Lancashire & Ors v Revenue & Customs (INCOME TAX - whether the appellants are taxable on sums received under offshore partnership and trust) [2020] UKFTT 407 (TC)

“(a) an individual (“the worker”) personally provides, or is under an obligation personally to provide, services (which are not excluded services) to another person (“the client”), (b) the services are supplied by or through a third person (“the agency”) under the terms of an agency contract, (c) the worker is subject to (or to the right of) supervision, direction or control as to the manner in which the services are provided, and (d) remuneration receivable under or in consequence of the agency contract does not constitute employment income of the worker apart from this Chapter.” 65. For the purposes of s 44: (1) “ agency contract ” means “a contract made between the worker and the agency under the terms of which the worker is obliged to personally provide services to the client” (under s 47(1)), and (2) “remuneration” (a) does “not include anything that would not have constituted employment income of the worker if it had been receivable in connection with an employment apart from this Chapter, but (b) subject to paragraph (a), includes every form of payment, gratuity, profit and benefit” (under s 47(3)). 66. Where the conditions set out in s 44(1) are met: (1) “the services which the worker provides, or is obliged to provide, to the client under the agency contract are to be treated for income tax purposes as duties of an employment held by the worker with the agency”, and (2) “all remuneration receivable under or in consequence of the agency contract (including remuneration which the client pays or provides in relation to the services) is to be treated for income tax purposes as earnings from that employment” (under s 44(2)). 67. For the tax year 2002/03 the agency rules were set out in s 134 of the Income and Corporation Taxes Act 1988 but the parties did not suggest that those rules are materially different to the rules in s 44. 68. Where s 44 is engaged, the PAYE rules apply essentially as though the agency were the employer and the worker were an employee: (1) Income which is deemed to be taxable as earnings under s 44 is taxed as “general earnings” under s 10(2) and therefore falls within the definition of “PAYE income” under s 683. (2) Section 688 provides that, where s 44 applies, the relevant provisions in ITEPA (including s 710) have effect as if the relevant individual held an employment with or under the relevant agency. (3) The PAYE regulations provide that for the purposes of the regulations, “agencies are treated as employers” and “agency workers are treated as employees” (regulation 10(1)). On that basis, all references in the relevant provisions of the PAYE regulations set out below to “employers” and “employees” are to be read as including persons treated as such under s 44. 69. If the sums in dispute are taxable under s 44, on the face of it, the effect of above rules would be that the Partnership, as the agency/deemed employer, would be required to comply with the PAYE rules in respect of the resulting income tax due on those sums. However, it was common ground that the obligation to comply with the relevant PAYE rules would fall on the Clients under s 689: (1) Section 689 applies where: “(a) an employee [each lead appellant] during any period works for a person (“the relevant person”) who is not the employer of the employee [the Client], (b) any payment of, or on account of, PAYE income of the employee [each lead appellant] in respect of that period is made by a person who is the employer [as employer includes a party deemed to be such under s 44, the Partnership/Trust]… (c) PAYE regulations do not apply to the person making the payment [the Partnership/Trust]…, and (d) income tax is not deducted, or not accounted for, in accordance with the regulations by the person making the payment [the Partnership Trust]….” (under s 689(1). It was common ground that the Partnership would not be subject to the PAYE regulations for the purposes of (c) above; as a non-UK based partnership with no presence in the UK, it/the partners were outside the scope of the regulations. (2) Where the above conditions are satisfied, under s 689(2) “the relevant person”, the Client, is to be treated, for the purposes of the PAYE regulations, as making a payment of PAYE income of the employee (each lead appellant) of an amount equal to the amount given by s 689(3), namely: “(a) if the amount of the payment actually made is an amount to which the recipient is entitled after deduction of income tax, the aggregate of the amount of the payment and the amount of any income tax due, and (b) in any other case the amount of the payment.” (3) Therefore, as did not appear to be disputed, if these rules are in point, under s 689(3)(b), each Client would be treated as making payments of PAYE income of the relevant lead appellant equal to the amount of the earnings the lead appellant is deemed to receive under s 44. 70. The mechanism for collecting the resulting income tax due where the above provisions apply is set out in s 710. This applies to “notional payments” which include payments treated as made by virtue of s 689 (excluding payments made under s 689(3)(a)) and, for the purposes of this provision, any reference to an employer includes a reference to a person who is treated as making a payment by virtue of s 689(2): (1) Sub-s (1) provides that if an employer makes a notional payment of PAYE income of an employee it must, subject to and in accordance with the PAYE regulations, deduct income tax at the relevant time from any payment or payments the employer actually makes of, or on account of, PAYE income of the employee. (2) Under sub-ss (3) and (4) where the actual payments made are insufficient to enable the necessary deduction of income tax to be made, the employer must “subject to and in accordance with PAYE regulations, account to HMRC at the relevant time for an amount of income tax equal to the amount of income tax the employer is required, but is unable, to deduct”. 71. Regulation 62 states that if an employer (which again includes a relevant person under s 689) makes a relevant payment which is a notional payment: (1) the employer “must, so far as possible deduct tax required to be deducted in respect of a notional payment….from any relevant payment or payments which the employer actually makes to the employee at the same time as the notional payment” (under regulation 62(2)); (2) if the employer cannot deduct such sums in full, it must make the deductions “so far as possible from payment or payments which the employer makes later in the same tax period” (under regulation 62(4)); and (3) if “the relevant payments actually made are insufficient to enable the employer to deduct the full amount of tax due in respect of a notional payment, the employer must account to [HMRC] for any amount which the employer is unable to deduct” (under regulation 62(5)). 72. HMRC submitted that, if these rules are in point the Clients would have been liable to account to HMRC for income tax due in respect of the relevant notional payments (of sums equal to the earnings which the lead appellants would be deemed to receive under s 44). The Clients would not have been liable to deduct income tax as they did not make any actual payments of “PAYE income” from which they could deduct the relevant sums. Directions under regulations 72 and 81 73. Regulations 72 and 81 allow HMRC, where certain conditions are satisfied, to absolve the employer/payer from the liability under the PAYE system to deduct and/or account for income tax chargeable on earnings with the consequence that the employee/worker is instead liable to account for that tax. Assuming these regulations are in point, due the effect of the regulations set out above, the provisions set out below are be read as though TPP/the relevant related entity or relevant Client is the employer and the relevant lead appellant is the employee. (1) HMRC can make a direction under regulation 72 as follows: “(1) This regulation applies if - (a) it appears to the Inland Revenue that the deductible amount exceeds the amount actually deducted, and (b) condition A or B is met. (2) In this regulation— “the deductible amount” is the amount which an employer was liable to deduct from relevant payments made to an employee in a tax period; “the amount actually deducted” is the amount actually deducted by the employer from relevant payments made to that employee during that tax period; “the excess” means the amount by which the deductible amount exceeds the amount actually deducted. (3) Condition A is that the employer satisfies the Inland Revenue - (a) that the employer took reasonable care to comply with these Regulations, and (b) that the failure to deduct the excess was due to an error made in good faith. (4) Condition B is that the Inland Revenue are of the opinion that the employee has received relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments. (5) The Inland Revenue may direct that the employer is not liable to pay the excess to the Inland Revenue……. (6 ) If a direction is made, the excess must not be added under regulation 185(5) or 188(3)(a) (adjustments to total net tax deducted for self-assessments and other assessments) in relation to the employee ……” (Emphasis added.)

“( 1) This regulation applies if - (a) any part of the tax determined under regulation 80 is not paid within 30 days from the date on which the determination became final and conclusive, and (b) condition A or B is met in relation to an employee. (2) Condition A is that the Inland Revenue are of the opinion that the employee in respect of whose relevant payments the determination was made has received those payments knowing that the employer has wilfully failed to deduct the amount of tax which should have been deducted from those payments. (3) Condition B is that the unpaid tax represents an amount for which the employer was required to account under regulation 62(5) (notional payments) in relation to a notional payment to the employee. (4) The Inland Revenue may direct that the employer is not liable to pay the amount of tax which appears to them should have been but was not - (a) deducted on making those relevant payments, or (b) accounted for under regulation 62(5)….. (5) If a direction is made, the amount of tax must not be added under regulation 185(5) or 188(3)(a) (adjustments for self-assessments and other assessments) in relation to the employee ……” (Emphasis added.)

“Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge. Direction is someone making a person do his/her work in a certain way by providing them with instructions, guidance or advice as to how the work must be done. Someone providing direction will often coordinate how the work is done, as it is being undertaken. Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.” (4) Under the agency contract (the Services Agreement), the lead appellants received remuneration (in the form of the Fee and the Profit Share) which does not constitute employment income of the lead appellants apart from the provisions of the Chapter in which s 44 falls. 77. Ms Redston said that it is clear that for the purposes of s 44(1)(d) and s 44(2) both the Fee and the Profit Share are captured as sums paid “under or in consequence of” the agency contract. She submitted that (a) it is explicit in s 44(2) that “all remuneration receivable” for the services is included as deemed taxable earnings, and (b) it is clear from the case law that earnings include payments for work carried out for the employer or deemed employer, which are paid at the individual’s direction to a third party such as in this case the Partnership and the Trust. She drew support for this view from RFC 2012 v HMRC [2017] UKSC 45 (“ Rangers ”) at [39] to [41]. In summary, in Rangers the Supreme Court held that, on a purposive construction of the general employment tax rules, the fact that a football club’s employees’ remuneration was routed through a trust arrangement did not prevent it being taxable as their employment “earnings” and did not prevent the club from being liable to account for the resulting income tax under the PAYE system. 78. Finally, Ms Redston submitted that HMRC were fully aware of the fact that s 44 may apply to arrangements such as these before the relevant time limits expired for them to be able to take action to recover the resulting income tax. She referred to correspondence HMRC had with the adviser to a different taxpayer (as contained in the bundles) as follows: (1) HMRC received correspondence from a firm of accountants, Warr & Co, about Mr Swarbrick, one of that firm’s clients who it appears used essentially the same arrangements as those used by the appellants: he worked in the UK providing services to a UK client, HBOS; he had a contract with an Isle of Man Partnership, the Steed Partnership, under which he was paid a monthly fee, which he accounted for as self-employment income; he also received income from a Trust, which was in exact proportion to the income paid under the contract with HBOS. (2) On 12 February 2009 HMRC’s investigating Officer, Mr MacDougall, told Warr & Co that if s 44 applied “HBOS would be the relevant person under s 689 ITEPA”

“Does Counsel believe that income received by the individual from the IIP Trust could fall within s 44(2)(b) as being ‘in consequence of the Agency Contract’? Counsel is of the opinion that this will depend on the actual facts. However, if what is received by the contactor from the IIP Trust is the balance of the fees - less costs - emanating from the contract that the contractor was - per the agency contract - undertaking, then there is a very strong case to argue that such income was, per s 44(2)(b), ‘remuneration receivable under or in consequence of the agency contract”, and would be subject to PAYE. Counsel is also of the opinion that HMRC does not have the ‘luxury’ of choosing which ‘piece’ of legislation it utilises in determining a tax liability. In this specific instance, HMRC may wish ‘for ease of admin’ to tax trust income received by the individual under s 858 of ITTOIA 2005. However, Counsel is of the opinion that s 44 ITEPA 2003 takes precedence where it applies.” (4) On 25 March 2010, HMRC issued directions under regulation 80 to recover income tax on the relevant income from HBOS. On 28 April 2010, HMRC sent Mr Warr a letter produced “after liaising with relevant specialists and upon receipt of legal advice”, which set out HMRC’s decision that: (a) Section 44 applied on the basis that Mr Swarbrick provided his services personally to HBOS, the contract between Mr Swarbrick and the Steed Partnership was an agency contract, Mr Swarbrick was subject to supervision, direction and/or control by HBOS and received “remuneration” from carrying out those services. (b) The Steed Partnership was the agency and, as it was offshore, s 689 applied so that HBOS was required under the PAYE system to account for income tax in respect of the remuneration deemed to be received by Mr Swarbrick. (c) Mr Swarbrick was entitled to a “PAYE credit” in relation to the income which HBOS should have accounted for under the PAYE system, unless a direction had been issued under the PAYE Regulations to recover the tax due from him. 79. Ms Redston submitted that HMRC’s analysis of the legal position under s 44 and the PAYE regulations, which she noted was arrived at after obtaining “comprehensive legal advice”, is identical to the lead appellants’ arguments in these proceedings except that HMRC decided the analysis applied only to the monies Mr Swarbrick received as a Fee and not to the monies received as Profit Share. In HMRC’s view the link between the Profit Share and the meaning of “remuneration” in s 44 was “too remote”

“….. it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create…… for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.” (2) HMRC’s argument was confined to suggesting that s 44(1) does not apply unless the precise terms and nature of each contract in place between the agent and the end-client can be established. However, for all the reasons set out above, on the correct interpretation of this provision, it does not require the tribunal to establish the precise terms of the arrangements involved in the supply of the lead appellants’ services between the Partnership and a Montpelier entity, that entity and the Recruitment Agent and the Recruitment Agent and the Client. (3) HMRC described some terms of the Services Agreement, such as the provisions enabling the parties to terminate the agreement by notice as wholly unrealistic and “unenforceable”

“ extends to money that the employee is entitled to have paid as his or her remuneration whether it is paid to the employee or a third party. The legislation does not require that the employee receive the money; a third party, including a trustee, may receive it.”

“(i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.”

“(1) For the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, and the amount payable by him by way of income tax for that year, he may be required by a notice given to him by an officer of the Board - (a) to make and deliver to the officer…a return containing such information as may reasonably be required in pursuance of the notice… (1AA) For the purposes of subsection (1) above— (a) the amounts in which a person is chargeable to income tax and capital gains tax are net amounts, that is to say, amounts which take into account any relief or allowance a claim for which is included in the return; and (b) the amount payable by a person by way of income tax is the difference between the amount in which he is chargeable to income tax and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) of ITTOIA applies….. (5 ) In this section and sections 8A, 9 and 12AA of this Act, any reference to income tax deducted at source is a reference to income tax deducted or treated as deducted from any income or treated as paid on any income .” (Emphasis added.)

“(a) an assessment of the amounts in which, on the basis of the information contained in the return and taking into account any relief or allowance a claim for which is included in the return, the person making the return is chargeable to income tax and capital gains tax for the year of assessment; and (b) an assessment of the amount payable by him by way of income tax, that is to say, the difference between the amount in which he is assessed to income tax under paragraph (a) above and the aggregate amount of any income tax deducted at source and any tax credits to which section 397(1) of ITTOIA 2005 applies …… but nothing in this subsection shall enable a self-assessment to show as repayable any income tax treated as deducted or paid by virtue of [provisions not relevant to the present appeal].” (Emphasis added.]

