AC-2022-LON-003474 |
KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
REX on the application of (1) STEPHEN WHITE (2) GARY ROBERT LAWS |
Claimants |
|
- and – |
||
THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS |
Defendants |
____________________
Ewan West KC (instructed by His Majesty's Revenue and Customs' Legal Group) for the Defendants
Hearing dates: 4 and 5 February 2025
____________________
Crown Copyright ©
Mr Justice Lavender:
Para | |
(1) Introduction | 1 |
(2) The Legal Framework | 5 |
(2)(a) The Avoidance Handling Process Guidance Manual | 12 |
(3) The Factual Background | |
(3)(a) The Edge and AML Schemes | 15 |
(3)(b) Disclosure, Tax Returns and HMRC Notices | 20 |
(3)(c) HMRC's Investigation: Stage 1 | 24 |
(3)(d) HMRC's Investigation: Stage 2 | 28 |
(3)(e) The Decision Notices | 32 |
(3)(f) Subsequent Representations | 36 |
(3)(g) The Claimants' Evidence | |
(3)(g)(i) The Claimants' Witness Statements | 39 |
(3)(g)(ii) Mr Webber's Statement | 46 |
(4) The Grounds for Judicial Review | 47 |
(4)(a) The Different Versions of the Grounds | 49 |
(4)(b) The Grounds Now Relied On | 54 |
(4)(c) The Grounds for Judicial Review: Decision | 56 |
(5) Some Procedural Issues | 59 |
(6) Further Investigation into the End Users | |
(6)(a) Further Investigation into the End Users: The Claimants' Case | 67 |
(6)(b) Tameside: The Law | 73 |
(6)(c) Further Investigation into the End Users: HMRC's Case | 75 |
(6)(d) Further Investigation into the End Users: Hoey | 76 |
(6)(e) Further Investigation into the End Users: Decision | 81 |
(7) Retrospectivity | |
(7)(a) Retrospectivity: The Claimants' Case | 83 |
(7)(b) Retrospectivity: HMRC's Case | 85 |
(7)(c) Retrospectivity: Decision | 86 |
(8) Edge's and AML's Alleged UK Tax Presence | |
(8)(a) UK Tax Presence: The Claimants' Case | 87 |
(8)(b) UK Tax Presence: HMRC's Case | 89 |
(8)(c) UK Tax Presence: The Tameside Duty | 90 |
(8)(d) UK Tax Presence: Voluntary Participation | 92 |
(8)(e) UK Tax Presence: Edge's UK Addresses | 95 |
(9) The UK Intermediaries | 106 |
(10) The Claimants' Personal Circumstances | 108 |
(11) Section 31 of the Senior Courts Act 1981 | 113 |
(12) Conclusion | 115 |
(1) Introduction
(1) Each scheme was indeed a disguised remuneration scheme.
(2) Income tax and national insurance contributions ("NIC") were due on the whole of the claimants' remuneration for the relevant years.
(3) Income tax and NIC have not been paid on the whole of the claimants' remuneration for the relevant years.
(2) The Legal Framework
(1) As is well known, employees are liable to pay income tax and NIC on their earnings but, where the PAYE scheme applies, the income tax and NIC liability arising on an employee's total earnings in a tax year is, or should be, met by the deductions made by their employer from their gross earnings during that year. The employer is required to make the appropriate deductions and to pay the amounts deducted to HMRC.
(2) The PAYE scheme is dealt with in Part 11 of ITEPA and is governed by the PAYE Regulations, which are made by HMRC pursuant to section 684(1) of ITEPA.
(3) As stated in paragraph 50 of the judgment in Hoey:
"Section 689 of ITEPA deals with the situation where the person or entity paying remuneration is based offshore and therefore cannot be made liable to deduct or account for the PAYE tax, but there is an end user of the employee's services based in the UK. It treats the end user of the services as making a payment of employment income and that end user becomes liable to make payments under the PAYE Regulations as if it were the employer. If the employer, or end user, is liable to account for the tax to HMRC then in broad terms, regulations 185 and 188 of the PAYE Regulations mean that the employee is entitled to treat the PAYE tax as having been paid and claim it as a credit against his or her own liability to pay tax."
(4) Section 684(7A)(b) of ITEPA provides as follows:
"Nothing in PAYE regulations may be read-
…
(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."
"HMRC rely on section 684(7A)(b) as giving them the 7A power to remove the requirement on the End Users to comply with the PAYE Regulations, with the result that Mr Hoey's underlying liability to pay the income tax due on the contributions to the EBTs remains and there is no PAYE credit available to Mr Hoey …"
"72. Returning to the language of the 7A power, it could not have been expressed more plainly and clearly. There is no expressed limit to the circumstances in which an HMRC officer can decide that it is "inappropriate" for the payer to comply with obligations under the PAYE Regulations. The provision recognises that, despite the detail of the PAYE Regulations, HMRC may form the view in the circumstances of a particular case, that it is not appropriate to expect an end user (or other employer) to comply with the deduction and/or accounting obligations in the PAYE Regulations.
