Patrick Brown v The Commissioners for HMRC

INTRODUCTION

1. This decision deals with HMRC’s application (“ the strike out application ”) dated 26 September 2024 to strike out the appellant’s appeal against the conclusions reached by HMRC and reflected in a final closure notice dated 15 September 2023, in which they concluded that the appellant’s employment income for the tax year 2010/2011 had been understated by £43,899 (“ the closure notice ”). Additional income tax of £9,753.60 is therefore due.

2. It is HMRC’s view that the appellant participated in a “contractor loan” scheme pursuant to which the appellant was remunerated for the services which were actually supplied to an end user via intermediaries; and that remuneration was paid by way of a combination of salary and loan. Tax and national insurance contributions have been paid on the salary element but not on the loan element. HMRC say that the entirety of the sums received by the appellant is taxable on the basis that payments made by the end user to an intermediary and then by way of a loan to the appellant constitute redirected earnings.

3. In their view, too, the appellant’s grounds of appeal do not bring the appellant within the jurisdiction of the tribunal. Alternatively, the appellant’s case has no reasonable prospects of success.

4. The appellant does not seriously challenge his involvement with the scheme nor the manner in which he was remunerated for the services which he supplied to the end user. It is his view (in a nutshell) that he received advice that the scheme was both legitimate and effective, and that it is wholly wrong that HMRC, having opened an enquiry in 2012 should have taken so long to have concluded it. Furthermore, he cannot understand why HMRC encouraged him to bring an appeal yet now say that the grounds of that appeal are unmeritorious.

5. I have considerable sympathy with the appellant’s position. However, for the reasons given later in this decision, I have granted the strike out application. THE LAW

6. The relevant law is set out in the Appendix. Words and phrases defined therein bear the same meanings in the body of this decision. THE EVIDENCE AND THE FACTS

7. I was provided with a substantial bundle of documents (including authorities). Mr Brown gave oral evidence on which he was cross-examined by Mr Hopkins. I found him to be a reliable and truthful witness and I accept his evidence in all respects. From this documentary and oral evidence, I make the following findings: (1) In September 2010 Mr Brown was considering starting work as a consultant/construction project manager and sought professional advice and guidance on how to structure the provision of those services. (2) His accountants advised him that there might be opportunities to reduce his tax burden by entering into a contract with a service provider (for example AML - see below) who would manage client invoicing and payments to him as well as dealing with his tax affairs. (3) It was Mr Brown’s evidence, which I accept, that the administrative services which were supplied by AML were of considerable importance to him and was as much a reason for using them as was any tax saving. (4) Furthermore, although AML had produced marketing material concerning the details of the scheme (to which I was taken by Mr Hopkins) it was Mr Brown’s evidence, which again I accept, that such material was not brought to his attention by either AML or his accountants before Mr Brown participated in the scheme. (5) However, he did accept that by participating in the scheme his effective tax rate was essentially reduced from 40% to 20%. (6) The way in which the scheme worked was as follows. (7) The contractor (in this case Mr Brown) entered into a contract of employment with an offshore employer, AML. Mr Brown’s contract was not available but he did not deny that it was similar if not identical to those contracts which I was shown as part of the bundle. The contract specifies an hourly rate of pay and other clauses one would expect in an employment contract. It also refers to an “Employee Handbook” the terms of which are deemed to be incorporated into the relationship between AML and the contractor/employee. (8) AML also entered into a contract with the end user to supply the contractor’s services to that end user (the “ contract for services ”). In the case of Mr Brown, the contract is between AML and Accor Afrique and provided that AML would supply the services of Mr Brown between November 2010 and February 2011 at a daily rate of €1,200 for that 74-day period, the total price being €88,800. Substantiated expenses would also be reimbursed. (9) An offshore trust (“ the trust ”) was established by an entity associated with AML. (10) The end client paid AML under the terms of the contract for services. AML then paid the contractor (Mr Brown) a salary based on national minimum wage or a small fraction of the full commercial earnings. That amount was paid under deduction of PAYE and National Insurance. In the case of Mr Brown, the amount of employment income recorded in his tax return for the tax year 2010/2011 was £2,516. (11) The balance of the amount payable under the contract for services (less an amount to cater for AML’s administrative fees) was then paid by AML to the offshore trustees, who then lent either all or a large proportion of that amount to the contractor. (12) It is not clear to me, as I did not have Mr Brown’s employment contract, whether his right to that balance was set out in the contract. However, I infer from the evidence, (namely the marketing material from AML, and a letter dated 26 July 2010, which concerns another AML employee in which AML indicate to a mortgage provider that the employee had a contract of service under which the remuneration of £98,000 was to be provided via salary and taxable loan awards) that AML was contractually obliged to pay to Mr Brown that balance by way of a combination of direct salary and indirect contributions to the trust. Indeed, Mr Brown did not gainsay that he had such a contractual entitlement. (13) The P11D submitted by AML for the relevant tax year records a loan made on 14 February 2011 with a closing balance amount of £43,899 (“ the loan ”). It is this figure that HMRC have used as the basis for the closure notice. (14) On 20 November 2012 HMRC opened an enquiry into Mr Brown’s self-assessment tax return for the 2010/2011 tax year and asked him for further information concerning the amounts received by him in connection with his engagement with AML. (15) A letter dated 22 January 2013 signed by Martin Rissbrook, the finance director of AML Tax (IOM) Ltd, records that the total of the loans made to the appellant in the 2010/2011 tax year was £43,898 and that on 17 May 2011, the same amount of those loans was repaid. (16) HMRC wrote to the appellant on 4 February 2013 indicating that they would then review the information supplied. (17) But it was not until 9 August 2022 that HMRC wrote to the appellant in connection with this matter, and that letter talked about his use of a disguised remuneration scheme, and that it was not appropriate to recover underpaid tax from the end user; and so HMRC intended to recover income tax on payments that the appellant had received in connection with the scheme, from him. (18) This was followed up, on 15 September 2023, with the closure notice against which the appellant appealed on 26 September 2023. On 21 December 2023 HMRC set out their view of the matter (the “ view of the matter letter ”) and offered a review which was accepted by the appellant on 19 January 2024 and followed up by him three days later with the provision of further information. The reviewing officer upheld the closure notice, and on 26 March 2024, the appellant appealed to the tribunal. DISCUSSION Submissions