“(6 ) If, on an appeal notified to the tribunal, the tribunal decides - (a) that, ... the appellant is overcharged by a self-assessment; (b) … ; or (c) that the appellant is overcharged by an assessment other than a self-assessment, the assessment…shall be reduced accordingly, but otherwise the assessment …. shall stand good.” 129. It was not disputed that the reference in s 50(6)(a) to a self-assessment at least includes a reference to a self-assessment as amended by HMRC on the issue of a closure notice under s 28A. A taxpayer cannot appeal his own self-assessment; but can appeal where a closure notice results in an amended assessment showing an increase in the assessment. Relevant legislation - payment and interaction with the PAYE rules 130. The requirement for a taxpayer to pay tax in respect of a tax year is set out in (a) s 59A TMA as regards payments on account of income tax due for that year, and (b) s 59B as regards (i) capital gains tax for that year, (ii) any balance of income tax for that year, and (iii) further payments due in other circumstances such as following amendments made by HMRC to a self-assessment or when they issue a discovery assessment. 131. In outline, under s 59A: (1) A taxpayer is required to make two payments on account of his liability to income tax for a tax year by 31 January in that year and the 31 July immediately following the end of that year of an amount equal to 50% of “the relevant amount” if: (a) as regards the immediately preceding year, he was assessed to income tax under s 9 in any amount; and (b) that amount exceeds the amount of any “income tax which was deducted at source”, where the amount of the excess (the relevant amount) exceeds certain thresholds. (2) It is stated that PAYE regulations may provide that, for the purpose of determining the amount of any such excess, any necessary adjustments in respect of matters prescribed by the regulations shall be made to the amount of tax deducted at source under PAYE regulations (under s 59A(10)). 132. The relevant parts of s 59B read as follows: “(1) Subject to subsection (2) below, the difference between - (a) the amount of income tax and capital gains tax contained in a person’s self-assessment under section 9 of this Act for any year of assessment, and (b) the aggregate of any payments on account made by him in respect of that year (whether under section 59A of this Act or otherwise) and any income tax which in respect of that year has been deducted at source , shall be payable by him or (as the case may be) repayable to him as mentioned in subsection (3) or (4) below but nothing in this subsection shall require the repayment of any income tax treated as deducted or paid by virtue of [a number of provisions which are not in point] (2) The following, namely - (a) any amount which, in the year of assessment, is deducted at source under PAYE regulations in respect of a previous year, and (b) any amount which, in respect of the year of assessment, is to be deducted at source under PAYE regulations in a subsequent year, or is a tax credit to which section 397(1) of ITTOIA 2005 shall be respectively deducted from and added to the aggregate amount mentioned in sub-section (1)(b). (3)…. (4) In any other case, the difference shall be payable or repayable on or before the 31 st January next following the year of assessment. (5) An amount of tax which is payable or repayable as a result of the amendment or correction of a self-assessment under - (a) section 9ZA, 9ZB, 9C or 28A of this Act (amendment or correction of return under section 8 or 8A of this Act)… is payable (or repayable) on or before the day specified by the relevant provision of Schedule 3ZA to this Act (5A)-(6)…. (7) In this section any reference to income tax deducted at source is a reference to income tax deducted or treated as deducted from any income or treated as paid on any income . (8) PAYE regulations may provide that, for the purpose of determining the amount of the difference mentioned in subsection (1) above, any necessary adjustments in respect of matters prescribed by the regulations shall be made to the amount of tax deducted at source under PAYE regulations .” (Emphasis added.)

“(1) This regulation applies for the purpose of determining - (a) the excess mentioned in section 59A(1) of TMA (payments on account of income tax: income tax assessed exceeds amount deducted at source), and (b) the difference mentioned in section 59B(1) of TMA (payments of income tax and capital gains tax: difference between tax contained in self-assessment and aggregate of payments on account or deducted at source). (2) For those purposes, the amount of income tax deducted at source under these Regulations is the total net tax deducted during the relevant tax year (“A”) after making any additions or subtractions required by paragraphs (3) to (5 ). (3) Subtract from A any repayments of A which are made before the taxpayer’s return and self-assessment is made under section 8 or 8A of TMA (personal return and trustee’s return). (4) Add to A any overpayment of tax from a previous tax year, to the extent that it was taken into account in determining the taxpayer’s code for the relevant tax year. (5 ) Add to A any tax treated as deducted, other than any direction tax, but— (a) only if there would be an amount payable by the taxpayer under section 59B(1) of TMA on the assumption that there are no payments on account and no addition to A under this paragraph, and then (b) only to a maximum of that amount. (6) In this regulation - “ direction tax” means any amount of tax which is the subject of a direction made under regulation 72(5) or regulation 81(4) in relation to the taxpayer in respect of one or more tax periods falling within the relevant tax year ; “relevant tax year” means - (a) in relation to section 59A(1) of TMA, the immediately preceding year referred to in that subsection; (b) in relation to section 59B(1) of TMA, the tax year for which the self-assessment referred to in that subsection is made; “ tax treated as deducted” means any tax which in relation to relevant payments made by an employer to the taxpayer in the relevant tax year— (a) the employer was liable to deduct from payments but failed to do so, or (b) the employer was liable to account for in accordance with regulation 62(5) (notional payments) but failed to do so ; “the taxpayer” means the person referred to in section 59A(1) of TMA or the person whose self-assessment is referred to in section 59B(1) of TMA (as the case may be).” (Emphasis added.)

“If a direction is made, the amount of tax must not be added under regulation 185(5) or 188(3)(a) ( adjustments for self-assessments and other assessments ) in relation to the employee”

“ Before completing his or her return, the taxpayer may seek your advice regarding an apparent under- deduction of tax by the employer, and the PAYE tax credit to be shown in the SA return. Regulation 185(5) entitles the taxpayer to credit for sums the employer was liable to deduct, but failed so to do, unless there is a direction that the tax shall be recovered from the employee. When advising the taxpayer of the estimated credit to enter on the return, you should also use function AMEND TAXPAYER SIGNALS to set the No Repayment signal on the SA record. This will ensure that no repayment is made automatically. In the event of the return calculation giving rise to an overpayment, the case is entered on the ‘Inhibited Automatic Repayment’ work list for review.” (5) It is clear from the guidance that HMRC consider that taxpayers are to include any tax credit in their self-assessment calculation. However, in the situation described in the guidance where there is no P60 or P45, HMRC staff are instructed to ensure that any repayment created as a result of the taxpayer including such a sum in his self-assessment is inhibited until they have checked that the claimed sum in fact relates to earnings in respect of which there is a tax credit. That is a practical step to reduce the risk of fraud; the principle that a tax credit is to be included as part of the return is unaffected by this common-sense check. (6) It would be very odd if a taxpayer is not required to take a tax credit into account in his self-assessment of income tax payable set out in his return given that he is plainly required to take such tax credits into account in his computation of payments of account which are required to be included in the return. 139. In HMRC’s view: (1) Any tax credit is only to be taken into account in computing sums payable or repayable as provided for in s 59B (or under s 59A). Regulation 185 specifically applies only to make adjustments to the amount of income tax treated as deducted at source for the purposes of those provisions ; it does not apply to s 8 and s 9. (2) Section 59B operates as a charging provision which is separate to and independent of the self-assessment provisions in s 8 and s 9 . A taxpayer has no right to appeal to the tribunal as regards HMRC’s asserted failure incorrectly to take the tax credit into account under s 59B. That is clear from the UT’s comment in Walker tha t s 59B “is not justiciable before the FTT, being concerned with matters of collection and enforcement” . (3) Accordingly, there can be no question that the lead appellants are “overcharged by a self-assessment” within the meaning of s 50(6)(a), as a result of HMRC not taking any tax credit into account in the s 28 amendments. Those amendments necessarily relate only to matters which are or ought to have been included in the lead appellants’ relevant self-assessments of income tax chargeable or payable by them, which, for the reasons given, does not include any tax credit. (4) This interpretation is supported by the earlier relevant regulations in the 1993 Regulations (see above). (5) The guidance Ms Redston referred to is practical guidance which does not override the effect of the legislation. Given regulations 72 E and F only came into effect after the periods in question, they cannot shed any light on the position. 140. Ms Redston responded that HMRC did not cite any authority in support of their contention that it is possible to rely on the earlier regulations referred to. She said that the normal position is that consolidation statutes are to be read without reference to the earlier provisions and, in any event, these provisions support the lead appellants’ stance in that their effect is that the employee is to include any tax credit in his self-assessment of income tax payable. She noted that the heading of regulation 101A refers to self-assessment returns. Caselaw 141. The parties each drew very different conclusions, in support of their contentions, from the UT’s decision in Walker . This case establishes that a taxpayer may be “overcharged” within the meaning of s 50(6)(a) by an amendment made by HMRC under s 28A to the taxpayer’s self-assessment of income tax payable (as well as by an amendment to the self-assessment of income tax chargeable) (b) including where any such amendment is made to the amount of any income tax the taxpayer has self-assessed to be repayable to him. In my view, however, as explained below, the decision does not provide an answer to the particular issue in this case. 142. As set out in the tribunal’s decision at [9], the facts were as follows: (1) In his tax return for the tax year 2011/12, Mr Walker showed a repayment of tax due to him of £6,040 which included £6,627.25 of tax which he claimed had been deducted by three contractors by whom he was engaged as a sub-contractor under the construction industry scheme (“ CIS ”). (2) In outline, under CIS, a contractor must make a deduction from certain payments to sub-contractors (a “ CIS deduction ”) which must be paid to HMRC. A CIS deduction is to be treated for income tax purposes (a) as not diminishing the amount of the payment and, (b) where the subcontractor is an individual, (i) as income tax paid in respect of the subcontractor’s relevant profits or, (ii) as regards any excess which is required to discharge any liability for Class 4 NICs, as a Class 4 NIC in respect of those profits (under s 62(2) and s 62(3) of the Finance Act 2004). (3) HMRC made the claimed repayment but on issuing a notice closing their enquiries into Mr Walker’s return under s 28A, they amended his return (amongst other matters) to reflect their view that Mr Walker had overstated the CIS deductions which (taking into account other adjustments) meant that he was owed a repayment of £821.07 only. 143. On the appeal to the tribunal, the tribunal calculated, at [25], that in fact £3,781 was repayable to Mr Walker by HMRC, in their view under s 59B on the basis that the CIS deductions totalled £7,724. They made that finding, at [23], on the basis Mr Walker received payments from the relevant contractor after deductions made under the CIS rules. In their view, the CIS deductions qualified to be treated as income tax paid for the purposes of the CIS rules notwithstanding that it appeared that the sums had not actually been handed over to HMRC; on their interpretation of the rules it sufficed that the subcontractor understood that CIS deductions had been made (see [41] to [44]). 144. The tribunal decided, however, that it had no power to amend Mr Walker’s return in order to reflect what, on its findings of fact, were the correct figures. They made the following main points: (1) As s 9 requires an assessment of not just the amount chargeable to income tax but also the amount payable “the amounts so deducted [under CIS] can, in whole or in part depending on the circumstances, contribute to or constitute an amount repayable” (see [29] and [30]). (2) The use of the word “charge” in s 50 seems to refer only to s 9(1)(a) as regards the self-assessment of tax chargeable but it would not be correct to limit s 50 in that way. PAYE is an obvious case where the correct amount of income tax to be deducted may be in issue such as where “the employer fails to deduct the right amount of PAYE so that paragraph (b) of the definition of “tax treated as deducted” in regulation 185(6)….applies….” (see [31]). I note that in making these comments, the tribunal seemed to assume that a taxpayer is required to take tax falling within regulation 185(6) into account in a taxpayer’s self-assessment of income tax payable. (3) A consequence of this interpretation of “charge” as covering s 9(1)(b) is, at [31], that: “there is no scope for saying that any amount is “charged” if the tax deducted at source exceeds the amount in which the person is chargeable to income tax. It seems to us irrelevant so far as s 50 is concerned that a self-assessment (including as amended) may show an amount repayable. Such an amount is given effect to under s 59B TMA and that section is not justiciable before this Tribunal, whether it provides for an amount to be payable or repayable.” (4) That there was no net amount of tax chargeable or payable on the original self-assessment and HMRC’s amendments did not alter the position, at [33], and: “…the amount in which the appellant was charged by the amended self-assessment was nil. We have…decided that the amount in which the appellant ought to be charged was also nil. Accordingly in terms of s 50(6) TMA the assessment stands good (at nil)”. (5) HMRC did not agree with this (see [34]). They added to the self-assessment statement the difference between the repayment shown in the self-assessment and the amount in the calculations attached to their closure notice and stated that that amount was payable by Mr Walker. The tribunal suggested, at [36], that HMRC may be able to recover that amount under s 30 relating to recovery of overpayments of tax. 145. The UT did not agree with the tribunal’s analysis. The UT set out details of the relevant legislation and their observations included that: (1) At [13], a CIS deduction constitutes income tax “treated as paid” for the purposes of s 9(1)(b) as a result of the CIS provisions set out above. (2) At [16], the tailpiece to s 9(1) envisages the possibility of a self-assessment showing an amount as repayable subject to the exclusion of certain items from that treatment but CIS deductions are not within that exclusion. A self-assessment return can, therefore, show as repayable an excess of CIS deductions over the income tax which would otherwise be payable. (3) At [25], s 59B(1) “envisages the possibility not only of a payment by a taxpayer to HMRC but also of a payment to a taxpayer by HMRC, in each case based on the figures contained in the original self-assessment return” (and ss 59B(2) and (3) make provision for the timing of the payment or repayment). They also noted that s 59B(5) applies where there is an amendment or correction to a self-assessment return under sections 9ZA or 28A which results in an amount of tax becoming payable or repayable; it makes provision for the timing of the payment or repayment of that amount 146. They continued, at [27], that (a) Mr Walker’s original self-assessment return showed an amount of income tax due and, had it not been subject to an enquiry, “there is no doubt that the sum owing to him, the amount “repayable” within s 59B(1), would have been £6,040” and (b) likewise, if he had not appealed against the closure notice, the amount repayable under that section (ignoring for the moment the £6,040 actually paid) would have been £821.07 shown in the amendments made by HMRC. However, on the appeal, the tribunal’s findings of fact resulted in an entitlement to repayment of £3,781 meaning that Mr Walker had been overpaid by HMRC £2,259 (the difference between £6,040 and £3,781 calculated to be repayable by the tribunal). 147. At [28], the UT explained that HMRC have a policy of “process now, check later” and that under this policy: “where an individual’s self-assessment return shows an amount owing to the taxpayer, HMRC give effect to that return by making a payment to the taxpayer of the amount shown. HMRC’s position is that, if it subsequently transpires that the payment should not, either in whole or in part, have been made, they are entitled to recover the overpayment. This is so, in particular, in the situation where a closure notice results in an amendment to the return which shows that an overpayment has been made.” 148. They continued in the same passage that any dispute on HMRC’s position would need to be resolved in enforcement proceedings. However, their view: “(without deciding the point) is that HMRC’s position is correct. In other words, the rights of the taxpayer and HMRC in relation to payment and repayment are determined by the contents of the self-assessment return as amended from time to time .” (Emphasis added)

“… the wording of section 50(6) and (7), which applies alike to appeals relating to self-assessments and appeals against assessments made by an officer of HMRC, reflects similar wording of very long standing which goes back long before the introduction of self-assessment. There is a venerable principle of tax law to the general effect that there is a public interest in taxpayers paying the correct amount of tax, and it is one of the duties of the Commissioners in exercise of their statutory functions to have regard to that public interest .” 152. At [32] the UT noted that the highlighted sentence above was expressly approved by Lord Walker in the Supreme Court (80 TC 641 , at [15]) and said, at [33], that, given that general principle, ss 50(6) and (7) “should be construed, insofar as their language sensibly allows, so as enable the FTT to amend a self-assessment return to give effect to the decision which they have made in relation to an appeal which is properly before them”