73. As Mr Grodzinski submitted, sections 684(7A)(a) and (b) are dealing with different aspects of the same problem - a situation where for whatever reason the payer ought to be relieved of its obligations under the PAYE machinery. Certain outlier situations, such as short-term or casual employment, are likely to fall within subsection (a). Since subsection (b) was also enacted, this provision must have an additional purpose and cater for different situations. Given its broad terms, it was clearly intended to apply whenever it is considered appropriate to relieve an employer from PAYE requirements and is not limited to outlier situations as Mr Mullan contended. Its focus is inevitably on the payer, and neither subsection makes any reference to the payee. This is unsurprising in circumstances where exercise of the 7A power has no impact whatever on the underlying liability to tax of the payee recipient of the PAYE income, which remains undisturbed.
74. The question for the officer in a subsection (7A)(b) case is simply whether, in the circumstances of the case, he or she is satisfied that it would be unnecessary or inappropriate for the payer to comply with the PAYE Regulations. Two points follow from the plain words of the provision. First, because the words "unnecessary" and "not appropriate" are used in the alternative by the drafter, it is clearly contemplated that an officer may be satisfied that it would be inappropriate to expect compliance with the PAYE Regulations, even where compliance is otherwise necessary. Secondly, by empowering the officer to decide what is appropriate, Parliament has decided that it should be within the discretion of the officer to decide when compliance with the PAYE Regulations is not appropriate. Nonetheless, this is not an untrammelled power. It must be exercised in accordance with well-established principles of public law, including the obligation to act Wednesbury rationally and the Padfield obligation not to act inconsistently with the purpose of the legislation."
"(1) This section applies if—
(a) an employee during any period works for a person ("the relevant person") who is not the employer of the employee,
(b) any payment of, or on account of, PAYE income of the employee in respect of that period is made by a person who is the employer or an intermediary of the employer or of the relevant person,
(c) PAYE regulations do not apply to the person making the payment or, if that person makes the payment as an intermediary of the employer or of the relevant person, the employer, and
(d) income tax and any relevant debts are not deducted, or not accounted for, in accordance with the regulations by the person making the payment or, if that person makes the payment as an intermediary of the employer or of the relevant person, the employer."
"(2) If subsection (1C) does not apply, the relevant person is to be treated, for the purposes of PAYE regulations, as making a payment of PAYE income of the employee of an amount equal to the amount given by subsection (3)."
"(6) In this section and sections 690 and 691 "work", in relation to an employee, means the performance of any duties of the employment of the employee and any reference to the employee's working is to be read accordingly."
(2)(a) The Avoidance Handling Process Guidance Manual
(1) (AHP8850) "HMRC has publicly stated that it expects employers and engagers of contractors to undertake reasonable due diligence to establish whether they have obligations under PAYE. However, contractor loan schemes are often complex and frequently interpose several layers between the offshore employer and the End Client designed to disguise the nature of the arrangements. Where a contractor loans scheme is used, the nature and operation of the scheme may therefore mean that reasonable due diligence would be insufficient for the End Client to identify an obligation to operate PAYE."
(2) (AHP8854) "Where a contractor loans scheme has been used, the following criteria need to be met if HMRC is to consider exercising the discretion provided by s684(7A)(b):
1. The taxpayer has used a contractor loans scheme involving an offshore employer or offshore entity;
2. The amounts received by the taxpayer may be taxable as employment income and, as a consequence, the PAYE Regulations may apply;
3. HMRC has reason to believe the End Client would not have been aware of or involved in the tax avoidance scheme.
HMRC does not need to know the identity of the End Client to be able to use the power provided by s684(7A)(b), provided HMRC has sufficient information about the way the scheme operates so that it is reasonable to assume that the End Client was unaware of and not complicit in the avoidance arrangements.
It is not necessary to test the actual motivation and knowledge of entities/persons that HMRC does not know of, have ceased to exist, or where the evidence HMRC has and HMRC's knowledge of the facts and surrounding circumstances are such, that it reasonably demonstrates an End Client exercising reasonable due diligence could not have been aware that they were required to operate PAYE."
(3) (AHP8856) "As a guide, the following factors might be relevant in determining whether it is reasonable to conclude that the End Client was not party to or aware of the tax avoidance:
... the existence of a UK intermediary independent of the agency or employer undertaking 'typical' intermediary activities e.g. payroll support/ invoicing functions. It is reasonable to consider, in the absence of evidence to the contrary, that the intermediary can only supply the End Client with information relating to its functions/ services that it provides. The intermediary is the person that the End Client typically has the contractual relationship with and, in consequence, one of the persons towards whom due diligence enquiries should be directed. It may be reasonable to conclude, on the evidence HMRC has, that the intermediary cannot pass to the End Client any information on the arrangements as a whole and this will impact on the effectiveness of any due diligence enquiries undertaken by the End Client/intermediary; …"
(3) The Factual Background
(3)(a) The Edge and AML Schemes
(1) A contractor became the employee of an offshore employer. Mr White and Mr Laws became employees of Edge and AML respectively. Edge and AML were Isle of Man companies.
(2) The contractor worked for (and usually at the premises of) a UK end user. As I have said, in Mr White's case, the end user was Nomura and, in Mr Laws' case, the end user was first RBS and then JP Morgan.
(3) There was a UK agent as intermediary ("the UK intermediary") between the offshore employer and the end user or its agent. In Mr White's case, the UK intermediary was first Norla Consulting Limited ("Norla") and then Target Recruitment and Nomura's agent was Knight Munro. In Mr Laws' case, the UK intermediary was Smartpay, RBS's agent was Resource Solutions and JP Morgan's agent was Church International.