8. In summary Mr Brown submitted as follows: (1) It was HMRC who suggested that he should appeal against the closure notice. So, it now seems wrong that they are suggesting that he has no grounds for that appeal. If they thought he had no grounds for appeal, then why did they offer him the opportunity to appeal in the first place. (2) There is no justification for HMRC saying that the tribunal has no jurisdiction in relation to his appeal. (3) He accepted that he had received a tax benefit, but the main reason for using AML was administrative given that he was working overseas and needed someone to deal with his tax affairs. (4) He believed AML and his accountants when they said that the scheme “worked”. He believed them when they said that the loan was not taxable. (5) The Rangers decision was released after the tax year under consideration. (6) HMRC have been guilty of inordinate delay. The first letter he received was in 2012, and it is incredible that in 2025 the matter is still being discussed. This delay was not something which was properly considered by HMRC and in particular by the reviewing officer. (7) Every time that he has dealt with HMRC, he has dealt with a different officer. His case has been handled inconsistently and there have been errors in documents that he has received. (8) The loan was repaid and thus there is no liability to tax on it. (9) The retrospective application of the loan charge legislation in 2016/2017 is relevant to his position yet no mention has been made about it by HMRC other than to state in the review letter that it was outside the scope of the review. (10) Furthermore, HMRC should have collected any employment tax from the employer (i.e. AML) rather than from himself. They should have exercised their discretion to do so in his favour. (11) In relying on professional advice, he has behaved reasonably and he should not be penalised for the arrangements which he believed to be effective when he entered into them.