“(i) the original assessment shows a positive amount as payable by way of income tax (ii) an amendment by HMRC increases that amount, for instance by disallowing part of a claim for tax deducted at source but (iii) the FTT finds on appeal that the taxpayer was entitled to the full deduction which he claimed. In such a case, the taxpayer is “overcharged” within the meaning of section 50(6)(a) by the amended assessment; and what he is overcharged to is the amount “payable” by way of income tax within section 9(1)(b)…..” 154. At [39], the UT agreed with the tribunal’s view that s 59B is not justiciable in the tribunal “being concerned with matters of collection and enforcement” but said “that is beside the point”

“Just as “overcharge” in section 50(6)(a) includes an over-assessment under section 9(1)(b) of amounts payable…..so too “overcharge” in section 50(6)(a) includes, in our view, an under-assessment of amounts repayable by HMRC: if a taxpayer receives less by way of repayment than he is entitled to receive, he can properly be described as having been overcharged…….” 156. They also disagreed, at [42], with the tribunal’s view that the amount in which the appellant was assessed to tax was nil. They noted that the assessment required by s 9(1)(a) is of the amount in which Mr Walker was charged to tax and that on any view he was undercharged (as could be corrected under s 50(7)(a)). As regards the assessment of the amount of tax payable: “ The amount of tax actually payable by Mr Walker (in contrast with repayable to him) may be nil; but the amount of the assessment required by section 9(1)(b) can result in a repayment to Mr Walker. This was the position under both his original assessment and under HMRC’s amended assessment. It would also be the case if the FTT were able to amend the assessment to reflect its own figures. None of these results in a nil assessment of the amount payable including an amount repayable.” 157. At [43], the UT concluded that their “interpretation does not put any, or any undue, strain on the words used in section 50(6) and (7); it produces a sensible result” whereas the tribunal’s conclusion had “the startling consequence that it is unable to afford a remedy to Mr Walker”. 158. At [44] the UT said that their interpretation results in a sensible application of section 59B: “Once an amendment is made to the self-assessment return by section 50(6) and (7), section 59B then applies to the amended return just as it does to an original return or to an amendment following a closure notice which is not appealed. Section 59B(5) expressly contemplates (in paragraph (a)) an amendment to a self-assessment under section 28A as the result of a closure notice. We prefer a construction of section 50(6) and (7) which allows all amendments under section 28A to be brought within section 59B(5). The FTT saw the provision as directed mainly at those cases where an increase of tax results from an amendment. That may be so, but that is no reason to adopt a restrictive interpretation of section 50(6) and (7).” 159. At [45] the UT also rejected the apparent reliance by the tribunal on the possible alternative route said to be open to HMRC, namely an assessment under s 30 TMA. The UT said that it may be that, in some circumstances, that section could be relied on, but in others it could no and in that case there was nothing to support a suggestion that HMRC could have relied on s 30: “There may be reasons why HMRC are in practice unable to recover the amounts which, according to the return in the form in which it remains after the Decision, they are entitled. Mr Walker’s defence to a claim for the full amount would not be straightforward and would, in essence, depend on the enforcement of public law rights against HMRC, alleging unreasonable conduct in attempting to enforce an amount of tax which ought not properly to be due. We would strive to avoid forcing HMRC and Mr Walker along such a path. Our interpretation of the relevant provisions avoids this result. ”

“( 7A) Nothing in the PAYE regulations may be read - (a) as preventing the making of arrangements for the collection of tax or other amounts in such manner as may be agreed by, or on behalf of, the payer and [ an officer of Revenue and Customs ] , or (b) as requiring the payer to comply with the regulations in circumstances in which an officer of Revenue and Customs is satisfied that it is unnecessary or not appropriate for the payer to do so.” 176. The parties referred to the explanatory notes issued when clause 684 was introduced in the Finance Bill 2003 which include the following statements: “This clause complements the work being undertaken by the Tax Law Rewrite Project to rewrite the PAYE Regulations. It modernises the powers for making PAYE regulations and so will enable the rewritten regulations to reflect current practices….. …..The new Item 7A makes clear that the PAYE regulations may exclude certain payments from PAYE. For example, employers are not required to operate PAYE on certain payments to employees for business expenses. The new Subsection (7A), confirms that the Inland Revenue can agree to different tax collection arrangements being set up that reflect the particular circumstances of a payer. Or alternatively that the payer does not have to follow PAYE regulations, where these would be unnecessary or inappropriate. Currently there are different arrangements covering casual employment and students, for example…..” 177. The s 684 decisions were set out in letters to the lead appellants of 8, 9 and 12 March 2019, in which an officer of HMRC made the following main points: (1) The officer set out the background to the appeals noting that (a) it was stated in the relevant returns that the relevant income was not taxable due to article 3, (b) legislation was introduced specifically in s 858 ITTOIA and s 59 of the Finance Act 2008 that made clear that that article did not apply, and (c) that that legislation was contested in the Huitson litigation but HMRC’s position was upheld. (2) The officer said that he had reviewed the circumstances of the appellant’s use of the tax arrangements, the PAYE Regulations and related legislation and considered how the PAYE Regulations might apply (including considering the arguments made in the statements of case supplied by the appellant, evidence given and what HMRC knows about the arrangements entered into) and: “In the course of my review, I have concluded that there may be a possibility, although not a probability, that PAYE regulations might apply and require an entity other than yourself (“a payer”) to account for tax on PAYE income.” (3) The officer then drew attention to s 13 ITEPA, s 8 ITTOIA and s 684(7A) ITEPA and said: “In the circumstances of your use of the arrangements, after taking into account the possibility that the PAYE Regulations might apply, I have concluded that it is not appropriate in these circumstances for a party to be required to comply with the PAYE Regulations. There is no evidence before me to suggest that any entity which might possibly be required to comply with the PAYE Regulations knew of or was a party to the entirety of the arrangements, given that the individuals were represented to them as self-employed. Further it is not in dispute that tax was under declared and primary legislation clearly identifies that the liability for tax remains with the individual taxpayer even if the PAYE collection mechanism were to apply. It is also inappropriate or unnecessary for a collection mechanism to operate and frustrate the collection of tax in the context of the use of these contrived arrangements that were designed to avoid tax. The effect of this decision is that you are liable to pay any additional tax due as a result of your use of the arrangements, and that any “credit” you are entitled to in respect of the operation of PAYE will be limited to the amount of tax actually collected via PAYE on your behalf . In the interest of avoiding confusion, this decision does not change the amounts of tax that HMRC is seeking from you in respect of the assessments currently under appeal….” 178. HMRC are seeking to address two issues in these letters although they have somewhat elided them: (1) First, they are seeking to disapply the PAYE regulations under which TPP/any relevant related entity or the Clients (as the payers for PAYE purposes) would otherwise have been liable to deduct and/or account for income tax due in respect of the lead appellants’ earnings in the relevant tax years. (2) Second, they are seeking to disapply regulations 185(5) and 185(6) under which a tax credit would otherwise have arisen in each of the relevant tax years on the basis that the income tax chargeable on the lead appellants’ relevant earnings constituted, within the meaning of that regulation, tax which each payer “ was liable ” to deduct or account for but which it did not so deduct or account for. On that basis, there would be no tax credit arising in respect of any of the relevant tax years: (a) which could reduce the income tax payable by the lead appellants in those tax years as computed under s 59B, and/or (b) which the lead appellants were required to take into account in their self-assessments made under ss 8 and 9 in respect of those tax years and which HMRC should, therefore, have taken into account in the s 28 amendments. 179. Whilst not explicit in their letters, it seems that HMRC’s view is that the s 684 decisions in effect disapply the PAYE regulations on the basis that they fall within the terms of s 684(7A)(b) with the result, so they suggest, that (a) the relevant PAYE regulations are not to be read as requiring the payers to comply with obligations they would otherwise have had to deduct and/or account for income tax in respect of the sums in dispute, (b) regulation 185(6) is not to be read on the basis that the payers were liable to deduct and/or account for such income tax, and (c) accordingly, there is no tax credit under regulation 185(5). 180. It follows from the conclusion set out in Part C that Mr Johnson was not taxable on the sums in dispute relating to the first period as earnings, that in any event TPP/any related entity had no liability as regards those sums under the PAYE rules. In the remainder of this Part, therefore, I have proceeded as though the s 684 decisions relate only to the Clients. Submissions 181. The lead appellants submitted that s 684 decisions were not issued by HMRC for any proper purpose but, as is apparent from the terms of the letters, in a blatant attempt by HMRC to (a) prevent the lead appellants winning their appeals, and (b) thereby to oust the jurisdiction of the tribunal. Ms Redston noted, in particular, that it appears the s 684 decisions were not sent to the Clients and that there was no need for HMRC to make the decisions as regards those parties given that HMRC are out of time to enforce the liability those parties would otherwise have had under the PAYE regulations in respect of income tax chargeable on the lead appellants’ earnings. She explained that the lead appellants have brought judicial review proceedings against HMRC in respect of the s 684 decisions and applied for those proceedings to be stayed pending the outcome of this hearing. 182. However, Ms Redston considered that, in any event, the s 684 decisions do not affect the lead appellants’ case for a number of reasons. First, she argued that the decisions do not affect the statutory position whereby the tax credit is available: (1) Under regulation 185, the tax credit arises in respect of income tax which the employer/payer “ was liable to deduct” from relevant payments made in the relevant tax year” or “ was liable ” to account for in respect of such payments. The liability to deduct or account for the tax crystallised when the relevant payments were made, over ten years before the s 684 decisions were issued. (2) The s 684 decisions cannot affect how ss 8, 9 and 59B operate. Under s 684(7A) such a decision can only impact on the operation of the PAYE regulations. (3) Moreover, s 59B(8) provides that, for the purposes of determining the amount of tax payable or repayable by a taxpayer “any necessary adjustments prescribed by the [PAYE] regulations shall be made to the amount of tax deducted at source”

“This discretion [as regards care and management] enables the commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of parliamentary time.” (3) In this case: (a) In issuing the s 684 decisions, HMRC is not seeking to address any of the circumstances set out by Lord Hoffman. HMRC’s stated purpose, namely, to prevent the lead appellants from succeeding in their appeals, is self-evidently an improper purpose. (b) HMRC have specific, targeted powers which they could have sought to use to (a) assess the Clients for the tax due when they failed properly to deduct and/or account for income tax in accordance with the PAYE regulations, and (b) by direction, in effect, to transfer the obligation to account for the income tax to the lead appellants. HMRC cannot now use its “care and management” powers to mend its own failures to exercise these statutory powers within the applicable statutory time limits. (c) Furthermore, HMRC cannot validly exercise any power they have by writing only to the lead appellants. These decisions cannot be effective unless communicated to the payers, as those who had the relevant obligations under the PAYE regulations. No such communication has occurred. (4) In any event, even if s 684(7A)(b) gives HMRC a power in addition to their general care and management powers, the s 684 decisions would be ultra vires and illegal for precisely the same reasons as set out above. 185. Ms Redston added that HMRC’s decisions are also unreasonable under the principles set out in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] EWCA Civ 1 because: (1) HMRC took into account irrelevant matters, including: (a) The possibility that the lead appellants would succeed in their appeals is self-evidently not relevant for the reasons set out above. (b) The fact that the lead appellants were “represented to [the payers] as self-employed” cannot be relevant given that s 44 ITEPA only applies to individuals who are self-employed; that is the very reason why the agency rules should have been operated by the payers. (c) That the payers did not know that they should have deducted and/or accounted for income tax under the PAYE regulations cannot be relevant given the long-standing nature of the legal requirement in question. All businesses should have been aware of s 44 ITEPA; they had a statutory obligation to apply it. (2) HMRC failed to take into account relevant matters, including HMRC’s failure to use their specific, targeted powers within the statutory time limits, as explained above, and the fact that all businesses should have been aware of s 44 ITEPA and had a statutory obligation to operate it. (3) The statutory process for transferring PAYE obligations from payer to payee, under regulations 72 and 81 of the PAYE Regulations, is subject to time limits and appeal rights. It is procedurally unfair for HMRC to make decisions which (so they say) gives the same effect as such a direction (by the removal of the tax credit) by using a purported discretionary power which is not subject to statutory time limits and in respect of which the taxpayer has no right to appeal. 186. Finally, Ms Redston argued that the issue of the s 684 decisions constitutes an abuse of process which justifies barring HMRC from taking any further part in these proceedings or from taking part in the part of the proceedings relating to the tax credit. She said that it is manifestly unfair for HMRC to have acted in a manner which, in her view, completely undermines the purpose of the hearing in an attempt to prevent the lead appellants succeeding in their appeals. She submitted that the decision in Foulser v HMRC [2013] UKUT 38 (TCC) (“ Foulser ”) provides authority that the tribunal has jurisdiction to decide “abuse of process” arguments and, if necessary, to order that the s 684 decisions are nullities. She noted that the lead appellants could also bring judicial review proceedings on this basis but, as judicial review is available only where there is no alternative remedy, it is for the tribunal to make a decision on this point. HMRC’s submissions 187. Mr Tallon made the following main points: (1) It is not part of the statutory exercise required for the tribunal to determine this appeal to decide whether HMRC have exceeded their powers in issuing the s 684 decisions or acted improperly. The tribunal can decide the issues before it in the usual way whilst the public law issues are correctly dealt with separately by the appropriate forum, the administrative court. If the administrative court decides that the decisions are for any reason “nullities”, HMRC would be required to give effect to that decision. (2) If, contrary to HMRC’s stance, the tribunal considers that it has jurisdiction to hear the lead appellants’ arguments on public law matters, in the interests of justice and fairness, the tribunal should deal with those arguments at a further hearing. The tribunal should not make a decision on these matters without allowing or requiring both parties to submit full evidence on the issues which neither party has done in preparation for this hearing. For example, any assertion that HMRC had an improper motive would require extensive evidence in order to be dealt with fully. (3) On the lead appellants’ abuse of process arguments: (a) The lead appellants only raised this issue very shortly before the hearing. (b) Any asserted unfairness as regards the issue of the s 684 decisions is not the type of procedural fairness which, as the UT held in Foulser , the tribunal has jurisdiction to hear. The tribunal can make a decision on all issues properly before the tribunal on the basis of the evidence submitted unimpeded by the s 684 decisions, in the knowledge that the issues relating to the s 684 decisions can be dealt with by the administrative court and that those decisions may not be relevant to the outcome of these proceedings at all. There is nothing unlawful or improper in HMRC asking the tribunal to determine the issues relating to whether the lead appellants have been overcharged by the closure notices. The parties further representations on Foulser and related caselaw are set out below. (c) To bar HMRC from proceedings would be a wholly disproportionate response given it would affect the outcome of the issues which do not depend on the issue of the s 684 decisions. (4) In any event, the s 684 decisions were properly made: (a) It is acknowledged that the s 684 decisions were made at a late stage and have serious and real consequences for the lead appellants. However, the reasons for the timing of the issue of the s 684 decisions raises factual matters on which full evidence would need to be called if the public law argument were to be considered by the tribunal. It should be borne in mind that HMRC had to comply with their governance processes in issuing the s 684 decisions. (b) It was appropriate for HMRC to make the s 684 decisions given that (i) the Clients did not themselves pay any remuneration to the lead appellants but paid sums to a Recruitment Agent as invoiced by that agent, (ii) the Partnership or Trust paid the remuneration, (c) the Clients were liable to account for income tax on the remuneration under the PAYE regulations only because the Partnership was outside the scope of the PAYE regime, (iii) the Clients were simply not in a position to know anything other than that they were dealing with a UK Recruitment Agent given the evidence that Montpelier and de Graaf were not in contact with the Clients, (iv) even if the Clients were aware of Montpelier or de Graaf, it was reasonable for them to suppose the relevant entity was based in the UK (given it used a UK address and that the lead appellants said that they would not have been aware of the Partnership and Trust), and, accordingly, that any such UK entity was the party liable under the PAYE system to account for income tax chargeable on the sums in dispute. (c) The lead appellants argued that HMRC should have known about the application of the agency rules at an earlier stage but HMRC simply did not have the detailed information to enable them to form that view. Unlike the lead appellants, HMRC were not in a position to know the agency rules applied (and, for the reasons given, the Clients were not in a position to know they needed to apply the PAYE regulations). (d) There is no time limit on HMRC’s ability to exercise their powers under s 684 or any requirement to inform the payer of the decision. It is clear from the explanatory notes that the legislature’s intention in introducing s 684 in the applicable form was to modernise it to reflect current practices. Whilst the notes give some examples of when HMRC may exercise their powers under this provision, it is plainly intended to provide a very flexible arrangement whereby HMRC may exercise their powers in a broad set of circumstances 188. Ms Redston added that the tribunal should reject HMRC’s application for this matter to be dealt with separately at a further hearing for the following main reasons: (1) It was HMRC’s choice to issue the s 684 decisions so close to the hearing. They plainly could have issued them earlier and in fact they did in other cases on 25 May 2018 (as shown in examples in the bundles). (2) It is not in the interests of justice to adjourn the hearing and delay the outcome, in particular, given that (a) the appeals relate to periods ending over ten years ago, (b) there are several hundred appeals which are stayed pending the outcome of these lead appeals, and (c) some appellants have already passed away since the appeals were notified to the tribunal. (3) HMRC have already significantly delayed the hearing of these appeals as set out in earlier case management hearing. (4) Whilst HMRC assert they must have the opportunity to provide evidence, when the lead appellants asked for evidence (such as HMRC’s emails, meeting notes and other records of the decision making process), HMRC refused to supply it (as shown in correspondence in the bundles). There is no reason why HMRC should now be allowed an adjournment to provide evidence which they could have supplied for this hearing but refused to provide given they are fully in control of the s 684(7A) process and its timing. Does the tribunal have jurisdiction to consider the legality of the s 684 decisions? Conclusion 189. In summary, for all the reasons set out below, I have concluded that: (1) The tribunal does not have jurisdiction to hear the lead appellants’ challenge to the s 684 decisions on the basis that they are unlawful, ultra vires or unreasonably arrived at. (2) However, the tribunal does have jurisdiction to consider the effect of s 684(7A)(b) in the light of the issue of the s 684 decisions. (3) As a matter of statutory construction, that provision does not apply to affect the analysis of whether there is a tax credit set out in Part C. 190. I note that it was a matter of dispute whether in making the s 684 decisions HMRC were acting (a) under a specific power conferred by s 684(7A)(b) as HMRC seemed to suggest, or (b) under their general statutory management and care powers, as the lead appellants considered to be the case. In my view, the analysis is the same whichever of these positions is correct. Caselaw 191. As summarised by the UT in Birkett , there are a number of cases in which the UT and the Court of Appeal have considered the extent of the tribunal’s jurisdiction as regards public law matters, namely: Oxfam v HMRC [2009] EWHC 3078 (Ch) (“ Oxfam ”), Hok Ltd v HMRC [2012] UKUT 363 (TCC) (“ Hok ”), HMRC v Noor [2013] UKUT 71 (TCC) (“ Noor ”) and Trustees of the BT Pension Scheme v HMRC [2015] EWCA Civ 713 (“ BT Trustees ”). 192. In Oxfam , Oxfam appealed to the tribunal against HMRC’s decision to disallow in part its claim for recovery of input tax for VAT purposes by amending the terms of a method for the apportionment of input tax between its business and non-business activities. The appeal was brought under s 83(1)(c) of the Value Added Tax Act 1984 (“ s 83(1)(c) ”) which provides that an appeal lies to the tribunal: “with respect to ... (c) the amount of any input tax which may be credited to a person ”

