Hoey v HMRC [2022] EWCA Civ 656

If HMRC could have chased your offshore employer for PAYE and didn't, does that mean you get credit as though it had been paid? The Court of Appeal's answer closed off one of the more resourceful arguments in disguised remuneration litigation.

Why This Case Matters

Hoey is a significant procedural and substantive decision in the long-running disguised remuneration and contractor loan scheme litigation, addressing a question distinct from whether such schemes work at all, which had already been settled decisively against taxpayers by cases including HMRC v Murray Group Holdings (the Rangers FC case). Once it is established that a loan arrangement was, in substance, disguised remuneration, Hoey confirms how HMRC can go about collecting the resulting tax: directly from the individual contractor under its statutory discretion, without first having to pursue PAYE recovery from an offshore or otherwise elusive deemed employer. This closed off a PAYE credit argument that had real practical appeal to affected contractors.

The Facts

The taxpayer was a UK-based IT contractor who provided services to UK end users. His arrangements involved an offshore employer making contributions to an employee benefit trust, which in turn made loans to the taxpayer, a structure typical of the disguised remuneration and contractor loan schemes marketed over roughly two decades. HMRC assessed the taxpayer directly for income tax on the loan payments, treating them as disguised earnings, relying on its discretion under section 684(7A)(b) ITEPA 2003 to collect tax directly from the individual rather than pursuing PAYE recovery from the offshore employer through the regulation 80/81 machinery.

Procedural History

• First-tier Tribunal: found substantially for HMRC on the underlying disguised remuneration issues.
• Upper Tribunal (Hoey v HMRC [2021] UKUT 82 (TCC), 12 April 2021): held the First-tier Tribunal had not erred in concluding it had no jurisdiction to determine entitlement to a PAYE credit once HMRC had exercised its discretion not to pursue the deemed employer, and that the transfer of assets abroad provisions were not separately engaged on the facts.
• Court of Appeal (13 May 2022): dismissed the taxpayer's further appeal, upholding HMRC's discretion under s684(7A)(b) ITEPA 2003 to assess the individual directly.

The Issue

Whether HMRC's discretion under section 684(7A)(b) ITEPA 2003 to assess an individual directly for income tax on disguised remuneration payments is constrained by, or subordinate to, its separate powers under PAYE regulations 80 and 81 to pursue the deemed employer, such that a taxpayer is entitled to credit for PAYE that should have been operated by the employer wherever HMRC could, in principle, have exercised those regulation 80/81 powers instead of assessing the individual.

The Ratio Decidendi

The Court of Appeal's reasoning reflects a practical recognition that, in offshore disguised remuneration structures, pursuing the deemed employer under regulations 80 and 81 is frequently impractical or impossible, the employer may be dissolved, uncooperative, or outside the UK's effective enforcement reach, and that Parliament cannot have intended HMRC's ability to collect tax properly due from the individual recipient to depend on the practical availability of a parallel route against a potentially unreachable employer.

Regulations 80, 81 and Section 684(7A)(b)

The PAYE regime ordinarily places the primary obligation to deduct and account for income tax on the employer, with regulation 80 allowing HMRC to determine the amount an employer should have deducted, and regulation 81 allowing a direction transferring liability to the employee in limited circumstances. Section 684(7A)(b) ITEPA 2003 gives HMRC a separate, discretionary power to assess an individual directly for income tax where PAYE has not been operated correctly, without that power being expressly conditioned on the regulation 80/81 machinery having first been used or exhausted against the employer. Hoey confirms these are genuinely parallel, independent routes, and that HMRC's choice between them is not, at least on the facts of a case like this, open to challenge on the basis that the individual should benefit from a credit reflecting the route not taken.

Practitioner Application

• Do not rely on a PAYE credit argument based solely on HMRC's theoretical ability to pursue the employer instead. Hoey confirms this argument does not succeed merely because regulation 80/81 recovery from the employer was, in principle, available.
• Focus disguised remuneration defence work on the underlying characterisation and quantum issues, and on genuine procedural or time limit defences, rather than on HMRC's choice of collection route, which Hoey confirms is largely a matter for HMRC's discretion.
• Where a client faces a direct assessment under s684(7A)(b), address the substantive disguised remuneration position and any reasonable excuse or time limit arguments, since the PAYE credit route Hoey addressed is now settled against taxpayers at Court of Appeal level.
• Read Hoey alongside the wider disguised remuneration case law, including the Rangers FC line of authority on whether loan arrangements constitute disguised earnings in the first place, since the two lines of argument address genuinely separate questions.

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