9. In summary Mr Hopkins submitted as follows: (1) The effect of the decision in RFC 2012 plc (formerly the Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 (“ Rangers ”) is that the payments made by the employer to the trust were Mr Brown’s redirected earnings and thus taxable as employment income at the point of that redirection irrespective of whether the loan was repaid or not. The amount of those redirected earnings is the amount of the loan the evidence for which is in the P11D form submitted by AML. (2) The decision in Hoey v HMRC [2022] EWCA Civ 656 (“ Hoey ”) is authority for the proposition that this tribunal has no jurisdiction to consider HMRC’s discretion to impose any tax on Mr Brown rather than the employer. (3) In truth Mr Brown’s case is more akin to a complaint about being treated unfairly than evidencing substantive grounds for opposing the closure notice. This tribunal has no jurisdiction to consider unfair treatment. That is a matter for judicial review or a complaint to HMRC. (4) The fact that there has been a delay does not give Mr Brown a ground for appeal. Again, this is something which should be pursued by way of a complaint rather than via the tribunal. (5) There is no justification in the complaints made about the statutory review process which was undertaken wholly properly. (6) The application of the loan charge legislation is not relevant to this appeal. (7) The appellant’s reliance on others, and in particular his accountants and AML is not a ground of appeal which falls within the tribunal’s jurisdiction. If Mr Brown believes that he was misled by his advisers, then it is for him to take action against those advisers. (8) It is for the appellant to show that the closure notice overcharges him, and he has produced no evidence that such is the case. (9) Accordingly, the appellant’s grounds of appeal are not within the jurisdiction of the tribunal and thus his appeal should be automatically struck out. Alternatively, the appellant’s case has no reasonable prospect of success and should be struck out on that basis. My view

10. I do not agree with Mr Hopkins that I must strike out the appeal because the tribunal does not have jurisdiction. Whilst I accept that certain elements of the appellant’s case are not within the ambit of the tribunal (for example the general submission of unfairness, or reliance on his advisers) there are two aspects of his case which are clearly within the tribunal’s jurisdiction; namely his challenge to the technical basis of the closure notice on the ground that he has repaid the loan, and secondly that (not quite as cogently explained by the appellant as this) HMRC have been guilty of inexcusable and inordinate delay which renders it impossible for him to have a fair trial.

11. I am not, therefore, prepared to strike out the appellant’s appeal for want of jurisdiction. However, for the reasons given below, I consider that there are no reasonable prospects of the appellant’s case or part of it succeeding.

12. Turning first to his challenge to the technical basis of the closure notice (“ the technical challenge ”). This is brought on the basis that the loan should not be subject to income tax on the basis that it was repaid, and even if tax was due, it should be recovered from the employer.

13. As regards the first element, HMRC say that the loan reflects earnings which were redirected to the trust by the appellant’s employer (AML). And that Rangers is authority that the charge to income tax on that employment income arises at the point at which that “salary” is paid by AML to the trust.

14. I agree. The relevant extracts from Rangers are set out below: “[41] As a general rule, therefore, the charge to tax on employment income 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… [58] In summary, (i) income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee; (ii) focusing on the statutory wording, neither s 131 of ICTA nor s 62(2)(a) or (c) of ITEPA, nor the other provisions of ITEPA which I have quoted (except s 62(2)(b)), provide that the employee himself or herself must receive the remuneration; (iii) in this context the references to making a relevant payment ‘to an employee’ or ‘other payee’ in the PAYE Regulations fall to be construed as payment either to the employee or to the person to whom the payment is made with the agreement or acquiescence of the employee or as arranged by the employee, for example by assignation or assignment; (iv) the specific statutory rule governing gratuities, profits and incidental benefits in s 62(2)(b) of ITEPA applies only to such benefits; (v) the cases, to which I have referred above, other than Hadlee , do not address the question of the taxability of remuneration paid to a third party; (vi) Hadlee supports the view which I have reached; and (vii) the special commissioners in Sempra Metals (and in Dextra ) were presented with arguments that misapplied the gloss in Garforth and erred in adopting the gloss as a principle so as to exclude the payment of emoluments to a third party. [59] Parliament in enacting legislation for the taxation of emoluments or earnings from employment has sought to tax remuneration paid in money or money’s worth. No persuasive rationale has been advanced for excluding from the scope of this tax charge remuneration in the form of money which the employee agrees should be paid to a third party, or where he arranges or acquiesces in a transaction to that effect”.

15. As regards timing, and relevance of subsequent payments by and to the trust, the Inner House held at [61] of Advocate General of Scotland v Murray Group Holdings Ltd [2015] CSIH 77 that: “It follows that the existence of the trust arrangements and the loans made by trustees to the employee in question were irrelevant to the question of whether there was a redirection of earnings. The redirection of earnings occurred at the point where the employer paid a sum to the trustee of the Principal Trust, and what happened to the moneys thereafter had no bearing on the liability that arose in consequence of the redirection”.