(4) The end user paid (either directly or through its agent) the UK intermediary for the contractor's work.
(5) The UK intermediary passed that money, less fees and costs, on to the offshore employer.
(6) The offshore employer paid a modest salary (less PAYE deductions) to the contractor.
(7) The balance of the money received (less fees) was contributed to an EBT of which the contractor was a beneficiary. In Mr White's case, the EBT has been referred to as the Edge EBT. In Mr Laws' case, the EBT was the Aston Management Limited Employee Benefit Trust.
(8) The trustees of the EBT made an interest-free loan to the contractor in an amount equivalent to the amount contributed.
(9) These loans were expressed to be repayable on demand, but the trustees did not in fact make demands for repayment. Mr White and Mr Laws were never asked to repay any of the money lent to them in this way. On 5 April 2017 Mr White's loan was written off. Mr Laws has said as follows:
(a) "I didn't think that the loans had to be re-paid and that the label of "loan" was required for the arrangement to be compliant."
(b) "I regarded the payments as being for services performed and not loans."
(1) "… As an employment business using tax efficient remuneration planning, AML enables our employees to receive their income in a tax efficient manner, allowing them to take home up to 86% of their gross contract value (as opposed to circa 68% under PAYE)."
(2) "… AML's business model is IR35 and s660 compliant. It is endorsed by leading Tax Counsel, has been fully disclosed and registered with the UK Inland Revenue (with a Scheme Registration Number) and is registered in the UK for PAYE. All aspects of the AML Scheme have also been verified by leading Employment Counsel."
"The AML and Edge schemes as in place in the relevant tax year are structured so as to obscure the fact there is an offshore employer, by typically having one or more UK intermediaries between the offshore employer and the end user."
(3)(b) Disclosure, Tax Returns and HMRC Notices
Tax Year | Mr White | Mr Laws |
2007/08 | 14 August 2009 | |
2008/09 | 22 February 2013 | 22 October 2010 |
2009/10 | 26 November 2013 | 2 January 2014 |
2010/11 | 26 November 2013 | 14 November 2012 |
(3)(c) HMRC's Investigation: Stage 1
(1) "Evidence that the end user(s) stipulated that the contractors must provide their services via this avoidance scheme structure";
(2) "Evidence of any due diligence undertaken by the end user(s)";
(3) "Evidence that the scheme promoter is a company director, key employee or shareholder of the end user";
(4) "Any connections such as common directorship between end user(s), offshore employer and/or scheme promoter"; and
(5) "Have any Regulation 80 assessments been issued to end users?"
"The arrangements place distance between the contractors employment with the offshore employer and the end user for no commercial reasons."
(3)(d) HMRC's Investigation: Stage 2
(1) 820 contractors used the Edge scheme and the sample consisted of 41 of those contractors; and
(2) 1,091 contractors used the AML scheme and the sample consisted of 61 of those contractors.
(3)(e) The Decision Notices
(1) "I am writing to you about the amounts you received in connection with your use of the [Edge Consulting Ltd/Aston Management Limited] scheme. It is HMRC's view that this is a disguised remuneration scheme."
(2) "I believe it is not appropriate for the end users of your services to account for any tax due under the PAYE regulations in respect of the income you received in connection with the [Edge Consulting Ltd/Aston Management Limited] scheme. I explain the reason for my decision in the enclosed document, under the heading 'No requirement to operate PAYE – my decision to exercise a power conferred on HMRC'. I also explain what you need to do if you do not agree with my decision."
(1) "Your employer, [Edge Consulting Ltd/Aston Management Limited], was a non-UK resident person. I understand they had no UK tax presence. This means that they were not obligated to deduct or account for PAYE in respect of your employment income.
Because of the above, the 'end-users' of your services may have been required (under section 689 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)) to comply with the PAYE regulations. This would mean they had to account for tax in respect of the income from your employer."
(2) "In relation your use of the [Edge Consulting Ltd/Aston Management Limited] scheme, I consider that it is not appropriate for the end users of your services to be required to comply with the PAYE regulations in relation to your employment income. This is because I have no reason to believe that any end user of your services was:
• aware or party to the disguised remuneration scheme
• aware that they were obliged (under the PAYE Regulations) to account for any tax due to HMRC in respect of the income from [Edge Consulting Ltd/Aston Management Limited]
This is based on the information available to me at this time."
(3) "You cannot appeal against my decision. But if you have information that may affect my decision, please write to tell me. We call this 'making representations'. You will need to give me:
• the name(s) of the end users of your services
• evidence that those end users were aware or party to your use of the [Edge Consulting Ltd/Aston Management Limited] scheme"
(3)(f) Subsequent Representations
(1) (Mr White's letter) "Nomura was a long term user of contingent labour and would have been familiar with their working conditions and the impact IR35 introduction in 2000 had.
It was common knowledge in the company and especially in working units employing contingent labour that structures such as Edge were in use. These units would have included full time permanent end user employees, reporting into their respective line managers."
(2) (Mr Laws' letter) "Whilst Mr Laws worked for his end client RBS Group, RBS would pay Resource Solutions who would then pass funds to AML who would then pay/loan him. There was an acceptable list of companies that RBS would work with and Mr Laws believes that AML was one of them.
