PAYE Regulations: The Case of Stephen Hoey

The Stephen Hoey case concerned whether or not HMRC were entitled to raise discovery assessments and to exercise discretion within the income tax legislation to disapply PAYE regulations. The case also considered whether the taxpayer could be subject to taxation under the transfer of assets abroad legislation. The importance of the case is, even though we anticipate it and similar cases will be the subject of an appeal to the higher courts, that it paves the way for HMRC to seek the tax on income from the taxpayer and not from the employer.

HMRC state that they exercised a general discretion available to them under s684(7A) ITEPA 2003 to disapply the PAYE regulations. Disapplying the regulations results in the effective burden of paying the tax being that of the employee. 

Under the PAYE regulations the normal process would be to collect from the employer. The decision was made not to pursue the end users because HMRC considered that they knew nothing about the tax avoidance arrangements. 

PAYE regulations contain specific provisions (Regulation 72 and Regulation 81) which permit HMRC to collect the tax due from the employee rather than the employer, but only in very specific circumstances. This does not therefore sit easily with s684(7A), which, reading the plain words, gives HMRC a very wide ranging discretion to disapply the PAYE regulations in circumstances where they consider it “unnecessary or not appropriate” to pursue the employer.

Prior to amendments made to the PAYE regulations, HMRC did not have the discretion to choose whether to collect tax from the employer or the employee: HMRC had to follow the regulations which require a direction to transfer PAYE to the employee.

The tribunal found that the wording of s684(7A) provided a very wide discretion to HMRC and effectively overrode Regulations 72 and 81. The position is not so clear though.

S684 ITEPA provides that the commissioners must make regulations (“PAYE regulations”) with respect to the assessment, charge, collection and recovery of income tax in respect of all PAYE income and that those provisions must include any such provision as is set out in a list contained within that section. 7A provides for the exclusion of payments of such description as may be specified from the operation of the regulations in such circumstances as may be specified. Whilst the case appears to have permitted HMRC to have specified payments that are excluded, it does not appear to have recognised that the legislation which states:

“[The provision that may be made in PAYE regulations includes] any such provision as is set out in the following list.”

The legislation doesn’t appear to require the ‘provision’ to be made in PAYE regulations since it ‘may’ be made but ‘may’ does not mean it has to be. Was it therefore the intention of the legislation to provide HMRC with the freedom to choose when and if a provision falls within PAYE or not? If that were the case, what was the point of the Rangers case, which simply stated the liability was that of the employer…..?

The Stephen Hoey case centred on the fact that the employee knew of the avoidance to the detriment of the person that would have been responsible for operating PAYE. Maybe in those circumstances, the provision would be justified in line with treating taxpayers fairly. Would the same be true where the employer and maybe employee were advised on the tax treatment based on the then known treatment (as per case law)? If the provisions were applied to one case but not another, HMRC would not be treating taxpayers fairly. For example, if a case had resulted in an employer being liable under PAYE regulations in respect of contributions to an employee benefit trust (EBT), the employer could not settle the liability and became insolvent and HMRC had not sought to seek the liability from the employee, would it be fair in a similar case to seek the liability from the employee?

The risk with the decision in Stephen Hoey is that HMRC will see it as a right to pursue the employee probably regardless of fairness (sorry HMRC). It will take a strong-hearted and well-funded employee to defend such a challenge – it would be advisable to record associated costs of such a challenge!

Our advice is likely to be to defend against the decision in Stephen Hoey from the outset and also consider whether HMRC have the ability to assess!

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