Cheshire Employer and Skills Development Ltd (Formerly Total People Ltd) v The Commissioners for HM Revenue and Customs
|England & Wales
|Lord Justice Etherton,Sir Stephen Sedley,Lord Justice Mummery
|06 November 2012
| EWCA Civ 1429
|Court of Appeal (Civil Division)
|Case No: A3/2012/0216
|06 November 2012
 EWCA civ 1429
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
JUDGE COLIN BISHOPP
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Etherton
Sir Stephen Sedley
Case No: A3/2012/0216
Giles Goodfellow QC and Charles Bradley (instructed by Grant Thornton UK LLP) for the Appellants
Richard Vallat and Richard Adkinson (instructed by HMRC Solicitors Office) for the Respondents
Hearing dates : 4th October 2012
This appeal concerns the question whether lump sum payments made by the appellant, Cheshire Employer and Skills Development Limited ("CESDL"), to its employees to cover motoring expenses gave rise to a liability to pay national insurance contributions ("NICs").
It is an appeal by CESDL from the decision of Judge Colin Bishopp, sitting in the Upper Tribunal ("the UT"), released in amended form on 25 November 2011 holding that the payments were emoluments of employment liable for NICs and that, accordingly, CEDSL failed in its claim for reimbursement of Class 1 NICs which CESDL claimed it had overpaid for the tax years 2002/3 to 2005/6. In so holding, the UT allowed HMRC's appeal from the decision of the First Tier Tribunal (Judge Richard Barlow and Mrs Marilyn Crompton) ("the FTT") released on 12 August 2010 which had found the payments in question were not paid as earnings and had allowed CESDL's appeal from HMRC's refusal to make any refund.
The factual background
There is no material dispute as to the facts. An agreed statement of facts was presented to the FTT. That, and documentary evidence, was supplemented in the FTT by the oral evidence of Mr Nigel Hartley, CESDL's managing director, who was cross examined. The FTT found him to be a truthful and reliable witness. The following facts were found by the FTT or, where indicated below, appear from the agreed statement of facts.
CESDL, which changed its name from Total People Limited in the course of these proceedings, was formerly known as the South East Cheshire Training and Enterprise Council. Its business has always consisted of the provision or placement of apprentices and other trainees with employers and the supervision of their training. At the times relevant to this appeal its staff numbered about 200 of whom about 160 were Training Advisors. The Training Advisors had to visit the employers and the trainees at their places of work. They specialised in certain trades and, as the training places were scattered about an area covering Cheshire and parts of the adjoining counties, there was a need for the Training Advisors to do a good deal of travelling in the course of their duties. In practice, that could mostly only be done by car. Motor travelling expenses were paid to CESDL's staff as necessary but most of them were paid to the Training Advisors.
CESDL's "Travel Policy", which was part of a Staff Handbook, said that there were two options for payment of travel expenses. One option was a "cash entitlement", which was 12p. and later 13p. per mile plus a lump sum. The other option was "mileage expenses", which were 40p. per mile or thereabouts. Which of those options applied to a member of staff was stated to be subject to agreement with the service director or chief executive on appointment or promotion. In practice staff appointed to posts that were likely to involve extensive travel on CESDL's business were not given the option of electing for the 40p. per mile option. Staff who travelled only occasionally were entitled to the mileage expenses option as and when they actually travelled on business. The cash entitlement was stated to be subject to the employee travelling at least 2,500 miles per annum on business, and the level of the lump sum was set according to salary. In practice, the lump sum was paid by monthly instalments.
The FTT accepted Mr Hartley's evidence that the rationale, genuinely believed by him, for structuring the payments in that way was that a 40p. per mile arrangement risked encouraging staff to maximise their travel so as to maximise their profit, which they might have perceived they could make from the 40p. payments, and that it was administratively more convenient.
CESDL also had a Driver Handbook which included a section on eligibility for the car allowance in much the same terms as the Staff Handbook.