Whilst Mr Laws worked for his end client JP Morgan, Church International would receive payment from JPM and would then pass funds to AML who would then pay/loan him. Again, there was an acceptable list of companies that JPM would work with and Mr Laws believes that AML was one of them."
(3)(g) The Claimants' Evidence
(3)(g)(i) The Claimants' Witness Statements
(3)(g)(ii) Mr Webber's Statement
(4) The Grounds for Judicial Review
"All 62 Claimants in the attached schedule have permission to file and serve amended statements of facts and grounds by 4pm on Friday 18 August 2023. Such amendments must be confined to addressing the decision of the Court of Appeal in Hoey v HMRC [2022] EWCA Civ 656, and is without prejudice to the Defendants' right to defend the claims on the ground that any one or more of the grounds upon which the Claimants (or any one of them) are seeking to rely, have not been brought promptly or within 3 months after the grounds to make the claim(s) first arose."
(4)(a) The Different Versions of the Grounds
"(ii) The 7A power was unlawfully exercised in that: it was exercised prematurely, retrospectively and it took into account irrelevant considerations and/or failed to take into account relevant considerations."
"(iv) The exercise of the 7A power was made upon a mistake of fact which, despite information requested and received from the Claimant, has not been corrected. This mistake of fact has led to an improper application of HMRC's own unpublished policy on the exercise of the 7A power in cases relating to contractor loan schemes."
"(i) The 7A power was irrationally and unreasonably exercised in that: it was exercised prematurely, retrospectively and it took into account irrelevant considerations and/or failed to take into account the personal circumstances of the Claimant, despite statements to the contrary.
(ii) The 7A power appears to have been exercised by HMRC without their having considered material considerations and/or making a mistake of fact namely:
(1) Whether the alleged offshore employer had a presence in the UK for the purposes of determining PAYE obligations
(2) Whether the transaction chain the Claimant was part of could have included an agency as defined in section 44 ITEPA 2023
(3) What was the true employment status of the Claimant.
(iii) The 7A power appears to have been exercised by HMRC having considered irrelevant matters."
"Ground 1: the 7A Power was irrationally and unreasonably exercised in that: it was exercised prematurely, retrospectively and/or it did not take into account the personal circumstances of the Claimants.
Ground 2: The 7A Power was exercised by HMRC without their having considered material considerations, and/or considered irrelevant matters and/or mistake of fact/misapplication of HMRC's own guidance namely:
(a) whether the alleged offshore employer had a presence in the UK for the purposes of determining PAYE obligations
(b) whether the UK entity in each case was a "relevant person" and/or a deemed employer (this was previously framed as: "b. whether the transaction chain the Claimant was part of, could have included an agency as defined in section 44 ITEPA 2003." After considering HMRC's disclosure of scheme documents in relation to other individuals particularly the contracts, this point is no longer pursued)
(c) what was the true employment status of each Claimant."
(4)(b) The Grounds Now Relied On
(1) HMRC exercised the 7A power prematurely.
(2) HMRC exercised the 7A power retrospectively.
(3) HMRC took into account irrelevant considerations.
(4) HMRC failed to take into account relevant considerations.
(5) HMRC acted under a mistake of fact and thereby misapplied its policy (i.e. the AHP manual).
(1) The allegation that HMRC failed to take into account the claimants' personal circumstances.
(2) The matters set out in grounds 2(a) to 2(c) of the grounds as formulated in the claimants' skeleton argument. As to these, and having regard to the allegation that they are based on matters which were already pleaded:
(a) In relation to ground 2(a), it was alleged in the original statements of facts and grounds that Edge and AML had a UK presence.
(b) In relation to ground 2(b), it was not alleged in the original or amended statements of facts and grounds that the UK intermediaries were "relevant persons". It was not suggested that the allegation that the UK intermediaries were "deemed employers" meant anything different.
(c) As for ground 2(c), the claimants' real employment status was raised as an issue in the original statements of facts and grounds, but only in the context of a submission that "the basis upon which HMRC think the "Employer" is an offshore entity is simply illogical". Contrary to that submission, the claimants now accept that they were employed by Edge and AML.
(4)(c) The Grounds for Judicial Review: Decision
(1) The order of 8 August 2023 provided that the amendments must be confined to addressing the decision of the Court of Appeal in Hoey. Save insofar as they consisted of deletions, it is unclear how the proposed amendments addressed that decision (which was made on 13 May 2022, long before the claims in the present case were issued).
(2) The order of 8 August 2023 was expressly made without prejudice to HMRC's right to defend the claims on the grounds of delay. Insofar as the proposed amendments go beyond the original grounds, it is unclear how it is alleged they could not have been made in time. They give every impression of being "second thoughts" about the case.
(1) without carrying out further investigations into the end users;
(2) after the time for seeking payment of the relevant income tax and NIC from the end users had expired;
(3) in circumstances where Edge or AML had, or may have had, a UK presence for tax purposes;
(4) in circumstances where each of the UK intermediaries was, or may have been, a "relevant person" for the purposes of section 689; and/or
(5) without investigating the claimants' personal circumstances.