16. I have found as a fact that the appellant participated in this contractor loan arrangement. He was an employee of AML who supplied his services to the end user. He was entitled to be paid a salary and other benefits by AML as a reward for those services. The work which he undertook was delivered directly to the end user, and payments made by the end user to AML reflected those services. It was contractually agreed between Mr Brown and AML that, subject to a deduction for administrative costs, the amount payable by the end user would be paid to Mr Brown by way of a mixture of salary and benefits from the trust, to which AML would contribute the balance which had not been paid to Mr Brown by way of salary. Both the salary and the balance payable to the trust were payable because of Mr Brown’s exertions as an employee and it was thus employment income. At the moment, therefore, that AML paid the balance to the trust, a tax point arose. At that moment the payment to the trust became “redirected earnings” on which employment tax was due and payable.

17. This is the case whether or not any subsequent loan by the trust to the appellant was made, and if so whether it was repaid. What happens “downstream” of the payment to the trust does not affect the taxability of the payment to the trust in the first place.

18. Furthermore, I accept on the authority of Hoey that I have no jurisdiction to consider the exercise of HMRC’s discretion to visit the tax charge on the appellant rather than on AML.

19. I need to consider whether this technical challenge has a realistic, as opposed to a fanciful, prospect of success. Regrettably for Mr Brown, I do not think that it does. My view is that this ground of appeal has no reasonable prospect of succeeding. In coming to this conclusion, I do not need to conduct a mini trial. Nor do I think that there is any further evidence which Mr Brown could adduce which would assist him if this matter went to a full trial. The technical challenge is “bad in law”. I should therefore grasp the nettle and deal with it at this stage.

20. However, Mr Brown has another string to his bow. It is that he will not get a fair trial because of the inordinate and inexcusable delay by HMRC ( the fair trial challenge ”).

21. Such an abuse of process is something which can be considered by the tribunal (see Nuttall v HMRC [2022] UKFTT 192 (“ Nuttall ”)).

22. In Nuttall at [23] it is clear that if, because of HMRC’s delay, a taxpayer has been prejudiced in pursuing his appeal because, for example, relevant evidence has been lost, then a hearing could be unfair to the taxpayer without some remedy from the tribunal.

23. As set out at [30] of Nuttall “the real question is whether HMRC’s delay has led Mr Nuttall to suffer any prejudice in pursuing his appeal”.

24. Mr Brown has not made any submissions about the prejudice to his case which HMRC’s delay has caused. He has not submitted, for example, that by virtue of the delay, it has not been possible to collect evidence which is relevant to his appeal.

25. To my mind, even though the delay between February 2013 and August 2022 is inordinate, and HMRC’s failure to provide any form of update to the appellant (broadly speaking they were pursuing the Rangers and Hoey litigation) might be considered inexcusable, I do not think that the appellant’s appeal has been prejudiced by that delay. It seems to me that he is in exactly the same position now as he would have been if he had pursued his appeal in, say, 2014. It might be possible at that stage to have sought evidence from AML, but in truth I suspect it would have been unlikely that they would have provided any relevant witness evidence, and indeed the contractor loan arrangements which are at the heart of the technical challenge, and which are set out above, are accepted as accurate by Mr Brown. I cannot see what additional evidence might have assisted him had it been available in 2014 and which is not available today.

26. My conclusion on the merits of the fair trial challenge is the same as regards the merits of the technical challenge. His prospects of succeeding in the fair trial challenge are fanciful and not realistic. There is no further evidence that I can see that might be produced at a trial which might bolster this ground of appeal and improve its chances of success.

27. I should add, for completeness, that none of the other grounds of appeal (for example unfairness, reliance on advisers, or HMRC’s encouragement to bring an appeal) have sufficient merit as to warrant this matter going forward to trial. They, too, have no reasonable prospects of succeeding.

28. I have taken the view that I should grasp the nettle and deal with this appeal at this stage. It would be wrong to permit this appeal to go further and take up time and cost when the appellant’s chance of success is fanciful. The appellant’s case has no reasonable prospect of success. DECISION

29. I therefore grant the strike out application and declare that the appellant’s appeal is struck out pursuant to Rule 8(3)(c). RIGHT TO APPLY FOR PERMISSION TO APPEAL

30. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 10 th OCTOBER 2025