Aug 23
Before 2011, there was common use of employee benefit trusts, known by the revenue as “disguised remuneration” schemes, under which employees entered into arrangements with their employee and a third party and received most or some of their remuneration and associated rewards in loans with a small salary. Consequently, Part 7A of the Income Tax (Earnings and Pensions) Act 2003 introduced a charge to tax on employment income and class 1 national insurance contributions under those schemes where the third party took a relevant step for the employee’s benefit such as making a loan to him. Schedule 11 to the Finance (No 2) Act 2017 introduced a charge to income tax for such schemes with a complementary charge also being introduced for class 1 contributions (collectively known as the “loan charge”). Sections 15–21 of the Finance Act 2020 introduced amendments to the loan charge. Section 15 provided that the charge should not apply to loans or quasi-loans made before 9 December 2010 as the publication date of the draft Part 7A provisions and the point at which the law became clear on such schemes. Sections 20 and 21 allowed for the repayment or waiver of qualifying amounts a person had paid or agreed to pay under an agreement entered into with the revenue between 16 March 2016 and 11 March 2020 for income tax applicable to a loan or quasi-loan no longer within the scope of the charge following the amendments introduced by the 2020 Act. The claimant entered into a disguised remuneration scheme in 2005. Following the announcement of the loan charge in 2016 prior to the introduction of Schedule 11 to the 2017 Act, he sought to avoid the charge by making repayments on loans he had received under his scheme. Once the 2020 Act was introduced and it became clear that the loans would not have been caught by the charge as they had been taken out prior to 9 December 2010, the claimant applied to the revenue to cancel the repayments and recommence drawing down on the loan facility under the scheme. The revenue refused, having taken the position that the scheme was a transaction between the claimant and third party independent of the revenue and outside its influence. The revenue also considered that future loans issued from the trust scheme would amount to the taking of a relevant step for the purposes of Part 7A and count as employment income subject to a charge to tax. The claimant sought judicial review of the revenue’s refusal to consider agreeing to his request that the loans if reinstated be taxed as if they had not been repaid on the grounds that (i) there was no proper basis upon which the revenue could refuse to agree based on the lack of clarity in the law and the revenue’s discretion to treat as being set aside the repayments made by mistake, and (ii) that it was irrational in any event for the revenue to have not taken into account the amendments introduced by the 2020 Act. The two key issues for the court were (i) whether the revenue had the power to enter into the type of arrangement proposed by the claimant, and (ii) assuming it did, whether it could do so in accordance with the principle that, while the revenue had a broad discretion as to the use of its powers of management, those powers did not extend to untaxing matters the revenue unequivocally considered to be taxable by granting an extra statutory concession.
On the claim—
Held, (1) the revenue had very wide powers of collection and management of revenue, and a discretion was inherent in those powers. The relevant decision in the present case was not a decision not to consider the claimant’s proposal, rather it was a decision not agree to it on the basis of there being no statutory authority to enter into such an agreement in circumstances where no extra-statutory assurance was being provided. The revenue had the power to agree to the proposed agreement., since even if it could not agree in advance that there would be no liability to tax, the revenue was not precluded from agreeing to make no assessment to tax. While there were limitations on the type of agreements the revenue could lawfully enter into regarding taxes that would become payable due to future transactions, an agreement that the reinstatement of the claimant’s loans should not result in a charge to tax under Part 7A of the 2003 Act would be an agreement on a situation with defined parameters where the otherwise payable amount of tax would be known. The claimant would then accept that the loans would be taxable in accordance with Part 7A in the future. That agreement would not prevent the revenue from investigating actual tax liabilities as they might subsequently arise. That was consistent with the revenue’s non-statutory power, in appropriate circumstances, to give clearances in respect of future transactions. Therefore, the revenue had the power to give advance assurances in respect of contemplated future transactions and to do so did not necessarily involve an impermissible advance tax agreement (paras 30, 32, 35, 36, 38).
(2) Dismissing the claim. In the absence of the proper construction of legislation being decided by the courts, such as was the case with Part 7A, the revenue lacked the power to enter into an arrangement such as that proposed in the present case where it had formed a settled view that tax was payable under the legislation and that view could not be considered to be irrational or formed for improper purposes. That approach was consistent with the revenue’s powers not extending to untaxing matters it considered were unequivocally taxed on the basis of a contrary arguable view of the legislation and enabled the revenue to formulate policy in the interstices of the tax legislation and to deal with minor or transitory anomalies. That recognition of the limitation on the revenue’s collection and management powers was also consonant with the statutory regime for challenging tax assessments. In the present case, it was clear that the revenue had a settled view on the construction of Part 7A that tax would be payable on the reinstatement of the claimant’s loans. Therefore, they did not have a discretionary power to agree that there should be no charge to tax on the basis that another view of the legislation was possible, might be established in future or that it would be more equitable for there not to be such a charge. If the claimant continued to disagree with that view then it was open to him to enter into the transaction and to appeal any assessment. Accordingly, it followed that the revenue’s decision not to agree to the claimant’s proposal was not unlawful (paras 46–48, 51, 53, 55, 56, 57, 63).
Rory Mullan QC (instructed by Wright Hassall LLP, Leamington Spa) for the claimants.
Sadiya Choudhury (instructed by Solicitor, Revenue and Customs) for the revenue.