(5) Some Procedural Issues
(1) Edge or AML had a UK tax presence, in which case section 689 would not apply to the end users, since the requirement in section 689(1)(c) would not be satisfied;
(2) the UK intermediaries were "relevant persons" for the purposes of section 689, either in place of or in addition to the end users, in which case either:
(a) section 689 would not apply to the end users; or
(b) if section 689 applied to both the UK intermediaries and the end users, then exercising the 7A power in respect of the end users would not deprive the claimants of the credit due to them in respect of the income tax and NIC which should have been accounted for by the UK intermediaries; and/or
(3) having regard to the test for what constitutes employment, as set out most recently in Professional Game Match Officials Ltd v HMRC [2024] ICR 1480, the end users were the claimants' employers, in which case the PAYE Regulations would apply to them as such and not by virtue of section 689.
(1) Edge and AML had a UK tax presence; and/or
(2) the UK intermediaries were "relevant persons" for the purposes of section 689.
(6) Further Investigation into the End Users
(6)(a) Further Investigation into the End Users: The Claimants' Case
(1) the identity of the end user(s);
(2) whether the end user(s) knew about the scheme being used by the contractor;
(3) whether the end user(s) turned a blind eye to the contractor's employment by an offshore employer;
(4) whether the end user(s) carried out due diligence in respect of the contractor;
(5) whether the end user(s) would, if they had carried out proper enquiries, have found out that the contractor had an offshore employer; and
(6) whether the end users(s) were the contractor's deemed employers.
(1) This submission is what was meant by the allegation that the 7A power was exercised prematurely.
(2) It was also an aspect of the allegation that HMRC took account of immaterial considerations, insofar as it was alleged that HMRC relied on untested assertions and assumptions about the end users (e.g. that the end users carried out reasonable due diligence).
(3) It was also at least an aspect of the allegation that HMRC failed to take account of material considerations (i.e. the information which further investigations would have revealed).
(4) It was presented in the claimants' skeleton argument, albeit for the first time, as a breach of the Tameside duty of a decision-maker "to ask himself the right question and take reasonable steps to acquaint himself with the relevant information to enable him to answer it correctly": see Secretary of State for Education and Science v Tameside MBC [1977] AC 1014 ("Tameside"), 1065B, per Lord Diplock.
(1) HMRC had evidence that the Edge and AML schemes included the use of a UK intermediary for no commercial purpose; and
(2) there was, as I have already noted, an obvious incentive for the promoters and operators of these schemes to conceal from the end users the fact that the contractors had an offshore employer.
(1) The existence of section 689 and the potential for liability under that section imposed, in practice, a duty on end users to exercise due diligence with regard to contractors working for them.
(2) This was particularly so for end users such as Nomura, RBS and JP Morgan, who were sophisticated entities, experienced in dealing with contractors and operating in a highly-regulated sector. She relied in this context on the Code of Practice for Banks.
(3) Indeed, paragraph AHP8850 of the AHP manual (which I have already quoted) states:
"HMRC has publicly stated that it expects employers and engagers of contractors to undertake reasonable due diligence to establish whether they have obligations under PAYE."
(4) HMRC did not seek to ascertain the identity of the end users.
(5) There was information available to HMRC about the end users, derived from their compliance checks on the end users.
(6) There was no urgency to HMRC's decisions.
(7) HMRC ought to have considered whether the claimants were employed by the end users. However, as I have already noted, she did not go so far as to submit that the claimants were in fact employed by the end users.
(6)(b) Tameside: The Law
"(1) The obligation upon the decision-maker is only to take such steps to inform himself as are reasonable.
(2) Subject to a Wednesbury challenge (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1947] 2 All ER 680, [1948] 1 KB 223), it is for the public body, and not the court to decide upon the manner and intensity of inquiry to be undertaken (R (on the application of Khatun) v Newham London BC (Office of Fair Trading, interested party) [2004] EWCA Civ 55, [2004] LGR 696, [2005] QB 37 at [35] per Laws LJ).
(3) The court should not intervene merely because it considers that further inquiries would have been sensible or desirable. It should intervene only if no reasonable authority could have been satisfied on the basis of the inquiries made that it possessed the information necessary for its decision (R v Kensington and Chelsea Royal London BC, ex p Bayani (1990) 22 HLR 406 at 415 per Neill LJ).
(4) The court should establish what material was before the authority and should only strike down a decision by the authority not to make further inquiries if no reasonable council possessed of that material could suppose that the inquiries they had made were sufficient (per Schiemann J in R v Nottingham City Council, ex p Costello (1989) 21 HLR 301; cited with approval by Laws LJ in R (on the application of Khatun) v Newham London BC at [35]).
(5) The principle that the decision-maker must call his own attention to considerations relevant to his decision, a duty which in practice may require him to consult outside bodies with a particular knowledge or involvement in the case, does not spring from a duty of procedural fairness to the applicant, but from the Secretary of State's duty so to inform himself as to arrive at a rational conclusion (R v Secretary of State for Education, ex p Southwark London BC [1995] ELR 308 at 323 per Laws J).
(6) The wider the discretion conferred on the Secretary of State, the more important it must be that he has all relevant material to enable him properly to exercise it (R v Secretary of State for the Home Dept, ex p Venables, R v Secretary of State for the Home Dept, ex p Thompson [1997] 1 All ER 327 at 378, [1998] AC 407 at 466G)."
(6)(c) Further Investigation into the End Users: HMRC's Case
(1) It was not disputed that the claimants made use of tax avoidance schemes.