“it covers all the issues between Oxfam and HMRC regarding the question whether HMRC should have allowed Oxfam credit for a higher amount of input tax…..including both the contract issue and the legitimate expectation issue. The words, “with respect to”, in section 83(1) appear clearly to be wide enough to cover any legal question capable of being determinative of the issue of the amount of input tax which should be credited to a taxpayer. The Tribunal’s jurisdiction is defined by reference to the subject matter specified in the section, not by reference to the particular legal regime or type of law to be applied in resolving issues arising in respect of that subject matter. ” (Emphasis added.)

“(i) if it appears that no penalty has been incurred, set the determination aside, (ii) if the amount determined appears to be correct, confirm the determination, or (iii) if the amount determined appears to be incorrect, increase or reduce it to the correct amount...” 207. The tribunal reduced the penalties to £100 on the grounds that HMRC had acted unfairly in delaying sending out a default notice. The UT, however, held that the tribunal had no jurisdiction to do this. There was no issue that the penalties were due as a matter of law; the issue was whether HMRC should be precluded from imposing or collecting them. That was not an issue of what was due but a quite separate issue of administration which was capable of determination only by way of judicial review and hence not by the tribunal (at [54]). 208. In Noor , the UT, in effect, disagreed with and departed from the decision of Sales J in Oxfam . In summary: (1) HMRC refused to allow Mr Noor to claim as input tax VAT which he had paid on services which were supplied more than six months before he was registered for VAT on the basis that VAT regulations prohibited recovery of VAT in relation to such supplies. (2) Mr Noor did not appear to dispute that these provisions were in point but appealed to the tribunal on the basis that he had been told by HMRC’s telephone advice line that he could claim input tax if he registered within 3 years of the relevant supplies to which the reclaim related. The right of appeal to the tribunal was, as in Oxfam , given by s 83. The tribunal held that Mr Noor had an enforceable legitimate expectation that he could recover the input tax as a result of the telephone call with HMRC. (3) The UT (comprising the same panel as in Hok ) held that the tribunal did not have any jurisdiction to give effect to any legitimate expectation which Mr Noor might have. 209. The UT said, at [30], that it is clear that the statute under which the tribunal is formed does not confer a general supervisory jurisdiction and that s 83(1) does not confer a general supervisory jurisdiction and there is no other provision of VATA (or any other legislation) which confers such a jurisdiction in relation to the legitimate expectation on which Mr Noor sought to rely. They said that it does not follow that the tribunal can never take account of or give effect to matters of public law but the tribunal can so only if it is “necessary…in the context of deciding issues clearly falling within its jurisdiction” which turns on the extent of the jurisdiction which is conferred by s 83 and “comes down to a point of statutory construction”. 210. In forming their conclusion, they said that, assuming that Sales J’s conclusion on the legitimate expectation point was part of the binding decision in Oxfam (as they thought it was) they were not bound to follow it. They noted the following: (1) The cases Sales J referred to in support of his view at [68] (see [199] above) “are examples of a court needing to decide a point of public law in order to be able to exercise the jurisdiction which it did have or to decide whether it in fact had jurisdiction in the first place”

“a. He recognised that the matter had not been the subject of detailed argument. b. ……he relied on the position in relation to the contract issue without drawing the distinction for the purposes of the argument between a contract which HMRC had power to enter into and one which they had no power to enter into……. c. He perceived very great difficulty in reconciling the exclusion of jurisdiction from the VAT Tribunal with Lord Lane’s dictum in Corbitt . We consider that he was wrong to perceive such difficulty. Absent reliance on that difficulty, it is not possible to say that he would have reached the conclusion that he should not follow the earlier cases (even if he was correct in saying that he was not bound to do so).” 211. They said, at [87], that the right of appeal given by s 83 is in respect of “a person’s right to credit for input tax under the VAT legislation ”

“ 401. Our reasons for saying that the Tribunal has no jurisdiction to give effect to the Extra-Statutory Concessions stems from the recent decision of the Upper Tribunal in [ Hok ]……... Mr Vajda has relied on the decision of Sales J in Oxfam v. HMRC [2009] EWHC 3078 (Ch) , [2010] STC 686 (" Oxfam "), paragraphs 61 to 79 to demonstrate that the Tribunal does have jurisdiction. However, that decision turned on a construction of 83(1)(c) of the Value Added Tax Act 1994 which Sales J held gave jurisdiction to the VAT Tribunal to deal with legitimate expectation in the context of an appeal as to the amount of input tax. It lends no support at all to the view that the Tribunal has a general jurisdiction to deal with public law matters, whether in the context of direct tax or indirect tax, in particular to require, in the exercise of some sort of supervisory jurisdiction, HMRC to give effect to a concession. The suggestion that there is a jurisdiction in the context of direct tax is refuted by the decision in Hok .”

“There is to be a tribunal, known as the First-tier Tribunal, for the purpose of exercising the functions conferred on it under or by virtue of this Act or any other Act. ” (2) In relation to income tax, the tribunal’s primary functions are to determine “appeals” made under the Taxes Act which are notified to it (see ss 49D(3), 49G(4) and 48(1) TMA). (3) In relation to the statutory appeals in question, para 9 of schedule 1A TMA provides: “(7) If on an appeal notified to the tribunal, the tribunal decides that a claim which was the subject of a decision contained in a closure notice under paragraph 7(3) above should have been allowed or disallowed to an extent different from that specified in the notice, the claim shall be allowed or disallowed accordingly to the extent that appears appropriate, but otherwise the decision in the notice shall stand good.”

“(1) The FTT is a creature of statute. It was created by s. 3 of the Tribunals, Courts and Enforcement Act 2007 (“TCEA”) “for the purpose of exercising the functions conferred on it under or by virtue of this Act or any other Act”

“on analysis have been because that was the true construction of para 9(7). Similar decisions have been made in relation to other cases where taxpayers have sought to argue that they should have had the benefit of an extra statutory concession: examples to which we were referred included Prince v HMRC [2012] UKFTT 157 , Shanklin Conservative & Unionist Club v HMRC [2016] UKFTT 135 (TC) .” 225. They continued, at [33], that they did not read the Court of Appeal’s decision in BT Trustees “as having laid down any general rule as to the FTT’s jurisdiction applicable in all cases” noting, in particular, that the Court of Appeal expressly said that they were giving no view on Sales J’s interpretation of s 83 in Oxfam . In the UT’s view, that confirms that the Court of Appeal viewed the question whether Sales J was correct on s 83 as a question of interpretation of that section. The UT said that they also did not need to express a view on the jurisdiction of the tribunal under s 83(1) and the contrasting decisions in Oxfam and Noor but said that “it can be seen that what is in issue is the correct interpretation of that provision”. 226. As regards the appeal in Birkett , they noted, at [35] to [38] that under s 49D(3) TMA, the tribunal’s jurisdiction is to decide “the matter in question”, which they thought was confined “to asking whether the statutory requirements under para 40(1) are met”

