Higgs – FTT lacks jurisdiction to disapply the PAYE Regulations

In Philip Higgs and Others v HMRC [2020] UKFTT 117 (TC), the First-tier Tribunal (FTT) held that it did not have jurisdiction to determine whether HMRC is entitled to exercise a discretion under section 684(7A), ITEPA, to disapply the PAYE Regulations.

Background 

The appellants were lead appellants in litigation between HMRC and various taxpayers who had participated in a tax avoidance arrangement. The arrangement was designed to reduce the income tax liability of the appellants, who received two payments: 

(i) a payment of the minimum wage through an off-shore company;  and 

(ii) payment of sums through an employee benefit trust (EBT) which purported to be in the form of discretionary loans. 

The appellants argued that they were entitled to a 'credit' for income tax which they said should have been deducted by the end-user of their services, which was a UK-resident party in the contractual chain liable to deduct tax under the Income Tax (Pay As You Earn) Regulations 2003 (as amended) (the PAYE Regulations). 

The appellants' position was that as a result of the operation of the PAYE Regulations, such credit would arise irrespective of the fact that tax was not in fact deducted at source through the PAYE system. 

The credit would reduce the amount of additional tax sought from the appellants under various assessments/closure notices which HMRC had issued to the appellants and which had been appealed.

The FTT had to consider, as a preliminary issue, the following: 

1. the calculation of a person's income tax liability and the justiciability of the PAYE Regulations before the FTT;

2. the extent of the FTT's jurisdiction to consider public law matters, including section 684(7A)(b), Income Tax (Earnings and Pensions) Act 2003 (ITEPA); and

3. whether section 684(7A)(b), ITEPA, could apply retrospectively.

FTT decision 

With regard to issue 1, the appellants argued that the PAYE Regulations, section 684(7A)(b), ITEPA, and the relevant provisions contained in the Taxes Management Act 1970 (TMA) should all be treated as if they operated consecutively and each in respect of the assessment to tax. However, in the view of the FTT, that submission ignored the 'classic division' of tax into the three separate aspects of  liability, assessment, and collection. The FTT concluded that the PAYE Regulations applied only to matters of collection, in respect of which the FTT had no jurisdiction. Accordingly, the PAYE Regulations were not justiciable in the FTT.

On issue 2, the FTT held that, whilst the precise extent of the FTT's jurisdiction to determine legal questions (including public law questions) which arose in, and were ancillary to, a statutory appeal, was not wholly clear, it was apparent from principle and from authority that it did have a limited jurisdiction to determine such questions. In Hoey v HMRC [2019] UKFTT 489 (TC), the FTT decided that the lack of a general public law jurisdiction did not prevent it from considering "whether or not the discretion which HMRC claim to have exercised is genuinely what they say it is". In that case, the FTT accepted that it was possible for it to consider the 'effect' of HMRC's section 684(7A)(b) decision. However, in the instant appeal, the FTT indicated that it must first be seized of jurisdiction before it is able to express a view and, given its conclusion in relation to issue 1, the FTT concluded that it did not have that jurisdiction and accordingly could not express a view. It followed that because the question as to the effect of section 684(7A)(b) arose in a statutory appeal, in which the FTT had no jurisdiction to consider the PAYE Regulations, the FTT had no jurisdiction to consider the exercise by HMRC of its discretion under section 684(7A)(b). 

With regard to issue 3, the FTT held that the aims and applications of section 684(7A)(b) overlapped with those of regulations 72 and 80 of the PAYE Regulations (which permit transfer of liability in certain restricted circumstances). It followed that they were not mutually exclusive, and that the generality of the former should not be narrowly construed in order to avoid infringing the principle that the specific overrode the general, as argued by the appellants. 

The FTT found that, whilst overlapping provisions undoubtedly made it harder for the courts to identify the purpose of any given provision, it was open to Parliament to enact such provisions if it wished to do so. The FTT did not agree with the appellants' submission that giving section 684(7A)(b) a wide, retrospective, interpretation would undermine the careful balance within the PAYE Regulations. In the FTT's view, Parliament intended that HMRC should have both the discretion conferred on it by section 684(7A)(b) and the powers provided to it by regulations 72 and 80. 

The appellants' primary submission that section 684(7A)(b) had to operate prospectively, was also rejected. The FTT stated that there was nothing in the statutory wording that cut down the exercise of the discretion to a prospective application only. So long as the discretion was properly exercised in accordance with the statutory requirement, there was no difficulty with the decision having prospective and/or retrospective effect.

Comment 

The FTT's decision in this appeal follows that in Hoey last year, which raised similar issues, and will be of interest to those taxpayers  who utilised similar 'contractor' structures. Unfortunately, for those taxpayers, the FTT has again concluded that it does not have jurisdiction to determine issues relating to the exercise of HMRC's purported discretion to disapply certain PAYE obligations.  

However, the FTT's conclusion on issue 1 does not sit comfortably with the Court of Appeal's judgment in Archer v HMRC [2017] EWCA Civ 1962. In Archer, it was held that the amount of tax to pay is a critical part of an assessment and/or closure notice. One would assume, therefore, that that is something which the FTT is necessarily able to address in an appeal against an assessment/closure notice. This would also be in accord  with the assessment and appeal provisions contained in the TMA. By focusing on the distinction between collection and assessment, taxpayers may have little option other than to run their arguments in judicial review proceedings commenced in the Administrative Division of the High Court (which would generally conflict with the comments of the Court of Appeal in R (Glencore Energy) v HMRC [2017] EWCA Civ 1716) and/or collection proceedings in the County Court.  

In respect of the overlapping nature of the PAYE Regulations and section 684(7A)(b), ITEPA, if the FTT is correct, then the detailed provisions contained in regulations 72 and 80 of the PAYE Regulations, which contain a number of important safeguards, can be easily overridden by the much broader power conferred by section 684(7A)(b), ITEPA. Likewise, the FTT's findings in respect of the retrospective nature of the power contained in section 684(7A)(b) is cause for concern given that it would appear that HMRC can, in effect, 'forgive' prior non-compliance with the PAYE Regulations. 

We are instructed in the Hoey case which is on appeal to the Upper Tribunal and, given the importance of these issues, it is to be hoped that the position will become clearer in due course. 

The decision can be viewed here.