(2) It was not disputed that HMRC correctly understood how the tax avoidance schemes were intended to work.
(3) The claimants' submissions did not adequately take into account the context for the decisions taken in this case, which includes the fact that the underlying liability to pay tax rested at all times on the claimants.
(4) Mr Millard asked himself the right question (i.e. whether he should exercise the 7A power) and there was no suggestion to the contrary.
(5) The claimants could not overcome the high hurdle set by the second and third principles identified in Plantagenet Alliance.
(6) A similar argument was rejected in Hoey: see paragraphs 101 to 105 of the judgment in Hoey.
(7) There was no statutory obligation on end users to exercise due diligence until 2017.
(8) HMRC did not have access to end users' internal communications.
(6)(d) Further Investigation into the End Users: Hoey
"… Mr McFarlane was amply entitled to conclude, on the facts known, that the End Users, exercising reasonable due diligence, could not have been aware that they were required to operate PAYE. Even if questions were asked by Aviva Investors in Mr Hoey's case, and a thorough due diligence process had revealed the existence of multiple intermediaries and an offshore employer, we have no reason to doubt that Aviva Investors would have been told that Mr Hoey was employed by the Employers who were operating PAYE on his salary payments, deducting PAYE and NICs. It is highly unlikely that the avoidance scheme and loans would have been disclosed. Even if the loans were disclosed, there would have been no reason for the End Users to conclude that such loans were in fact payments of earnings until the Rangers decision [2017] 1 WLR 2767. Even then, the point was only conceded by the Claimants in July 2019. In those circumstances, we accept Mr McFarlane's evidence: he reasonably formed the view that due diligence by the End Users would not have identified a liability to deduct PAYE under the arrangements which the Claimants had participated in, even if the End Users had asked the Claimants to explain their arrangements."
"Ultimately the question for us on this part of the case is whether the HMRC officers took a lawful approach to the exercise of the 7A power. They were required to acquaint themselves with the facts and the relevant considerations. It is not for the court to decide on the manner and intensity of the enquiry to be undertaken. We can intervene only if no reasonable decision-maker could be satisfied, on the basis of the enquiries made, of the merits of the decisions. This test is not met. We consider that the approach of the HMRC officers was lawful: they took into account the relevant considerations as we have explained, and their decisions were not based on irrelevant considerations. Mr Hoey and the Claimants were given the opportunity to provide evidence that the End Users were aware of the arrangements and/or the need to operate PAYE, but as we have observed, no such evidence was ever provided."
(6)(e) Further Investigation into the End Users: Decision
(1) The enquiries made by HMRC were sufficient for them to identify correctly the nature of the Edge and AML schemes.
(2) Those schemes involved both an offshore employer and the use of a UK intermediary for no apparent commercial purpose. As I have said, there was an incentive for those promoting or operating the schemes to conceal from the end users that the claimants had offshore employers.
(3) Although the end users were expected to exercise due diligence, the considerations identified in Hoey apply.
(4) It was argued that end users insisted on individuals being contractors rather than employees, but that consideration is neutral as to the nature of the scheme used by the contractor.
(5) It was also suggested that end users turned a blind eye to contractors' arrangements, but I was shown no evidence of this, let alone any evidence which was available to HMRC when they made the decisions.
(6) It was not at all clear what information might have been available to HMRC about the end users' understanding of the Edge and AML schemes:
(a) If and insofar as HMRC had information about the due diligence carried out by the end users, that was inherently unlikely to contain information that the end users were aware that they were "relevant persons" for the purposes of section 689: had the end users acknowledged this to HMRC, then they would surely have complied with their obligations under section 689 and the PAYE Regulations.
(b) The same is true of the end users' own records of their due diligence.
(c) The sort of informal discussions referred to by the claimants in their witness statements are inherently unlikely to be the subject of records which could be obtained by HMRC.
(7) Retrospectivity
(7)(a) Retrospectivity: The Claimants' Case
(1) It was not submitted that ITEPA imposes any time limit on the exercise of the 7A power. In rejecting a related argument in Hoey, the Court of Appeal held (at paragraphs 81 to 94 of its judgment) that the power can be exercised retrospectively.
(2) If there were good grounds for exercising the 7A power in a particular case which were in existence before the expiry of the time for enforcing an end user's obligations under the PAYE Regulations, no argument was addressed to me that those grounds would cease to be good grounds simply because that time had expired.
(3) I suggested in the hearing that the retrospectivity argument appeared to be an argument that HMRC had acted for an improper purpose, i.e. to use the 7A power to make up for its own failure to pursue the end users in time. Miss Montes Manzano agreed with this analysis.
(4) It was alleged in the amended statements of facts and grounds that the decisions were unfair, but substantive unfairness is not a ground for judicial review and procedural unfairness appears to be no more than a restatement of the submission that the 7A power either could not be exercised when it was or was exercised for an improper purpose.
(7)(b) Retrospectivity: HMRC's Case
(7)(c) Retrospectivity: Decision
(8) Edge's and AML's Alleged UK Tax Presence
(8)(a) UK Tax Presence: The Claimants' Case
(1) Edge and AML registered for PAYE, made PAYE deductions from the income which they paid directly to the claimants and accounted for those deductions to HMRC.