“the resolution of this appeal turns in our view on what the statutory provisions say, not on some broader principle”. 228. They noted, at [41], that counsel said that the legislation in this case was wide enough to confer power on the tribunal to review whether a penalty should have been imposed: para 46(1)(a) of schedule 36, which provides that “HMRC may assess the penalty”, conferred a discretion on HMRC to assess a penalty, and the power of the tribunal to confirm or cancel the decision under para 48(3) should be construed as wide enough to enable the tribunal to reconsider the exercise of discretion and hence to take into account such matters as fairness and the appellants’ legitimate expectations. 229. At [42] they rejected that argument. They accepted that para 46(1)(a) confers on HMRC a discretion whether to assess a penalty and, if the legislation had conferred a right of appeal against that discretionary decision, then it would have been arguable that the tribunal would have had the power to reconsider the appropriateness of the penalty being assessed and that, in doing so, it could take into account all relevant factors, including fairness and legitimate expectation. But as they read the legislation, para 47(a) does not confer a right of appeal against the discretionary decision of an HMRC officer under para 46(1)(a) to assess the penalty. Discussion - approach set out in the caselaw 230. It is plain from the decisions set out above that, as a body formed by statute to carry out functions conferred by statute, the tribunal can only consider public law matters if and to extent that that function is conferred on it by statute. I note, in particular, that in BT Trustees the Court of Appeal (a) held that the statutory jurisdiction conferred upon the tribunal (by s 3 TCEA 2007), namely, to exercise the functions conferred on it by statute is “to be read as exclusive” and (b) commented that the fact that s 15 TCEA 2007 gives the UT jurisdiction to decide applications for judicial review when transferred from the administrative court indicates that when one of the tax tribunals is “ intended to be able to determine public law claims Parliament made that expressly clea r”. 231. On that basis, clearly, the tribunal has jurisdiction to consider a public law matter if there is an express statutory provision conferring that power upon it. However, under the case law set out above it has been held that, even where there is no such express provision, the tribunal may have jurisdiction to consider a public law matter if, on the correct construction of the provisions which confer jurisdiction on it or under which it exercises its jurisdiction, it is “necessary” or “falls to” the tribunal to decide that public law matter in exercising that jurisdiction or in deciding whether it has jurisdiction. 232. The decision in Oxfam is the only decision cited to me in which it has been held that, notwithstanding the absence of an express provision conferring power on the tribunal to hear a public law matter, the tribunal had jurisdiction to do so. In that case Sales J put a broad interpretation on the provision giving the taxpayer the right to make an appeal to the tribunal “with respect to ... (c) the amount of any input tax which may be credited to a person” (s 83(1)(c)). In his view, on its ordinary and natural meaning that provision is wide enough to cover any legal question capable of being determinative of the issue identified in its terms such as the legitimate expectation argument the taxpayer wished to raise. Sales J also commented that there was a clear public benefit in construing s 83 in that way and it seemed plausible that Parliament would have had these public benefits in mind then legislating in these wide terms. In the later decision in Noor , however, the UT took an entirely contrary view of the scope of this provision, namely that Parliament’s intention was to enable a taxpayer to appeal to the tribunal only in respect of a right to credit for input tax provided for under the VAT legislation . In Hok , Birkett and BT Trustees the UT and the Court of Appeal all interpreted the relevant provisions conferring jurisdiction on the tribunal as confined to entitling it to consider the relevant question under applicable tax law and not common law matters of legitimate expectation. 233. In the later cases, in seeking a resolution to the conflict in the decisions in Oxfam and Noor , taxpayers have argued that the decision in Oxfam has laid down a broader principle that the tribunal has jurisdiction to decide a public law point. However, in Birkett and in BT Trustees the UT and the Court of Appeal have both specifically and emphatically rejected that. In their view, Sayles J made the decision in Oxfam on the basis of the correct interpretation of the relevant statutory provision (namely, s 83(1)(c)); he did not set out some broader principle of general application whatever the wording used. Accordingly, in Birkett the UT did not consider it necessary to consider which of the contrasting views set out in Noor and Oxfam is correct; that was not material to the decision given that the position depends on the statutory construction of the particular statutory rules in question. However, it is notable that whilst holding that, in principle, on the correct interpretation of the relevant statutory provisions, the tribunal may have jurisdiction to hear public law matters, in practice, in none of the cases following Oxfam , have the UT or court found that is what Parliament intended in the absence of any express indication in the relevant legislation to that effect. Whilst each case will depend on the statutory wording in question, there is no example available in a direct tax context of what type of wording may indicate such an intention and, in an indirect tax context, no consensus on the intention to be taken on the relevant wording considered. Discussion - application of the approach set out in caselaw 234. Approaching the matter as set out in the relevant case law, it is necessary, therefore, to consider the scope of the tribunal’s jurisdiction as a matter of statutory interpretation. To recap, the appeal process operates as follows: (1) The lead appellants appealed to HMRC under s 31(1)(b) in respect of “any conclusion stated or amendment made by a closure notice under section 28A”, namely, the s 28 amendments made by HMRC when they closed their enquiries into the lead appellants’ returns for the relevant tax years. (2) Under s 49A to I, where the appeal is notified to the tribunal, the tribunal is to decide “the matter in question” which means “the matter to which an appeal relates”, namely, the s 28 amendments. (3) The extent of the tribunal’s powers on such an appeal is set out in s 50 which includes a provision that, on an appeal notified to the tribunal, if the tribunal decides that the appellant “is overcharged by a self-assessment” which, for this purpose, includes amendments to a self-assessment made under s 28, the assessment is to be reduced accordingly, but otherwise the assessment stands good. (4) The lead appellants’ case is, in essence, that, under the s 28 amendments, they were “overcharged” to income tax on the disputed sums because a tax credit arose, as defined in regulation 185, which HMRC should have taken into account in those amendments. 235. Under the above provisions, the scope of the lead appellants’ appeals to the tribunal and of the tribunal’s powers in respect of those appeals is framed essentially by reference to the overall scope of the self-assessment system and HMRC’s powers in relation to it. I note the following: (1) In the overall context of the operation of the self-assessment regime, the obligation (under ss 8 and 9) on a taxpayer to include in his tax return for each tax year a self-assessment of the capital gains tax and income tax “chargeable” on him and income tax “payable” by him requires an assessment of such sums as provided for under the statutory tax regime. (2) Under s 9A HMRC may enquire into anything included in a return or required to be included in a return such as the taxpayer’s self-assessment. In this case, HMRC enquired into the lead appellants’ income tax position in respect of the arrangements as self-assessed by them in the relevant tax years. (3) When HMRC close such an enquiry they are required under s 28 to state their conclusions and make any amendments to the return necessary to give effect to their conclusions. Given the nature of the enquiry permitted under s 9A, the conclusions and amendments contemplated are those relating to the taxpayer’s tax position under the statutory tax system. In this case, under the s 28 amendments, HMRC concluded that further income tax was due in respect of the relevant tax years. (4) Section 50, in effect, confines the tribunal’s power to deciding if the lead appellants are “overcharged” by the s 28 amendments which HMRC have made. The reference to an “overcharge” is broadly framed; it is not specifically confined to an excess charge to tax or to sums due under the statutory tax system. However, with the above context in mind, it is reasonable to suppose that the tribunal’s powers are intended to be confined to deciding if, under the s 28 amendments, HMRC have calculated too much income tax to be chargeable and payable, as such income tax is to be computed under the statutory tax regime. 236. The relevant underlying statutory question, on which the lead appellants’ case hinges, is whether, under the arrangements, a tax credit arises in respect of each relevant tax year, within the meaning of regulations 185(5) and 185(6). HMRC argued that, as a result of the issue of the s 684 decisions, s 684(7A)(b) applies, in effect, to override the analysis set out in Part C that such a tax credit arises in the relevant periods (other than the first period). In their view, s 684(7A)(b) instructs the tribunal not to read the relevant PAYE regulations as though the Clients were required to comply with them as regards accounting for income tax chargeable on the sums in dispute and, therefore, not to read regulation 185(6) as meaning that the Clients were liable to account for such income tax (so that no tax credit arises under that provision). 237. Whether and how s 684(7A)(b) applies is, therefore, plainly a matter which the tribunal must consider. The tribunal cannot determine whether a tax credit arises under regulation 185 without considering whether s 684(7A)(b) applies and, if so, what effect it has. It seems to me that this ought not to be controversial; it is plainly within the tribunal’s remit to consider the application and effect of any provision within the tax legislation which may impact on an issue of statutory construction squarely before it in deciding whether an appellant has been “overcharged” within the meaning of s 50. 238. However, the lead appellants’ arguments raise the further question of whether the tribunal is entitled to consider whether, even if on the face of it the s 684 decisions fall within the terms of s 684(7A)(b), the decisions are, as a matter of public law, nullities, void and of no effect so that, whatever the correct interpretation of its terms, s 684(7A)(b) can have no practical effect. I note the following: (1) There is no provision conferring any right on a taxpayer to appeal to the tribunal against the s 684 decisions or conferring any supervisory jurisdiction on the tribunal as regards whether the decisions have been made by an officer of HMRC acting reasonably, whether the officer is viewed as having acted under HMRC’s general care and management powers or under a specific power conferred by s 684(7A)(b) itself. (2) As set out above, the rules setting out the lead appellants’ appeal rights and conferring jurisdiction on the tribunal to consider the lead appellants’ appeal do not themselves indicate that the tribunal has any general power to consider public law matters in considering appeals of this type. (3) On that basis and in light of the approach set out in the caselaw, it seems to me that the tribunal would have jurisdiction to consider the lead appellants’ public law arguments only if, on the correct interpretation, that is required by the provisions the tribunal must construe to decide if there is a tax credit, namely regulation 185 and s 684(7A)(b) itself. 239. Regulation 185 is framed by reference to the employer’s or payer’s liability to deduct and/or account for income tax under the PAYE regime. In my view, on its plain, natural meaning, s 684(7A)(b) does not require or entitle the tribunal to consider whether the relevant officer has lawfully made or has acted unreasonably in making any decision which he purports to make under or in accordance with that provision: (1) Section 684(7A) is perhaps somewhat oddly framed in that it does not expressly confer on HMRC’s officers a power to make decisions of the type referred to or refer to HMRC’s officers having the power to do so under any under statutory provision. Rather it is implicit that the officer is viewed as entitled to make a decision of the specified type from the fact that s 684(7A) operates to give effect to such a decision by providing, in effect, that the PAYE regulations are to be read in accordance with that decision, thereby preventing the relevant regulations from applying where they otherwise would. (2) Given that the provision operates “in circumstances in which the officer is satisfied that it is unnecessary or inappropriate to require” the payer to comply with the PAYE regulations, there can be no implication that the tribunal is mandated to form its own judgement on whether it is unnecessary or inappropriate for the payer to comply with the PAYE regulations or to decide if the officer has acted unreasonably in forming his view. In other words, s 684(7A) works on the basis that it is for the officer himself to decide whether he is so satisfied and, for the reasons already given, it is assumed that he is entitled to make that decision. (3) The tribunal is simply instructed (as is any other person who has to interpret the PAYE regulations) that where an officer is so satisfied, the PAYE regulations are to be read in a manner which gives effect to that decision. 240. I note that, in a broad sense, it can be said that it is “necessary” for or, that it “falls to” the tribunal to decide whether the s 684 decisions are invalid because the outcome of the public law analysis may well affect the impact of the tribunal’s decision whether a tax credit arises as a matter of statutory interpretation. For example, if the tribunal were to decide that s 684(7A)(b) requires the PAYE regulations to be read as HMRC argue for such that there is no tax credit in any relevant period, a finding by the administrative court that, as a matter of public law, the s 684 decisions are nullities, in effect, would render redundant or entirely negate the tribunal’s conclusion on that point. HMRC would be required to give effect to the decision of the administrative court presumably by recognising a sum equal to the tax credit that would have arisen but for their invalid s 684 decisions in computing the lead appellants’ tax liability in the relevant tax years. In that sense, the outcome of the tribunal’s statutory analysis and of the public law issues are inextricably linked. That appears to be what the lead appellants meant in arguing that the tribunal cannot decide whether there is a tax credit without assessing whether the s 684 decisions are valid. 241. However, in my view, on a purposive approach to the legislation, it cannot be assumed that Parliament had an intention to empower the tribunal to decide a public law matter, in the absence of any clear indication in the wording used in the relevant provisions, simply because the outcome of that matter may have an impact on the effect of any decision which the tribunal does have jurisdiction to make. As the Court of Appeal said in BT Trustees it is to be expected that, if the tribunal is to have jurisdiction in such public law matters, Parliament would make that expressly clear. It is a question of assessing which forum is intended to have the power to decide such matters and there is simply nothing in the relevant statutory powers conferred on the tribunal or in the relevant provisions under consideration to indicate that it is intended to be the tribunal. 242. I note that in Noor the UT indicated (although they did not decide the point) that the wording which gives a taxpayer a right to appeal to the tribunal “with respect to… (c) the amount of any input tax…”, may be construed as broad enough to permit an appeal in respect of all decisions made by HMRC under any powers conferred on it under the statutory VAT regime which impact on the amount of input tax. That may include, so the UT seemed to suggest, an appeal on the grounds that a decision made under a discretionary power conferred on HMRC under the VAT regime which affects the amount of an input tax credit was made unreasonably. The UT contrasted that with the case where a taxpayer seeks to challenge a decision made by HMRC acting wholly outside any discretionary powers conferred on HMRC under the statutory VAT regime on legitimate expectation grounds, which they considered plainly to be outside the scope of the tribunal’s jurisdiction. 243. Whilst that may well be a viable argument on the broad wording in question in Noor , my view is that, for all the reasons already given, in this case the wording of the relevant provisions does not carry any implication that it is for the tribunal to decide anything other than whether there is a tax credit as a matter of statutory construction of the relevant provisions, where relevant as those provisions are to be interpreted under s 684(7A)(b). Interpretation of s 684(7A)(b) Conclusion 244. For all the reasons set out below, I have concluded that, in any event, s 684(7A)(b) has no impact on the analysis of whether there is a tax credit as set out in Part C. As a matter of statutory construction, in my view: (1) Section 684(7A)(b) has no application in these circumstances. The s 684 decisions do not fall within its ambit or, if they do, that provision does not apply to give effect to them. (2) If the conclusion stated in (1) is wrong and s 684(7A)(b) is in point, it does not, in any event, require the tribunal to read regulation 185(6) on the basis that the Clients were not liable to account for income tax chargeable in respect of the relevant earnings. Discussion - does s 684(7A)(b) apply? 245. To recap: (1) Section 684(7A)(b) starts by setting out the consequence of its application in the form of an instruction to a person interpreting the PAYE regulations that “[n]othing in the PAYE regulations may be read as requiring the payer [a person who makes payments of, or on account of, PAYE income] to comply ” with them. (2) It then specifies when that consequence is to occur, namely, “ in circumstances in which ” an officer of HMRC “ is satisfied that it is unnecessary or not appropriate for the payer to do so [to comply with the PAYE regulations]”. 246. In my view, it is plain on the natural and ordinary meaning of s 684(7A)(b), that its overall purpose is to ensure that the payer is relieved from obligations under the PAYE regulations which an officer of HMRC decides should not apply to it on the basis that it is unnecessary or inappropriate for it to comply with them. In effect, it disapplies the PAYE regulations to the extent necessary to give effect to such a decision. 247. However, its overall tenor, in particular, in the framing of the provision in the present tense plainly indicates that it is intended to apply only where an officer makes a decision which, at the time of its making, seeks to relieve the payer from an obligation “ to comply” with the PAYE regulations which is an extant or “live” obligation, in the sense that, at the point the decision is made, the obligation remains to be fulfilled by the payer and/or, at least, that it could be subject to enforcement by HMRC. Hence, the need for the PAYE regulations to be disapplied. 248. On that basis, the s 684 decisions do not fall within the terms of s 684(7A)(b): (1) In all the circumstances of this case, in issuing the s 684 decisions, the relevant officer can be taken to have decided, effectively, only that he is presently satisfied that it is unnecessary or inappropriate for the relevant parties to have been required to comply with, or to have been subject to obligations under, the PAYE regulations as regards the relevant tax years. The officer has made the decision in circumstances in which (i) the dates for the Clients to comply with the relevant regulations by accounting for income tax chargeable on the sums in dispute have long passed, and (ii) HMRC are unable to enforce the Clients’ liability in that respect due to the expiry of the applicable statutory time limits or to direct that they are not so liable under regulation 81 (and HMRC accept that regulation 72 is not in point). (2) The s 684 decisions are not, therefore, the type of decision contemplated by s 684(7A)(b). They are not decisions seeking to relieve the Clients of an extant obligation “to comply” with the PAYE regulations, as envisaged by s 684(7A)(b), given that, at the time of their making, those parties would otherwise have no enforceable obligation to do so. (3) Moreover, it is reasonable to suppose that, if the legislature intended to enable HMRC in effect to disapply the PAYE regulations in circumstances such as these with wholly retrospective effect, they would have used clear words to that effect. 249. Even if the s 684 decisions are considered to fall within the terms of s 684(7A)(b), the provision would not operate to give effect to decisions of this type. For the reasons already set out, I read the opening words of s 684(7A) as limited to an instruction that nothing in the PAYE regulations may be read as requiring the payer to comply with them to the extent that, when the relevant decision is made, the payer would have an extant or live obligation to do so in the sense set out above. Discussion - effect of s 684(7A)(b) if it does apply 250. The decision in this section is made on the assumption that, contrary to the conclusions set out above, s 684(7A)(b) applies as a result of the issue of the s 684 decisions. The question at this stage of the analysis is whether, on the correct construction of its terms, s 684(7A)(b) requires the tribunal to read regulation 185(6) as though the Clients were not liable to account for income tax chargeable on the relevant sums in dispute. I note that the lead appellants raised other points as to why s 684(7A)(b) does not affect the statutory analysis which otherwise applies but, in my view, the prior question is precisely what effect that provision itself has. 251. In my view, in addressing this issue it is important to remember that, by issuing the s 684 decisions HMRC are seeking effectively to disapply two related but distinct sets of PAYE regulations as those provisions affect two different sets of taxpayers: (a) the regulations under which, as the employers/payers, the Clients were required to account for sums in respect of the income tax chargeable on the lead appellants’ earnings, and (b) regulations 185(5) and (6) which operate to determine if there is a tax credit which, under that regulation as it operates in relation to s 59B, is to be taken into account in computing the lead appellants’ tax position under s 59B(1) (and which ought to have been taken into account in the s 28 amendments). 252. HMRC seem to assume that if s 684(7A)(b) gives effect to the first aspect of their s 684 decisions, it must also give effect to the second aspect. However, for all the reasons set out below, I have concluded that even if, on HMRC’s argument, s 684(7A)(b) gives effect to the s 684 decisions so far as they relate to the disapplication of the PAYE regulations in relation to the Clients (as the payers), it does not give effect to those decisions so far as they purport to disapply the provisions of regulation 185 as regards the tax position of the lead appellants. 253. As set out above, it is plain that the overall purpose of s 684(7A)(b) is to ensure that the payer is relieved from obligations which HMRC decide should not apply to it. The consequences set out in that provision are triggered only if and to the extent that an officer of HMRC decides that the payer is not required to comply with the PAYE regulations and those consequences are limited to ensuring that, “nothing in the PAYE regulations may be read” as requiring the payer to comply to that extent. Leaving aside my concerns as to the retrospective nature of the s 684 decisions it would accord with that purpose if s 684(7A)(b) were to apply to require the tribunal to read the relevant PAYE regulations, which would otherwise require the Clients to account for income tax due on the sums in question, as though the Clients were not required to comply with them. 254. However, in my view, it does not necessarily follow, as HMRC seemed to suggest, that the legislature must be taken to have intended that the retrospective disapplication of the payer’s compliance obligation, where relevant, is to be read into regulations which determine the tax position of the relevant worker. It is one thing to disapply the PAYE regulations retrospectively to relieve the payer/employer from its own obligations under them for a tax year and another, in effect, to re-write the rules under which the employee/worker is required to calculate his tax liability for that tax year. In other words, it seems to me that an intention to give effect to a decision by an officer of HMRC to absolve the employer/payer from liability under the PAYE regulations with retrospective effect does not necessarily connote an intention that that liability is to be assumed never to have existed so far as that is relevant to determining the tax position of the employee/worker. That is particularly the case where, as is the situation here, reading that disapplication into the relevant regulation (185(6)) would shift the liability to account for tax from the employer/payer to the employee/worker. 255. I have concluded that in fact s 684(7A)(b) is not intended to extend that far: (1) As noted, as aligns with its underlying purpose (namely, to relieve payers of obligations under the PAYE regulations where HMRC decide they should not be subject to them), the very clear focus of s 684(7A) is on the position of the payer/employer as regards its own obligations under the PAYE regulations. That suggests that s 684(7A) is intended to affect the meaning only of those PAYE regulations which are capable of applying directly to the payer in terms of subjecting it to an obligation (to the extent that HMRC’s decisions means that the relevant obligation should not apply). (2) It seems to me that clear words would be needed to indicate that s 684(7A)(b) is intended to apply also to affect the interpretation of regulations, such as regulation 185, which are concerned with the tax liability of the relevant employee/worker. Regulation 185(5) operates to include income falling within regulation 185(6) in the sums to be deducted from the tax assessed to be chargeable on the employee/worker in computing the overall tax payable by him for the relevant tax year under s 59B. Viewed in context and on the natural and ordinary meaning of the terms used, regulation 185(6) captures income tax which the employer/payer was liable to deduct or account for in respect of the relevant earnings under the law applicable in the relevant tax year in the light of all facts and circumstances applicable at that time. (I note that the question of how much tax is payable by the lead appellants under s 59B is not as such before the tribunal for decision. The tribunal’s task is to consider whether the lead appellants have been overcharged by the s 28 amendments and, hence, to assess how regulation 185 and s 59B interact with the self-assessment provisions in ss 8 and 9. However, in this context it is relevant to consider this issue given that, on HMRC’s interpretation, s 684(7A)(b), in effect, disapplies regulation 185(5) for all purposes.) (3) However, there are no such clear words: (a) The instruction in s 684(7A)(b) that, where HMRC have made a relevant decision, “nothing in the PAYE regulations may be read as requiring the payer to comply ” does not readily translate into an instruction that the tribunal is to read regulation 185(6) as though the Clients were not liable to deduct or account for income tax under the PAYE regulations. (b) To read s 684(7A)(b) in that way would require reading words into it along the following lines: “or as having required the payer to comply….” and, to put the matter beyond doubt, “so that the payer is not to be regarded as being or having been liable to comply with any such PAYE regulations whether for the purposes of assessing its own liability under those regulations or the tax position of any other person under any other regulation”. (4) Adopting HMRC’s interpretation could lead to results which are wholly out of kilter with the purpose of s 59B and regulation 185 and the scheme of the self-assessment and charging mechanism generally. The effect would be to generate wholly unexpected tax liabilities for taxpayers who have accounted for tax according to the applicable law in the light of the circumstances in the relevant tax years. Abuse of process 256. For the reasons set out below, I have decided that the tribunal does not have jurisdiction to hear the appellants’ “abuse of process” arguments and, accordingly, that there is no basis for the tribunal to direct that HMRC is barred from all or any part of these proceedings. Caselaw 257. The extent of the tribunal’s jurisdiction as regards “abuse of process” has been considered in detail by the UT in Foulser . At [28], the UT said the difficulties which arise in this context are largely attributable to the fact that the phrase “abuse of process” has been used to describe two different things: (1) One type of “abuse of process” is where “a party abuses the procedure of the court or tribunal and the court or tribunal needs to react to that abuse by making appropriate orders, which might extend to an order striking out a case or a defence”. (2) Another type is where “a party’s conduct in bringing the process is unlawful in public law and a court is asked to exercise its judicial review jurisdiction to restrain such behaviour”