Both documents stated that eligibility for the cash entitlement was on the basis of a need to travel to trainees' sites and CESDL's other offices, but they also stated that for some senior posts the entitlement was "additional". The FTT took that to mean that it was paid despite the fact that the holders of such posts did not have to travel to the same extent as the Training Advisors.
The documents also stated that the entitlement of senior staff to receive the lump sum payments would form "part of the recruitment package".
The contracts of employment did not, however, show the lump sum as part of salary. In a separate paragraph from the one dealing with salary some of the contracts of employment did state whether or not the post came with a car allowance and in some cases the amount of that allowance was stated.
Although not mentioned by the FTT in its decision, the agreed statement of facts records CESDL's recollection that the lump sum was originally calculated on the basis of the costs of running a Ford Mondeo 1.8LX petrol driven car for 15,000 miles per year and used 50 per cent for business. Mr Hartley's evidence was that CESDL had a policy of requiring staff to have reasonably good cars and not "old bangers" and that the lump sums in part recognised that a member of staff might well have to take out a hire purchase or other loan to buy the car and needed to know what he or she could commit to by way of monthly instalments.
Most of the employees who received the lump sums received £3,600 per annum in the years 2002/03 and 2003/04, £3,667 in 2004/05 and £3,700 in 2005/06. The amounts were reviewed with effect from 1 August each year. There was in fact only one increase in the four years in question. It occurred on 1 August 2004 giving rise to a pro rata increase of £67 for the then current tax year. A small number of more senior staff received £4,100 per annum which was increased to £4,200 from 1 August 2004, and two directors received £7,000 which was increased to £7,100. The 160 or so Training Advisors received the £3,600 and £3,700 amounts.
CESDL increased its staff salaries by an inflation related percentage in each of the four years in question, which was in the region of 3–4 per cent but, as is apparent from the sole increases of the lump sum payments in that period, increased in the travel allowance were not in any way linked to those increases and were at a much lower level and occurred less frequently.
Not all the senior staff, who were paid the higher lump sums, travelled the 2,500 miles used as the basis of the award to the more junior staff. Indeed, some of the more junior staff who had fallen below the 2,500 mileage did not thereby lose their entitlement. The FTT found, however, that those departures from the generality of the arrangements were statistically insignificant, and they attached little, if any, significance to them.
The lump sums were paid pro rata where a member of staff joined or left during a year or was a part time worker. Although not stated by the FTT in its decision, the agreed statement of facts records that the lump sum was also pro-rated where the employee had a dual role: for example, if an employee spent three days per week visiting businesses and two days per week tutoring at CESDL's "home" office, the employee would receive three-fifths of the allowance. Where a member of staff took extensive sick leave the lump sum payments stopped when the employee ceased to be paid their full salary after 12 weeks.
The legal framework
Section 6 of the Social Security (Contributions and Benefits) Act 1992 ("the 1992 Act") provides that NIC is payable where in any tax week "earnings are paid to or for the benefit of an earner over the age of 16". Section 3(1) of the 1992 Act provides that the expression "earnings" includes "any remuneration of profit derived from an employment".
The payment of earnings to or for the benefit of employed earners triggers a liability to primary and secondary Class 1 NICs. These liabilities are paid by the "secondary contributor" (generally the employer). The difference is that the primary liability is paid by the secondary contributor on behalf of the earner (with the secondary contributor having the right to recover this cost from the earner by deduction from the earnings) whereas the secondary liability is solely that of the secondary contributor (with no deduction from earnings allowed).
Regulation 25 and Part VIII of Schedule 3 of the Social Security (Contributions) Regulations 2001 ("the 2001 Regulations") provide (among other things) that certain travelling expenses are to be disregarded in the calculation of an employed earner's earnings for NIC purposes. They include the following:
"Qualifying amounts of relevant motoring expenditure
7. To the extent that it would otherwise be earnings, the qualifying amount calculated in accordance with regulation 22A(4)."
"Specific and distinct payments of, or towards, expenses actually incurred
9(1) For the avoidance of...
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