(2) In various documents, i.e. P60, P11 and P14D forms relating to Mr White and others, Edge gave an address in Coventry. The address provided appears to have been that of Edge's accountants, Thomas & Co, whose name was sometimes given, prefaced in some documents by "C/O". Moreover, this was the address recorded by HMRC in their employer record system, until it was replaced with the address in Coventry of different accountants, Advantage Accounts Limited.
(8)(b) UK Tax Presence: HMRC's Case
(8)(c) UK Tax Presence: The Tameside Duty
(8)(d) UK Tax Presence: Voluntary Participation
"In oral argument Mr Mullan suggested, for the first time, that the voluntary operation of PAYE by the Employers in respect of the small salary element of the contractors' earnings meant that the Employers had surrendered to the jurisdiction of the PAYE regime. Mr Mullan produced no authority to support this novel contention. Clark v Oceanic [1983] 2 AC 130 does not provide any support for this proposition: it sets out the relevant test as whether there is a trading presence in the UK. There is no evidence that the Employers had a UK tax presence applying this test. The arrangements depended on the use of UK-based intermediaries, and absent evidence, it certainly cannot be assumed that the offices and postal addresses of such intermediaries could be treated as those of the Employers. No positive case has otherwise been advanced. Despite their voluntary operation of PAYE on part of the earnings, no doubt to lend respectability to the arrangements, we can see no foundation for any suggestion that the PAYE Regulations did in fact apply to them. Accordingly, this argument is without any merit either."
(8)(e) UK Tax Presence: Edge's UK Addresses
"… (1) Oceanic is not resident for income tax purposes in the United Kingdom. (2) It has, however, a design office at Wembley, a platform fabrication yard near Inverness, and a branch at Aberdeen providing skilled services in connection with its North Sea activities. It operates P.A.Y.E. in respect of employees at these establishments. (3) It accepts that it has a place of business within Great Britain and is liable to corporation tax on profits from its activities in the United Kingdom and in the United Kingdom sector of the North Sea, all of which are taxed as a single trade. It is an overseas company to which section 407 of the Companies Act 1948 applies. It has complied with the requirements of the section and has an address for service in Wembley. (4) The operating base for its North Sea activities is the port of Antwerp; the headquarters of its North Sea division are at Brussels. Its North Sea activities consist of installation and maintenance of platforms and the laying of pipelines in the United Kingdom and Norwegian sectors of the North Sea, for which purpose it operates barges out of Antwerp. (5) The work force employed on these operations was in 1977-78 several hundred strong (approximately 400 in 1977), of whom approximately 60 per cent. were United Kingdom nationals. They had written contracts not governed by English law. They were paid (in United States dollars) and employed outside the United Kingdom."
(1) The majority of their Lordships (i.e. Lord Scarman, Lord Wilberforce and Lord Roskill) rejected Oceanic's argument that the section only applied to employers who were resident in the United Kingdom. This is the context for Lord Scarman's dictum (at 145F) that:
"Presence, not residence, is the test."
(2) A differently-constituted majority, i.e. Lord Scarman (at 146G), Lord Edmund-Davies (at 154F to 156A) and Lord Lowry (at 157D to 158C), rejected the Crown's argument that the section applied to any employer whose employees were chargeable to United Kingdom income tax.
(3) The majority held that section 204 applied to Oceanic, but they did not purport to define the circumstances in which section 204 would apply to any other employer who was not resident in the United Kingdom.
(1) Lord Wilberforce said (at 150H) that he regarded section 38(4) of the Finance Act 1973 as critical in the appeal. He went on to say as follows (at 153A-C):
"So, the question one has to ask in relation to section 204 is this: why should not this section apply to a company which, as regards the very activities to which the section relates, is itself made subject to United Kingdom tax legislation. Why not more particularly, when the employees, to whom the question relates, are employed on precisely those activities, so that the wages they are paid, which are treated as being in respect of duties performed in the United Kingdom, enter into the trading accounts of the company? To the answering of this question non-residence is quite immaterial, as, indeed, section 246 itself shows; it disregards non-residence or, perhaps more accurately, it makes "non-residence" a condition of liability and fastens upon trading through a branch or agency. This provides a clear, and surely satisfactory, answer to the question of construction of section 204, so that this section only applies to those companies which are within the taxing provisions of section 246. As to such companies section 246 provides a convincing reason why the respondent company should be liable to operate the P.A.Y.E. system. I should add that, as the company has an address for service in the United Kingdom, the liability can be enforced against assets here."
(2) Lord Scarman also attached significance to Oceanic's trading presence in the United Kingdom. Although he did not expressly refer to section 38(4) of the Finance Act 1973 in his speech, he clearly had it in mind when he said (at 148E-F):
"… But the present case is concerned with the territorial limitation to be implied into a section which establishes a method of tax collection. The method is to require the person paying the income to deduct it from his payments and account for it to the revenue. The only critical factor, so far as collection is concerned, is whether in the circumstances it can be made effective. A trading presence in the United Kingdom will suffice.