“I would accordingly affirm the power of the magistrates…..to exercise control over their proceedings through an abuse of process jurisdiction. However, in the case of magistrates this power should be strictly confined to matters directly affecting the fairness of the trial of the particular accused with whom they are dealing, such as delay or unfair manipulation of court procedures. Although it may be convenient to label the wider supervisory jurisdiction with which we are concerned in this appeal under the head of abuse of process, it is in fact a horse of a very different colour from the narrower issues that arise when considering domestic criminal trial procedures. I adhere to the view I expressed in Reg. v. Guildford Magistrates' Court, Ex parte Healy [1983] 1 W.L.R. 108 that this wider responsibility for upholding the rule of law must be that of the High Court and that if a serious question arises as to the deliberate abuse of extradition procedures a magistrate should allow an adjournment so that an application can be made to the Divisional Court which I regard as the proper forum in which such a decision should be taken.” (Emphasis added,)

“….. there is a limited category of cases, involving infractions of the rule of law outside the narrow confines of the actual trial or court process, where the magistrates do not have jurisdiction, or alternatively as a matter of law should not exercise such jurisdiction as they may have . So much is clear from Lord Griffiths’s speech in Bennett …….That category is however a narrow one. It excludes every complaint that is directed at the fairness or propriety of the trial process itself………… 5. The wide category of cases over which magistrates have jurisdiction includes investigation of the bona fides of the prosecution or of whether the prosecution has been instituted oppressively or unfairly: see for instance per Lord Oliver of Aylmerton in Bennett at pages 132 and 70……. The category of domestic trial procedures to which Lord Griffiths referred in Bennett must include cases that fall foul of the Hunter rule.” (Emphasis added.)

“18 The two categories of cases in which the power to stay proceedings for abuse of process may be invoked in this area of the court's jurisdiction are (i) cases where the court concludes that the defendant cannot receive a fair trial, and (ii) cases where it concludes that it would be unfair for the defendant to be tried. We derive these two categories from the judgment of Neill LJ in R v Beckford (Anthony) [1996] 1 Cr App R 94 , 101. He observed that in some cases these categories may overlap. There may, of course, be other situations in which a court is entitled to protect its own process from abuse, for example where it considers that proceedings brought by a private prosecutor are vexatious (see R v Belmarsh Magistrates’ Court ex p Watts [1999] 2 Cr App R 188 ), but we are not here attempting to carry out an exhaustive review of this jurisdiction. 19 We are not at present concerned with the second of these two categories (which we will call “category 2 cases”), in which a court is not prepared to allow a prosecution to proceed because it is not being pursued in good faith, or because the prosecutors have been guilty of such serious misbehaviour that they should not be allowed to benefit from it to the defendant's detriment. In some of these cases it is this court, rather than any lower court, which possesses the requisite jurisdiction: see Ex p Watts, per Buxton LJ at p 195 B - D. 20 In these cases the question is not so much whether the defendant can be fairly tried, but rather whether for some reason connected with the prosecutor's conduct it would be unfair to him if the court were to permit them to….The court's inquiry is directed more to the prosecutor's behaviour than to the fairness of any eventual trial. Although it may well be possible for the defendant to have a fair trial eventually, the court may be satisfied that it is not fair that he should be put to the trouble and inconvenience of being tried at all. … 24 The first category of case (see paragraph 18 above: we will call these “category 1 cases”) is founded on the recognition that all courts with criminal jurisdiction, including magistrate's courts, have possessed a power to refuse to try a case, or to refuse to commit a defendant for trial, on the grounds of abuse of process, but only where it is clear that otherwise the defendant could not be fairly tried. An unfair trial would be an abuse of the court's process and a breach of article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms. In these cases, the focus of attention is on the question whether a fair trial of the defendant can be had.” (Emphasis added.)

“I consider that for the purpose of determining the jurisdiction of the FTT to deal with arguments as to abuse of process, cases of alleged abuse of process can be divided into two broad categories. The first category is where the alleged abuse directly affects the fairness of the hearing before the FTT. The second category is where, for some reason not directly affecting the fairness of such a hearing, it is unlawful in public law for a party to the proceedings before the FTT to ask the FTT to determine the matter which is otherwise before it. In the first of these categories, the FTT will have power to determine any dispute as to the existence of an abuse of process and can exercise its express powers (and any implied powers) to make orders designed to eliminate any unfairness attributable to the abuse of process. In the second category, the subject matter of the alleged abuse of process is outside the substantive jurisdiction of the FTT. The FTT does not have a judicial review jurisdiction to determine whether a public authority is abusing its powers in public law. It cannot make an order of prohibition against a public authority.” 262. In addition to relying on Foulser , Ms Redston relied on comments of Lord Diplock in Hunter v Chief Constable of West Midland [1982] AC 529 (as cited in the Belmarsh case cited in Foulser ): (1) As Lord Diplock explained, the abuse of process in question in that case related to: “ the initiation of proceedings in a court of justice for the purpose of mounting a collateral attack upon a final decision against the intending plaintiff which has been made by another court of competent jurisdiction in previous proceedings in which the intending plaintiff had a full opportunity of contesting the decision in the court by which it was made”. (2) Lord Diplock then made the following general comments on which Ms Redston relied: “ This is a case about abuse of the process of the High Court. It concerns the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people. The circumstances in which abuse of process can arise are very varied; those which give rise to the instant appeal must surely be unique. It would, in my view, be most unwise if this House were to use this occasion to say anything that might be taken as limiting to fixed categories the kinds of circumstances in which the court has a duty (I disavow the word discretion) to exercise this salutary power.” (Emphasis added.)

“(1) … the following provisions of this section shall have effect for the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfer of assets by virtue or in consequence of which, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled outside the United Kingdom. … (2) Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated operations, such an individual has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled outside the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be income of that individual for all purposes of the Income Tax Acts.” 266. The terms “associated operations” and “power to enjoy….income” are defined in s 742 as follows: “(1) For the purposes of sections 739 to 741 “an associated operation” means, in relation to any transfer, an operation of any kind effected by any person in relation to any of the assets transferred or any assets representing, whether directly or indirectly, any of the assets transferred, or to the income arising from any such assets, or to any assets representing, whether directly or indirectly, the accumulations of income arising from any such assets. (2) An individual shall, for the purposes of section 739, be deemed to have power to enjoy income of a person resident or domiciled outside the United Kingdom if - (a) the income is in fact so dealt with by any person as to be calculated, at some point of time, and whether in the form of income or not, to enure for the benefit of the individual; or (b) the receipt or accrual of the income operates to increase the value to the individual of any assets held by him or for his benefit; or (c) the individual receives or is entitled to receive, at any time, any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which directly or indirectly represent that income; or (d) the individual may, in the event of the exercise or successive exercise of one or more powers, by whomsoever exercisable and whether with or without the consent of any other person, become entitled to the beneficial enjoyment of the income; or (e) the individual is able in any manner whatsoever, and whether directly or indirectly, to control the application of the income. (3) In determining whether an individual has power to enjoy income within the meaning of subsection (2) above— (a) regard shall be had to the substantial result and effect of the transfer and any associated operations, and (b) all benefits which may at any time accrue to the individual (whether or not he has rights at law or in equity in or to those benefits) as a result of the transfer and any associated operations shall be taken into account irrespective of the nature or form of the benefits…..” 267. The lead appellants also referred to the following provisions in s 743: “(2) In computing the liability to income tax of an individual chargeable by virtue of section 739, the same deductions and reliefs shall be allowed as would have been allowed if the income deemed to be his by virtue of that section had actually been received by him…. (5) In any case where an individual has for the purposes of that section power to enjoy income of a person abroad by reason of his receiving any such benefit as is referred to in section 742(2)(c), then notwithstanding anything in subsection (1) above, the individual shall be chargeable to income tax by virtue of section 739 for the year of assessment in which the benefit is received on the whole of the amount or value of that benefit except in so far as it is shown that the benefit derives directly or indirectly from income on which he has already been charged to tax for that or a previous year of assessment.”

