    Further, HMRC claimed that the FTT had no jurisdiction to question HMRC’s use of that discretion; this was a matter of public law on which only the High Court had power to interfere.

    The judgment is substantial (at 40 pages with 186 paragraphs) and deals with a number of issues, such as the application of EU law and transfer of assets abroad legislation.

    The effect of HMRC’s exercise of discretion was that the taxpayer was liable to account for the income tax liability that otherwise would have been collected from the notional employer.

    The FTT agreed with HMRC, declaring that it could not interfere with HMRC’s exercise of discretion (though it could determine whether the result of that exercise of discretion had the effect that HMRC thought it did).

    Why was this important?

    The taxpayer sought to argue that his liability to income tax should be reduced by the amount of income tax that should have been deducted at source by the notional employer, even though no such deduction at source had been made. This was because the PAYE regulations state that the worker should receive such a credit, even if no deduction had been made at source unless HMRC had exercised its discretion to absolve the employer of that liability (which can only be done if certain conditions are met).

    HMRC’s exercise of discretion was fatal to the taxpayer’s position.

    EU Law

    It is of additional note that the taxpayer also sought to argue that the charge to income tax offended against the EU right to free movement of capital.

    The FTT disagreed; the aim of preventing tax avoidance was a legitimate reason to inhibit the free movement of capital and the measures were reasonable.


    The FTT judgment in Higgs was given after Hoey and the tribunal asked the parties for representations in the light of the earlier judgment.

    In this case, the FTT took a similar line; that the FTT had no jurisdiction to question the exercise of discretion by HMRC, its power was limited to looking at whether the correct amount of tax had been paid.

    The point was made that the PAYE regulations were concerned with the collection of income tax and not how much income tax was payable.

    The FTT went even further and declared that HMRC could exercise its discretion under the PAYE regulations (to shift the PAYE liability from the notional employee to the worker) even with retroactive effect or retrospectively.


    The judgment in the Lancashire is behemothic, at 141 pages with 351 paragraphs and the FTT in that case also dealt with a large number of issues.

    Lancashire was argued without reference to either Hoey or Higgs but dealt with a similar approach by the taxpayer.

    In this case, the taxpayer had provided services and received payments from a trust in the Isle of Man and it had been claimed that no income tax was due as a result of the double taxation treaty between the UK and that jurisdiction.

    In something of an about turn, the taxpayer argued that the agency legislation applied to the engagement, so that income tax did in fact arise on all monies paid. As a consequence, he claimed that he was due the credit to his income tax position as was sought in Hoey and Higgs.

    Just before the appeal was heard, HMRC issued a letter to the taxpayer claiming that HMRC had exercised its discretion to absolve the notional employer of their PAYE liability and pass it to the taxpayer.

    In this case, the FTT declared that HMRC had a power to make an assessment against the notional employer under the PAYE regulations (reg. 80) but had a limited time of four years in which do so (as the TMA 1970 applied). It was in that time only that HMRC could then exercise its discretion to shift that liability to the worker (reg. 81).

    HMRC was out of time.

    The FTT reached this conclusion despite agreeing that it had no jurisdiction to go behind HMRC’s exercise of discretion. On this, the tribunal was on the same footing as it was in the other two cases.

    The distinction here was that the FTT found that the option to exercise any discretion was simply not available to HMRC at the point in time when HMRC declared that it had done so.


    All three appeals considered a broad range of interconnected issues. Lancashire provides a beacon of hope to some taxpayers who used certain tax avoidance arrangements.

    However, the argument will only arise (and succeed) if the facts align so that the interaction between the PAYE regulations and the other pertinent legislation produce the hoped-for outcome.

    The UT decision will likely confirm the impact of the PAYE regulations on the income tax outcomes of such schemes, either confirming Lancashire or condemning it to irrelevance.

    As demonstrated by the reasoned divergence of conclusions by the FTT judges in these cases, the legislation in this area is particularly complex and anyone hoping to utilise such arguments would be well-advised to obtain high quality tax advice.

    If you would like to find out more about this issue please get in touch with Alexander or Thomas.