Judgment summary
This is an appeal against a discovery assessment issued on 25 January 2014 under section 29(1) of the Taxes Management Act 1970 for the tax year ended 5 April 2010, in the sum of £7,534.40 (1).
The assessment was based on payments of £36,301 made by Aston Management Limited (AML) to an associated Employee Benefit Trust (EBT), which then loaned the sum to the Appellant, treated by HMRC as employment earnings (1).
The Tribunal found that the Appellant was employed by AML during the relevant year, receiving £9,712 in salary (from which £646.40 tax was deducted) and £36,301 paid to the EBT and loaned to her (14, 16).
Applying the Supreme Court decision in RFC 2012 plc v Advocate General for Scotland (Rangers), the Tribunal held that the payments to the EBT were earnings for the purposes of employment income tax, regardless of the loan arrangement (28(1)).
The Tribunal found the discovery assessment valid, both subjectively and objectively, and made within the four-year time limit under section 34 TMA 1970 (28(4)).
The appeal was dismissed (34).
Background
AML was a company incorporated in the Isle of Man operating an employment business, under which employees received a salary subject to PAYE and additionally received interest-free loans from an associated Employee Benefit Trust, described in AML's own 'Scheme Overview' document as 'tax efficient remuneration planning' (11).
The Appellant, an IT consultant, was engaged in 2009 to provide services to the European Medicines Agency through Intrasoft International SA, with AML as her employer (12, 13, 14).
In the tax year to 5 April 2010, AML paid the Appellant £9,712 in salary (with £646.40 deducted as PAYE) and £36,301 to the EBT, which was then loaned to her, with the loan benefit valued at £707 (14(1)).
No tax return was submitted for the Appellant for that year, nor had HMRC issued a notice requiring one (17).
On 5 November 2013, an HMRC officer identified an insufficiency of tax because the loan amount had not been treated as earnings, and the Assessment was raised on 25 January 2014 (18).
AML appealed the Assessment on the Appellant's behalf on 21 February 2014 (19). The appeal was not substantively progressed while lead litigation, first Rangers (to 2017) and then Hoey v HMRC (2019 to 2022), was ongoing (20).
On 26 July 2022, HMRC confirmed they would not seek payment from the end users of the Appellant's services (21). Following further correspondence and a statutory review upholding the Assessment on 11 March 2024, the Appellant brought this appeal on 9 April 2024 (22-25).
A further assessment for the tax year ending 5 April 2011, in the sum of £28,597, was initially also challenged but was withdrawn by HMRC because a tax return had been submitted for that year, restricting HMRC's powers under section 29 TMA 1970; that assessment was not before the Tribunal (26).
Core dispute
The Appellant argued that the sums paid by AML to the EBT and then loaned to her were loans, not employment income, and should not be taxed under the Income Tax (Earnings and Pensions) Act 2003 (28, Ground 1).
She further argued that she participated in the AML scheme in good faith on professional advice, that the scheme was not designed to avoid tax, and that the facts of her case were distinguishable from Rangers (28, Grounds 2 and 3).
She also contended that the discovery assessment was invalid, being based on an incorrect interpretation of the facts and law and issued after unreasonable delay (28, Ground 4).
Additional points raised at the hearing included whether HMRC had to prove her employment with AML, a query about the calculation of the Assessment, why the 2010 Assessment had not been withdrawn like the 2011 Assessment, and an argument that the AML arrangements were not of her making (30-33).
Court findings
The Tribunal found as fact that the Appellant was employed by AML, relying on P14 and P11D information submitted by AML to HMRC, AML's appeal on her behalf in 2014, and admissions in her grounds of appeal and signed witness statement that she participated in the AML scheme and received loans (14).
The Tribunal accepted that the Appellant entered into employment with AML in good faith, and recorded that HMRC made no criticism of her participation in the scheme (15).
Applying Rangers, the Tribunal held that the £36,301 paid by AML to the EBT constituted earnings and employment income at the point of payment, irrespective of the subsequent loan or its terms, because the payments were remuneration for her work (28(1)).
The Tribunal held that her good faith participation did not alter this analysis (28(2)), and that factual differences from Rangers did not change the fundamental point that the charge to tax on employment income extends to money paid as remuneration to a third party such as a trust (28(3)).
On validity, the Tribunal found that the HMRC officer both subjectively believed there was an insufficiency of tax for the year to 5 April 2010 and that this belief was objectively reasonable, given total remuneration of £46,013 against only £646.40 of tax accounted for by PAYE, and that the Assessment was made within the four-year time limit under section 34 TMA 1970 (28(4)).
The Tribunal confirmed that the calculation of the Assessment was accepted by the Appellant once explained at the hearing (31), and that the difference between the withdrawn 2011 Assessment and the upheld 2010 Assessment lay in whether a tax return had been submitted, which affected the restrictions under section 29(2) and (3) TMA 1970 (32).
The Tribunal held that even if the AML arrangements were not of the Appellant's making and she had signed no contract with AML, this would not affect the validity or amount of the Assessment, because she was remunerated for her work both by salary and by the payment to the EBT, and income tax arises in respect of both (33).
Outcome
The Tribunal dismissed the Appellant's appeal against the Assessment of £7,534.40 for the tax year ended 5 April 2010 (34).
Major issues / areas of contention
- Whether payments made by AML to an Employee Benefit Trust, subsequently loaned to the Appellant, constituted employment earnings under section 62 ITEPA 2003.
- Whether the principle in RFC 2012 plc v Advocate General for Scotland (Rangers) applied to treat EBT payments as taxable earnings regardless of the loan arrangement.
- Whether the Appellant's good faith participation in the AML scheme affected the tax treatment of the payments.
- Whether the discovery assessment under section 29(1) TMA 1970 was validly made, including the subjective and objective elements required.
- Whether the Assessment was made within the four-year time limit under section 34 TMA 1970.
- Whether the Appellant was in fact employed by AML.
- Why the 2010 Assessment was upheld while the 2011 Assessment was withdrawn, given the difference in tax return submission for each year.
- Whether the fact that the AML arrangements were established by others, and not signed by the Appellant, affected the validity or amount of the Assessment.