“by entering into the contract of employment the taxpayer created rights vested in [the company] which were valuable and capable of being turned to account, and that by virtue of those rights, together with the associated operation of carrying on a trade as business consultant, income became payable to [the company].” 272. In making this finding, he rejected the Special Commissioners’ view that the taxpayer’s earning capacity was not an asset in respect of which rights could be transferred to or created in favour of the company. He could see no basis for this restrictive interpretation: “The Special Commissioners found, in my judgment rightly, that the contract of employment conferred enforceable rights against the taxpayer. O’ Brien (Inspector of Taxes) v Benson Hosiery (Holdings) Ltd [1979] STC 735 ….shows that such rights can be assets for the purposes of a disposal under the capital gains legislation. In my judgment they are equally rights which qualify as assets under [the predecessor to s 739]. ” 273. Ms Redston submitted that: (1) In Brackett , it was relevant to the decision that the taxpayer’s remuneration was deferred and that the relevant arrangements created enforceable rights between the parties. She also noted that in R (oao Dickinson) v HMRC [2017] UKHC 1705 (Admin) at [73] the High Court noted that “the facts [of Boyle ]…are stark and so at least potentially easily distinguishable from other cases”. (2) Applying the usual principles of contractual construction to the interpretation of the Services Agreement, as those principles are set out in Autoclenz v Belcher , the true agreement between the parties was that the monies the lead appellants expected to receive for the provision of their services to the Clients would pass through the Partnership into their hands in a largely tax free form. Moreover, on HMRC’s own case, the Partnerships had no enforceable rights against the lead appellants: HMRC accepted in submissions that (i) in effect, the arrangements could be switched on or off at the lead appellants’ option; (ii) the provision in the Services Agreements which required that the appellants worked for 1200 hours per year was inoperable; (iii) the provisions relating to termination of the agreement on the giving of notice were not enforceable and those in the Assignment Contracts related to the requirements of the Recruitment Agent and the Clients. 274. HMRC countered as follows: (1) The fact that the lead appellants obtained a fixed Fee under the Services Agreement is immaterial; there is no requirement in the case law that to constitute a transfer of assets in the form of the creation of a contract for the provision of services, the services must be provided for no value or at an undervalue (although, in this case, they clearly were provided at an undervalue). (2) The fact that some of the provisions in the Services Agreement may be unenforceable does not alter the fact that the agreement created rights in favour of the Partnership which were of at least some value to the Partnership; the obligation to work for the Partnership or its clients plainly produced value for it in the form of the income it then received (and thereby for the Trust). The rights created may not be as valuable as those created in Brackett or in O’Brien , but the provision does not require an assessment of the precise value of the rights created. (3) Moreover, if the lead appellants are correct that there was no creation of any rights then their argument cannot succeed that s 44 ITEPA applies on the basis that there was a binding agency contract between the lead appellants and the Partnership. The lead appellants cannot argue that there was a creation of such rights for the purposes of s 44 but not for the purpose of the TOAA provisions. 275. Essentially, I agree with the points made by HMRC. Applying the reasoning in Brackett , the creation of rights under the Services Agreement constituted a transfer of assets to the partners in the Partnership. On the factual findings made above, in entering into the Services Agreement: (1) Each lead appellant plainly created rights vested in the relevant Partnership which were valuable and capable of being turned to account and by virtue of which, together with the associated operation of the lead appellant providing his services to Clients, income became payable to the partners in the Partnership as allocated in its entirety to the Trustee. (2) In return for those rights, each lead appellant was contractually entitled to receive the Fee. It could perhaps be argued that each lead appellant had the benefit of an undertaking by the Partnership (albeit not written into the Services Agreement) or at any rate an assurance that the relevant sums would be allocated exclusively to the Trustee in its capacity as partner in the Partnership thereby falling within the income arising to the Trust which was to be paid to the lead appellant as the life tenant of the Trust. However, the fact that the lead appellants were entitled to the fixed Fee under the Services Agreement suffices to create a binding contract between the parties. (3) I note that, as HMRC submitted, the lead appellants cannot “have it all ways”

“ For my part I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so.” (b) Similarly, in East End Dwellings v HMRC [1952] AC 109 at p 132, Lord Asquith said: “If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it.” (3) On the facts of these appeals, it is simply not possible for the income received by the relevant Trustees to be “deemed to be” the lead appellants’ income under s 739(2): (a) The lead appellants had no power to enjoy the income generated by their work for the Clients until, in effect, it arose to the Trust in the form of the Profit Share but it was already their income before it was paid to the Trust as s 44 ITEPA applied to deem it to be such. Therefore, there is no point in time when the income received by the Partnership could be deemed to be the income of the lead appellants for the purposes of s 739. In other words, sums which are already deemed to be taxable income of the relevant individuals for income tax purposes (in this case under s 44 ITEPA) cannot be deemed to be the very thing that such sums already constitute. (b) Similarly, it is clear that the lead appellants had no power to enjoy the income of the Partnership because the lead appellants’ only right under the Services Agreements was to the fixed Fee. They had no power to enjoy the rest of the income derived from their work until it was transferred to the Trust. In any event, at the very moment when the income was received by the Partnership, s 44 ITEPA applied to charge it to tax as the lead appellants’ deemed earnings under that provision. 277. HMRC responded as follows: (1) It is clear that s 739 can apply even where another taxing provision also applies. It is expressly stated to apply to income “whether it would or would not have been chargeable to income tax” apart from the application of s 739 for all the purposes of the Income Tax Acts. In other words, s 739 takes precedence over any other provisions which may potentially apply such as s 44 ITEPA. Furthermore, this is clear from the decision in IRC v McGuckian [1997] STC 908 (see, for example, the comments of Lord Steyn.) (2) The lead appellants are incorrect that the Profit Share is to be treated as earnings when the relevant monies are received by the Partnership: (a) It is only when the Profit Share was paid out of the Trust to the relevant lead appellant that s 44(2) ITEPA is triggered to deem those monies to be earnings, as sums “receivable under or in consequence” of an agency contract. The monies do not lose their inherent character as income of a trading Partnership arising to the Trustee until that point. If that were not the case, the lead appellants would be liable to tax under s 44 ITEPA on the gross sums before the deduction of items such as the Arrangement Fee. (b) Moreover, there is no straight read across from Rangers to the facts of this case given that that case dealt with the general charging provisions in ITEPA. (c) In any event, the general provisions in ITEPA do not assist the lead appellants as, under those provisions (s 18 ITEPA), a tax charge is triggered by reference to the time when a payment is received or when a person has an entitlement to receive it. The lead appellants had no entitlement to the relevant sums until the sums arose to the relevant Trust and did not receive them until they were paid to them. 278. The lead appellants added that: (1) On the point about when a tax charge is triggered under ITEPA, as Lord Hodge said in Rangers at [38], the rule in s 18 is “unspecific as to the identity of the recipient”

“for all the purposes of the Tax Acts, that interest, whether it would or would not be chargeable to tax apart from the provisions of this section - (a) shall be deemed to be the income of the owner or, in a case where the owner is not the beneficial owner of the securities and some other person (hereafter in this section referred to as 'a beneficiary') is beneficially entitled to the income arising from the securities, the income of the beneficiary; and (b) shall be deemed to be the income of the owner or beneficiary for that chargeable period, and (c) shall not be deemed to be the income of any other person; . . .” (5) The special commissioner held that the transactions were not a sham and that, since the notice of assessment stated that the tax liability arose under s 478, he could not uphold it under s 470. (6) In the Court of Appeal HMRC contended that (a) although the transactions were not a sham they fell to be disregarded under the principles set out in W. T. Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 and (b) the special commissioner should have upheld the assessment under s 470 and the Court of Appeal could remit the case to him with a direction that he should do so. The Court of Appeal by a majority rejected the argument based on the Ramsay principle but held that it did have power to remit the case to the special commissioner with a direction that he uphold the assessment under s 470. (7) In the House of Lords HMRC appealed against the dismissal of their claim based on the Ramsay principle and the taxpayer cross-appealed against the order remitting the case to the special commissioner. 282. As Lord Browne-Wilkinson explained at page 912, the crucial question was whether the moneys received by the trustee as consideration for the assignment of the right to the dividends fell to be treated as “income” of the trust for the purposes of s 478. On the face of it, those moneys constituted capital not income, being the price of the sale by the trustee of its right to the future dividends of the offshore company. However, HMRC argued that, applying the approach in Ramsay , the sale of the right to the dividends, though not a sham, had to be disregarded for tax purposes. The sale was an artificial transaction inserted for the sole purpose of gaining a tax advantage: the reality of the transaction was the payment of a dividend by the offshore company to the shareholder, the trustee, which received it as income. 283. Lord Browne-Wilkinson considered that the circumstances in McGuckian fell squarely within the classic requirements for the application of the Ramsay principle as stated by Lord Brightman in Furniss v Dawson [1984] AC 474 , 527D-E. He said, at page 913, that on that basis, the liability for tax on the indirect receipt of such dividend by the trustee “has to be determined by stripping out the artificial steps and applying the provisions of the Taxes Acts to the real transaction, i.e. the payment of a dividend to the shareholder, [the trustee], which received such dividend as income”

“For the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax…”

“refer not to the intention of the transferor of the assets or the effect of such transfer but to the intention of Parliament in enacting the section. That parliamentary intention is certainly relevant in construing the section. But the words of subsection (1) make it clear that the actual avoidance of tax is not a precondition to the application of the section. The income is deemed to be the income of the United Kingdom resident "whether it would or would not have been chargeable to income tax apart from the provisions of this section". It is therefore clear that section 478 can still apply even though the effect of the transfer of assets abroad would not have been successful in avoiding United Kingdom income tax .” (Emphasis added).

“Secondly, I would reject the argument that it is a condition precedent to section 478 applying that there must be proof of an actual avoidance of tax liability. Such a construction treats section 478 as a power of last resort and it substantially emasculates the effectiveness of the power under section 478. Nothing in the language or purpose of section 478 compels such a construction. Properly construed the opening words of section 478 merely provide that there must be an intention to avoid liability for tax. The sensible construction is that section 478 can be applied even if there are other provisions which could be invoked to prevent the avoidance of tax. That the revenue authorities should have overlapping taxation powers is an unremarkable consequence. And such a construction cannot cause any unfairness to the taxpayer since he cannot be taxed twice in respect of the same income .” (Emphasis added.)

“Mr Lancashire is the settlor/beneficiary of the [Trust] the trust deed of which was executed on 18/5/04 and is based in the Isle of Man.…. …..Mr Lancashire is the settlor/beneficiary of the [Trust] a trust established and controlled in the Isle of Man. The trust is a partner in a trading partnership written under the laws of the Isle of Man. The income received relates to the profits of the trading partnership distributed to the family settlement. According to [article 3] the profit from a Manx enterprise is exempt from the UK taxes on income. Income from the offshore partnership is treated as income from “Manx Enterprise” because all the partners are Isle of Man residents. The management and control of the partnership is carried out in the Isle of Man. No trade is carried out by a permanent establishment in the UK, thus the profits of the partnership are assessable by the Isle of Man and not the UK. The income which was received from the trust, represents the commercial profits of a Manx enterprise (the partnership profits), which are exempt from UK tax under [article 3]. This foreign income is subject to UK tax and has been disclosed in the 2004/05 tax return with a claim for double tax relief because such income is precisely the same income that has been exempted from UK tax. The principles of Archer Shee v Baker support this argument that the income arising to our client from the trust is not subject to UK tax as the income from the trust distributed to the beneficiary retains its character as treaty protected income earned by the Isle of Man partnership. Thus the income received by Mr Lancashire from the trust is characterised as income from the “Manx enterprise” and consequently he is entitled to claim Double Taxation Relief under [article 3].” (3) In a letter of 30 November 2006 HMRC said the letter had been sent to Mr Alan Brannigan of Special Civil Investigations. They noted they had not received the deed of settlement and enclosed a notice (issued under s 19A TMA) requiring this to be provided. Montpelier sent the deed to HMRC on 8 December 2006. (4) On 21 December 2006, HMRC replied that the relevant income was taxable on the basis that the “income arising to the trustees is chargeable on the life tenant because it is regarded as his income under the authority of Archer Shee v Baker”

“As you are aware enquiries are ongoing into your previous Tax Returns with regard to your claim for relief under [article 3]. I note that you have claimed relief again for 2005/06. As such, this year will be included as part of HMRC’s overall enquiry for this notice”

“ In the Budget on 12 th March the Government announced proposals to introduce legislation to retrospectively put it beyond doubt that claims such as yours are invalid. The consequence of the announcement is that assuming the proposals become law then, the claims you have made under the DTA will not be effective and the share of income arising in the Partnership(s) you have an interest in via your Trust(s) will be chargeable on you for every year in which such income arose or arises. Given this you may now wish to submit an amended return for 2006/07 to reflect that the partnership income is chargeable.” (11) In a letter of 18 July 2008 in relation to an unrelated tax issue in the tax year 2006/07, HMRC noted that Mr Lancashire’s self-assessment for that year was under enquiry in respect of the claim for relief under article 3. HMRC referred to the fact that proposals in the Finance Bill were moving to Royal Assent in July and that a colleague, Mr Alan Brannigan, who was dealing with this matter, hoped to meet with Montpelier to resolve outstanding issues. (12) On 23 November 2009, HMRC opened an enquiry into the 2007/08 year stating: “Every year we check a number of returns to make sure that they are correct …I would now like to check your return….I note that you have claimed relief under [article 3]”

“ My conclusion is that the Isle of Man Partnership income is taxable and therefore you have under-declared your tax . I am amending your return to reflect this…My amendment results in a £37,582.66 increase in tax due”

“The income of the trust, which you have claimed as exempt is chargeable as partnership income and as such is liable to both income tax and Class 4 NICs . I have amended your tax return to reflect my conclusion. It previously showed you are due to pay £184.05 tax. It now shows you are due to pay £12,383.20 tax. The difference is £12,199.15.” (Emphasis added.)

“ We are of the opinion that the distributions from the Isle of Man Settlement are exempt from UK tax by virtue of [article 3]. We do not consider the distributions to be partnership profits under s 858 ITTOIA 2005… We further contend that s 58(4)(5), Finance Act 2008, are contrary to the UK Human Rights Act under the First Protocol and Article 14.” (18) On 30 April 2009 HMRC acknowledged receipt of the appeals and said the matter was being dealt with by Special Investigations. Mr Lee 299. There was the following main correspondence in relation to Mr Lee’s tax position under the arrangements: (1) In a letter dated 8 December 2004 HMRC raised an enquiry into Mr Lee’s return for 2002/03 asking the same questions as they raised in relation to Mr Lancashire initially (see [298(1)] above). (2) On 25 February 2005, Mr Lee wrote to HMRC stating the following: “The income that I received from the offshore trust, in my capacity as the sole income beneficiary, represents the share of the profit of an Isle of Man Partnership whose profits are excluded from tax by virtue of [article 3]..My claim for Double Tax Relief, as the life tenant, is based on Baker v Archer Shee principles.” (3) On 1 March 2005 HMRC replied to Mr Lee stating that they were likely to challenge the validity of the claim made under article 3. They said that HMRC were “also aware of the payment structure and in particular the use of your trust as a vehicle for receiving income,” and they asked for accounts for the Trust. (4) On 10 March 2005, HMRC informed Mr Lee that “SCO Liverpool” was dealing with the article 3 issue. (5) In a letter dated 1 July 2005 HMRC said that they were likely to challenge the claim under article 3 and that the “complexity of the claim requires careful consideration and consultation with the Revenue Technical Consultant” which was likely to take some time. They invited Mr Lee to make a payment on account of the tax they calculated to be due. (6) On 30 November 2005, Mr Lee sent HMRC a copy of the draft Partnership accounts for the year ended 31 March 2003. (7) In a letter dated 14 February 2006 HMRC set out their concern in relation to s 739 in similar terms as they did in relation to Mr Lancashire. They also asked for agreed accounts for the Partnership for all periods up to 5 April 2004, confirmation of the name of the Partnership and the name of the partner in the Partnership which related to Mr Lee’s Trust. (8) On 11 April 2006 Montpelier replied to HMRC on a similar basis as they responded to HMRC in relation to Mr Lancashire (see [298(2)]). (9) HMRC raised enquiries into Mr Lee’s tax returns for the tax years 2003/04, to 2006/07 in letters dated 19 December 2005, 2 November 2006, 27 November 2007 and 22 September 2008 respectively in each case using similar wording to that used in the letters opening enquiries into Mr Lancashire’s returns (other than the first one) (see [298(8)] and [298(10)] above). (10) In a letter dated 16 December 2009 HMRC raised an enquiry into the 2007/08 tax return. They said “[a]s you aware enquiries are ongoing into your previous Tax Returns with regard to your claim for relief under [article 3]. I note that you have claimed relief again for 2007/08. As such this year will be included as part of HMRC’s overall enquiry under this notice”

