Judgment summary
Mr Bates appealed against a discovery assessment of £20,716.40 issued on 18 October 2013 for the tax year 2010-11 (1). HMRC's case was that Mr Bates had used the Darwinpay contractor loan scheme, receiving £69,030 described as 'loans' from an offshore trust, which HMRC said were in substance earnings taxable under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (2).
Mr Bates argued that HMRC bore the burden of proving both that the Loans were earnings and that a valid discovery had been made, and that HMRC had not discharged that burden (3). He also raised alternative arguments that the Assessment overcharged him and would give rise to double taxation because of the loan charge legislation (4).
The Tribunal dismissed the appeal, finding that the Loans were earnings taxable under section 62 and that the Assessment was a valid, in-time discovery assessment (5, 54, 55).
Background
Mr Bates was an employee of the Darwinpay Partnership, an Isle of Man partnership, during the 2010-11 tax year (23(1)). The Darwinpay arrangements involved individuals becoming employees of the Isle of Man partnership, which supplied their services to end users who paid a fee to the partnership; the partnership paid a small salary and a much larger amount, described as a loan, was paid from a trust funded by the partnership (20).
Mr Bates' salary for the year was £8,909, but he also received £69,029.78 from the Darwinpay Trust and benefits in kind of £3,224 (23(3)). Underlying clients were billed at a day rate significantly higher than his salary, for example £450 per day (23(4)). The amounts from the Darwinpay Trust were funded from payments by underlying clients via the Darwinpay Partnership (23(5)). Mr Bates did not submit a self-assessment return for 2010-11 (23(6)).
HMRC discovered a loss of tax on 10 September 2013 and issued the Assessment on 18 October 2013 (28(2)).
Core dispute
The core dispute was whether the sums described as 'Loans', totalling £69,030, received by Mr Bates from the Darwinpay Trust in 2010-11 constituted earnings within the meaning of section 62 ITEPA and were therefore liable to income tax as employment income (2, 31).
A further issue was whether HMRC had made a valid discovery within the meaning of section 29 TMA and issued the Assessment within the four-year time limit under section 34 TMA, including whether HMRC needed to identify the specific discovering officer (3, 37-46).
Mr Bates also raised alternative arguments that the Assessment overcharged him and that it would give rise to double taxation because of the operation of the loan charge legislation (4, 48).
Court findings
The Tribunal found as a fact that the amounts described as 'loans' were, on the balance of probabilities, unconditional payments to Mr Bates with no intention that they would ever be repaid, noting that the loans were written off in the Darwinpay Trust accounts and that it was not credible that Mr Bates would accept minimum wage while the balance of the client fee was merely 'lent' to him with a repayment risk (26).
Applying RFC 2012 plc (Rangers) v Advocate General for Scotland [2017] UKSC 45, the Tribunal held that the payments had the character of employment income and were earnings within section 62, regardless of the absence of Mr Bates' direct contractual entitlement (31, 32). In the alternative, the Tribunal found that even if the Loans had been genuine loans intended to be repaid, the same result would follow, because the charge to income tax arose when salary was redirected from the employer to the Darwinpay Trust (33-35).
On discovery, the Tribunal accepted Officer Hargreaves' evidence, applying the subjective and objective tests from Anderson v HMRC [2018] UKUT 159 (TCC), and found that an HMRC officer formed a concluded belief of an insufficiency of tax on 10 September 2013, and that another officer issued the Assessment on 18 October 2013, within the four-year time limit under section 34 TMA (38-46). The Tribunal held that HMRC was not required to identify the specific discovering officer (44).
The Tribunal found that Mr Bates had not provided evidence to show he was overcharged, citing Bi-Flex Caribbean Ltd v Board of Inland Revenue (Trinidad and Tobago) (1990) 63 TC 515 and Nicholson v Morris [1976] STC 269 (49-51). It further held that the double taxation argument relating to the loan charge legislation was not within its jurisdiction, and that in any event HMRC stated the Assessment would be taken into account in loan charge calculations (52).
Outcome
The Tribunal dismissed Mr Bates' appeal, holding that the Loans, or amounts equivalent to them, were taxable employment income, that the Assessment was a valid in-time assessment, and that Mr Bates had not shown he was overcharged or established any valid collateral ground to allow the appeal (54, 55).
Major issues / areas of contention
- Whether sums described as 'Loans' received under the Darwinpay contractor loan scheme constituted earnings within section 62 ITEPA
- Whether the payments were genuine loans with a repayment obligation or unconditional payments in substance
- Whether HMRC discharged the burden of proving a valid discovery under section 29 TMA
- Whether HMRC was required to identify the specific officer who made the discovery
- Whether the Assessment was made within the four-year time limit under section 34 TMA
- Whether Mr Bates showed that the Assessment overcharged him
- Whether the loan charge legislation gave rise to double taxation, and whether this was within the Tribunal's jurisdiction