Upon the facts of this case a trading presence is made out. For the purposes of corporation tax Oceanic, it is agreed, carries on a trade in the United Kingdom which includes its operations in the United Kingdom sector of the North Sea. For the purpose of this trade it employs a work force in that sector, whose earnings are assessable to British income tax. Finally, Oceanic does have an address for service in the United Kingdom. It is not the least surprising that the special commissioners concluded that in Oceanic's case there would be no practical difficulties in operating P.A.Y.E. For these reasons I conclude that Oceanic by its trading operations within the United Kingdom and in the United Kingdom sector of the North Sea has subjected itself to the liability to operate P.A.Y.E. in respect of those emoluments of its employees which are by section 38 (6) of the Act of 1973 chargeable to British income tax. Oceanic must, therefore, operate P.A.Y.E. in respect of those emoluments."
(3) Lord Roskill agreed (at 161C) with both Lord Scarman and Lord Wilberforce.
(1) having a workforce in the United Kingdom which was subject to United Kingdom income tax;
(2) Edge's voluntary registration under the PAYE scheme; and
(3) the provision by Edge of an address in the United Kingdom.
(1) As I have said, a majority of their Lordships decided in Clark v Oceanic that the first of these factors was not sufficient, in itself, to subject a non-resident employer to the PAYE Regulations.
(2) I have already dealt with the second of these factors.
(3) There is nothing in the speeches in Clark v Oceanic to support the proposition that the mere provision of an address within the United Kingdom would suffice to constitute a "tax presence" such as to bring an employer within the scope of the PAYE Regulations. On the contrary, the passages which I have cited show that the provision of an address was merely an additional consideration, rather than a necessary or sufficient consideration, in deciding whether an offshore employer was subject to the PAYE regulations.
"Oversea companies which, after the commencement of this Act, establish a place of business within Great Britain shall, within one month of the establishment of the place of business, deliver to the registrar of companies for registration:—
…
(c) the names and addresses of some one or more persons resident in Great Britain authorised to accept on behalf of the company service of process and any notices required to be served on the company."
(9) The UK Intermediaries
(1) that it was wrong for HMRC to exercise the 7A power without investigating whether the UK intermediaries were liable to tax as a relevant person for the purposes of section 689; and
(2) that the UK intermediaries were liable to tax as a relevant person for the purposes of section 689.
(1) Section 689 did not apply to the UK intermediaries. Having regard to the definition of "work" in section 689(6), the claimants did not work for the UK intermediaries. There is no evidence that the claimants performed any of the duties of their employment for the UK intermediaries. The claimants were employed by their offshore employers to provide services to the end users. That is what they did. Their employment contracts did not require them to provide any services for the UK intermediaries. They did not provide any services for the UK intermediaries. Miss Montes Manzano sought to rely on an "Individual Project Agreement" issued to Mr White, but that document clearly identified Edge as Mr White's employer.
(2) There was no reason for HMRC to conduct any further investigation into this alternative scenario. It was fundamental to the Edge and AML schemes that the claimants had offshore employers. The claimants identified Edge and AML as their employers in their tax returns. There is no evidence which identifies any reason for HMRC to doubt that the schemes had operated as intended in that respect.
(10) The Claimants' Personal Circumstances
(1) their reasons for entering into the relevant scheme;
(2) how the scheme was marketed to them;
(3) the (incorrect, or even misleading) advice which they had received;
(4) their honest belief that the scheme was tax-compliant; or
(5) the financial and other effects on them of having to pay tax so long after the event.
"… Its focus is inevitably on the payer, and neither subsection makes any reference to the payee. This is unsurprising in circumstances where exercise of the 7A power has no impact whatever on the underlying liability to tax of the payee recipient of the PAYE income, which remains undisturbed."
(1) The claimants submitted tax returns in which they failed to declare the majority of their income. I do not doubt that they did this in reliance on what they had been told by others, but the receipt of bad tax advice does not remove an individual's liability to pay tax and it certainly does not make it appropriate for a third party to pay that tax instead.
(2) The claimants must have appreciated that they were using schemes which involved the payment of significantly less tax than would have been paid if the money paid for their services by the end users (after deduction of administration fees) had been treated as their income.
(3) It may well be a challenge for the claimants, and others like them, now to find the money to pay the tax which is due from them (assuming that there is tax due from them), but that situation would not have arisen if the claimants had entered into schemes under which the tax due from them in the relevant years had been paid at the time. Also, the claimants have known for some time that their tax returns for the relevant years were being investigated, so they have had the opportunity to prepare themselves for an adverse outcome to that investigation.
(4) Likewise, any distress which has been caused to the claimants is the consequence of their decision to enter into the Edge and AML schemes.
(11) Section 31 of the Senior Courts Act 1981
(1) My understanding of the judgment in Hoey is that the Court of Appeal considered that it was not unlawful for HMRC to proceed by issuing a decision notice before seeking representations from the taxpayer, but to ask in that decision notice for representations from the taxpayer.
(2) As I understand that decision, and as I would myself have held in the absence of that decision, the decisions set out in the decision notices in the present case, although not expressed to be provisional, were in substance provisional, since they invited representations which were capable of leading to a reconsideration of the decision.
(3) However, if I am wrong about that, I consider that any error of law on HMRC's part made no difference, since HMRC were entitled, having received the claimants' representations and witness statements, to maintain their decisions, as they did.
(12) Conclusion
(1) I refuse permission to amend the statements of facts and grounds, save insofar as the amendments consist of deletions. The proposed new grounds were made late and have no prospect of success.
(2) I refuse permission to apply for judicial review.