“My conclusion is that the income of the trust, which you claimed as exempt, is chargeable as partnership income and as such is liable to both income tax and Class 4 NICs. I have amended your SA return to reflect my conclusion. It previously showed you were due to pay £2,330.83 tax. It now shows you are due to pay £49,439.36 tax. The difference is £47,478.60.” 300. On 27 November 2009 and 29 March 2012, Montpelier lodged appeals with HMRC in respect of the tax years (a) 2002/03 to 2006/07 and (b) 2007/08 respectively, in each case on the same basis as the appeals made by Mr Lancashire. Mr Johnson 301. As regards Mr Johnson: (1) On 12 November 2008 HMRC wrote to Mr Johnson opening their enquiries into his return for 2006/07 noting that in that return he had claimed relief under article 3. They referenced the proposals announced in the Budget which had become law and stated that: “The consequence is that the share of income arising in the Partnership(s) you have an interest in via your Trust(s) will be chargeable on you for every year in which such income arose or arises”

“My conclusion is that the income of the trust, which you have claimed as exempt is chargeable as partnership income and as such is liable to both income tax and Class 4 NICs. I am amending your tax return to reflect this… Your Tax Return is amended as follows: Your self-assessment before my enquiry showed that £684 of tax was due. My amendment results in a £7,990.70 increase in tax due. The amended self-assessment is now £8,674.70 tax due.” (3) Mr Johnson appealed against the closure notice. In the notice of appeal, he set out HMRC’s conclusion as set out in their letter of 10 February 2009 and said that the grounds of appeal were: “Your calculation appears to have ignored my claim for exemption from UK income tax in respect of certain receipts. This claim was made in box 6.39 of my tax return. Perhaps you would be so kind as to give effect to that claim and adjust your calculation accordingly.” (4) In a letter dated 15 September 2009 HMRC wrote to Mr Johnson stating that they were opening an enquiry into his tax return for 2007/08 and “[a]s you aware enquiries are ongoing into your previous Tax Returns with regard to your claim for relief under [article 3]. I note that you have claimed relief again for 2007/08. As such this year will be included as part of HMRC’s overall enquiry under this notice”

“My conclusion is that the income of the trust, which you have claimed as exempt is chargeable as partnership income and as such is liable to both income tax and Class 4 NICs. I have adjusted your self-assessment return to reflect my conclusion. The amended figure for your self-assessment return is as follows: · Your original self-assessment return said you were due to pay £1,279.76 tax. · Your self-assessment return now says you are due to pay £12,407.50 tax.” 302. On 27 October 2009 Mr Johnson wrote to HMRC notifying them that he wished to appeal against their amendments made to his 2007/08 return in respect of foreign income received up to 12 March 2008. Caselaw 303. The parties both referred to the Supreme Court’s detailed consideration of how to determine the scope of an appeal in HMRC v Tower MCashback LLP 1 & Anor [2011] STC 1143 and to the comments made in the lower courts. I refer to this case as “ Tower MCashback ”

“I am satisfied that the Tower MCashback scheme fails on the section 45(4) point alone.” (3) HMRC later wanted to rely on a new argument, namely, that the taxpayer had not incurred the expenditure in buying the software licence within the meaning of s 45 because over 75% of the funds needed for the purchase had been borrowed against security provided by the seller on uncommercial terms. 305. The Special Commissioner ruled in favour of HMRC that he had jurisdiction to consider the new argument. Mr Justice Henderson reversed this in the High Court ( HMRC v Tower MCashback LLP 1 and Another [2008] EWHC 2387 , [2008] STC 3366 ) but the Court of Appeal ( HMRC v Tower MCashback LLP 1 and Another [2010] EWCA Civ 32 , [2010] STC 809 ) and the Supreme Court decided in favour of HMRC. 306. Mr Justice Henderson made a number of comments which were referred to by the Supreme Court: (1) At [113], he noted that there was no express requirement for the officer to set out his reasons for his conclusions and that what mattered “is the conclusion which the officer has reached upon completion of his investigation of the matters in dispute, not the process of reasoning by which he has reached those conclusions.” (2) He said, at [115], that there is a principle of tax law “to the general effect that there is a public interest in taxpayers paying the correct amount of tax……[which] still has at least some residual vitality in the context of section 50 [TMA]” such that the Commissioners must: “ be free in principle to entertain legal argument which played no part in reaching the conclusions set out in the closure notice. Subject always to requirements of fairness and proper case management, such fresh arguments may be advanced by either side or may be introduced by the Commissioners on their own initiative.” (3) He then said, at [116], that this did not mean that an appeal against a closure notice “opens the door to general roving enquiry into the relevant tax return”

“The scope and subject matter of the appeal will be defined by the conclusion stated in the closure notice and by the amendments (if any) made to the return. The legislation does not say this in so many words, but it follows from the fact that the taxpayer’s right of appeal under section 31(1)(b) is confined to an appeal against any conclusion stated or amendments made by a closure notice. That is the only appeal which the Commissioners had jurisdiction to entertain.” (4) At [128], he noted that “the result may from the Revenue’s point of view be characterised as conferring a windfall benefit on the taxpayer” but that another way of looking at the limitation on the scope of the appeal is as “part of the protection given by Parliament to taxpayers under the self-assessment system. There is always a balance to be struck between the interest of individual taxpayers on the one hand and the interest of the State and the general body of taxpayers on the other hand. Parliament has decreed how the balance is to be struck…” 307. In the Court of Appeal, the majority of Moses LJ and Scott Baker LJ (with Arden LJ dissenting) largely appeared to agree with the reasoning of Henderson J but reached a different conclusion in applying those principles. Moses LJ also noted the public interest in the correct amount of tax being paid and, at [29], that the self-assessment regime contains a system of checks and balances which, at [31], it is not to be supposed that Parliament intended to be overridden by the retention of a system of “thoroughly uninformative notices of assessment and notices of appeal”

“The subject matter of this appeal is defined by the subject matter of the enquiry and the subject matter of the conclusions which close that enquiry. But that statement of principles serves only to give rise to further questions and problems. As this appeal demonstrates, there is likely to be controversy as to how one draws the boundaries of the subject matter of the conclusions stated in the closure notice. Are reasons for the conclusion to be distinguished from the conclusion stated, and if so, how?” 309. At [37], he warned against too rigid an approach noting that, as Parliament had not chosen to identify some legal principle on this issue, it would be wrong for the court to attempt to do so and any such statement of principle “is likely to condemn both taxpayer and the Revenue to too rigid a straitjacket” and may “prevent a taxpayer from advancing a legitimate factual or legal argument which had hitherto escaped him or deprive, on the other hand, the public of the tax to which it is entitled.” 310. At [38], he said that “with those nebulous observations” he would leave it to the Commissioners (now the tribunal) to identify the subject matter of the enquiry and thus the subject matter of the conclusions in which exercise the tribunal will have to “ balance the need to preserve the statutory protection for the taxpayer afforded by notification that the inspector has completed his enquiries and the need to ensure that the public are not wrongly deprived of contributions to the fisc. ” 311. He continued, at [41], to state that it is to the tribunal that the statute looks to identify what s 28ZA describes as the subject matter of the enquiry: “The closure notice completes that enquiry and states the inspector’s conclusions as to the subject matter of that enquiry. The appeal against the conclusions is confined to the subject matter of the enquiry and of the conclusions. But I emphasise that the jurisdiction of the Special Commissioners is not limited to the issue whether the reason for the conclusion is correct. Accordingly, any evidence or any legal argument relevant to the subject matter may be entertained by the Special Commissioner subject only to his obligation to ensure a fair hearing.” 312. At [42], he expanded on this as follows: “Protection of the public requires, at the least, that other issues arising from the subject matter of the enquiry ought to be considered, if necessary, by the fact-finding tribunal. In D’Arcy [2006] STC (SCD) 543 at para 11, the Special Commissioner ruled that the scope of an appeal against a conclusion or amendment made by a closure notice will depend on the facts. The conclusion in that case was, as described by Dr Avery Jones, very specific and relied upon the Ramsay principle. But the Special Commissioner permitted other issues arising from the facts to be advanced since the tribunal must form its own view on the law without being restricted to what the Revenue stated in their conclusion or the taxpayer states in the notice of appeal (see para 13). I see no reason for confining that view merely to legal issues. Provided a party can be protected from ambush, the only limitation on issues which might be entertained by the Special Commissioner is that those issues must arise out of the subject matter of the enquiry and consequently its conclusion, and be subject to the case management powers to which I have referred.” 313. Lord Justice Moses concluded, at [51], that the closure notice did not of itself allow so restricted a view of the subject matter of the appeal as had been decided by Henderson J. Whilst “it did refer to previous correspondence which clearly focused on section 45(4), the closure notice itself was in plain terms a refusal of the claim for relief under section 45”. 314. In the Supreme Court, Lord Walker, at [15], approved Henderson J’s comments at [113], [115] and [116] of his judgment noting that he had reached his conclusion “despite having correctly made” those observations. He then referred, at [16], to the comments of Moses LJ, at [32] and [41] of his decision, concluding, at [17], that there was “little if any difference” between the majority of the Court of Appeal and Henderson J as to the principles to be applied; the difference was as to the application of those principles. He preferred the approach of Moses LJ. 315. Lord Walker cautioned, at [18], against the decision being taken as encouragement to draft every closure notice in wide and uninformative terms although, “if, as in the present case, the facts are complicated and have not been fully investigated, and if their analysis is controversial, the public interest may require the notice to be expressed in more general terms”

“‘It seems to me inherent in the appeal system that the tribunal must form its own view on the law without being restricted to what the Revenue state in their conclusion or the taxpayer states in the notice of appeal. It follows that either party can (and in practice frequently does) change their legal arguments. Clearly any such change of argument must not ambush the taxpayer and it is the job of the Commissioners hearing the appeal to prevent this by case management.’” 316. Lord Hope said, at [83], that, as the right of appeal under the relevant provision is against the conclusion stated in or amendment made by a closure notice, “it is desirable that the statement by the officer of his conclusions should be as informative as possible”

“i) The scope and subject matter of an appeal are defined by the conclusions stated in the closure notice and by the amendments required to give effect to those conclusions. ii) What matters are the conclusions set out in the closure notice, not the process of reasoning by which HMRC reached those conclusions. iii) The closure notice must be read in context in order properly to understand its meaning. iv) Subject always to the requirements of fairness and proper case management, HMRC can advance new arguments before the FTT to support the conclusions set out in the closure notice.” 321. He noted, at [51], that in his view the UT had been right not to take too rigid an approach as though this was a question of statutory construction. He agreed with them that “it is not appropriate to construe a closure notice as if it is a statute or as though its conclusions, grounds and amendments are necessarily contained in watertight compartments, labelled accordingly”

“the Revenue are also aware of the payment structure and in particular the use of your trust as a vehicle for receiving income”. (5) In any event, there is no substantive unfairness, HMRC should have known that the agency rules apply before they issued their decisions. For the reasons already given, they had all they needed to know to establish that was the case (see, in particular, the correspondence relating to Mr Swarbrick (see [79] and [80]). The breadth of what may be taxed as earnings was entirely apparent from the caselaw at the time HMRC were considering this (even though the decision by the Supreme Court in Rangers came later) (see also [80]). 329. Mr Tallon responded that the fact that Mr Swarbrick, a party who is not involved in these proceedings, may have raised with HMRC similar arguments to those raised by the lead appellants in the PAYE Grounds does not alter the unfair disadvantage to HMRC outlined above. He noted in particular, (a) the PAYE Grounds were not raised by any of the appellants until a late stage, (b) the information and documentation available to HMRC in these appeals was (and remains) very little, (c) at the time when HMRC took the stance that in Mr Swarbrick’s case s 44 ITEPA only applied to the Fee and not to the Profit Share the case law on remuneration was not as developed as it is today, (d) little can be taken from the limited information available as regards Mr Swabrick’s position given he is not present to give evidence. 330. Mr Tallon added that it is unrealistic to say that HMRC should have considered that s 44 extended to the Profit Share at an earlier point on the basis of the cases Ms Redston referred to. Those cases are concerned with the tax position of actual employees and not those deemed to be employees under s 44 ITEPA. There is no straight read across from the facts and circumstances of those cases and those in these appeals as regards the specific statutory terms of s 44 ITEPA. In effect s 44 ITEPA provides its own code for what is taxable under it. Conclusion 331. For all the reasons, set out below I have concluded that the tribunal has jurisdiction to hear the PAYE Grounds and that it is not unfair or unjust to permit the lead appellants to raise these grounds of appeal. Correct approach 332. It is clear from the principles set out in Tower MCashback and Fidex that the scope and subject matter of an appeal is determined essentially by the conclusions and amendments set out in the closure notice as viewed in the context of the preceding enquiry and related correspondence. As Henderson J said, in the passages from his judgment in Tower MCashback which were expressly approved by Lord Walker in the Supreme Court, the tribunal cannot stray beyond that. 333. This caselaw relates to determining the scope of an appeal for the purpose of assessing what issues HMRC can raise in the appeal proceedings. However, both parties seemed to accept that it is also necessary to decide on the scope of the appeal according to the principles set out in this caselaw, in order to determine what arguments an appellant may raise in support of an appeal. Moreover, in Tower MCashback the courts plainly envisaged that their comments were just as relevant to deciding what arguments an appellant may raise. 334. The courts have emphasised that the tribunal is not merely acting as an arbiter between the parties but in the public interest in determining the correct amount of tax due. Inevitably, the exercise involves balancing the protection for the individual and the public interest in the payment of the right amount of tax. So, whilst the legislature has, as Henderson J noted, provided for the drawing of a line by reference to the subject matter of the conclusions, precisely where to draw that line, taking into account this balancing exercise, is left to the tribunal to determine on the facts of the particular case. 335. I note that in the Supreme Court decision in Tower MCashback Lord Walker, like Moses LJ in the Court of Appeal, approved the comments of Dr Avery Jones in the D’Arcy case that it is “inherent in the appeal system that the tribunal must form its own view on the law without being restricted to what the Revenue state in their conclusion or the taxpayer states in the notice of appeal” and that it followed that “either party can (and in practice frequently does) change their legal arguments” although “clearly any such change of argument must not ambush the taxpayer and it is the job of the commissioners hearing the appeal to prevent this by case management”. 336. As Lord Hope said, closure notices “must be read in their context” and s 50 does “not tie” the tribunal’s hands “to the precise wording of the closure notice” when hearing the appeal. As the UT said in Fidex , as approved by Kitchin LJ in the Court of Appeal, it is not appropriate “to carry out this exercise as though it were a matter of statutory construction or as though its conclusions, grounds and amendments are necessarily contained in watertight compartments, labelled accordingly”. 337. As noted, Ms Redston focussed on the judgement of Moses LJ in the Court of Appeal in Tower MCashback whereas Mr Tallon said the correct approach is that set out by Henderson J, as expressly approved by the Supreme Court in that case, and as explained by the Court of Appeal in Fidex . The parties suggested, therefore, that there is a difference in approach between Henderson J and Moses LJ and Mr Tallon seemed to cast doubt on whether the Supreme Court fully endorsed the comments of Moses LJ. 338. As noted in Fidex , Moses LJ referred several times to the need to have regard to the subject matter of the enquiry . For example, at [41] of his judgment, he said that the tribunal must have regard to “the subject matter of the enquiry” as “the closure notice completes that enquiry and states the inspector’s conclusions as to the subject matter of that enquiry”