Cheshire Employer and Skills Development Ltd (formerly Total People Ltd) v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 06 November 2012 |
| Date | 06 November 2012 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Mummery and Etherton L JJ and Sir Stephen Sedley.
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.
The following cases were referred to in the judgment:
Donnelly v WilliamsonTAX [1982] BTC 11
Hochstrasser v MayesELRTAXELR [1960] AC 376; (1959) 38 TC 673 (HL); [1959] Ch 22
Kuehne + Nagel Drinks Logistics Ltd v R & C CommrsTAX [2012] BTC 58
Pook v OwenELRTAX [1970] AC 244; (1969) 45 TC 571
R & C Commrs v Forde and McHugh LtdUNKTAX [2012] EWCA Civ 692; [2012] BTC 194
National Insurance contributions - Earnings - Travel expenses - Lump sum payments made to employees using own cars for business travel in addition to mileage payments - Whether lump sum payments additions to salary and so liable to NICs - Taxpayer's appeal allowed - Social Security (Contributions) Regulations 2001, reg. 22A - Income Tax (Earnings and Pensions) Act 2003, Income Tax (Earnings and Pensions) Act 2003 section 229 subsec-or-para 2s. 229(2).
This was an appeal by the taxpayer from a decision of the Upper Tribunal ([2011] UKUT 329 (TCC); [2011] BTC 1,832) holding that lump sum payments made to reimburse employees for business mileage were emoluments of employment liable for NICs and that, accordingly, the taxpayer failed in its claim for reimbursement of Class 1 NICs which it claimed it had overpaid for the tax years 2002/3 to 2005/6.
The taxpayer, which had changed its name from Total People Ltd, was formerly known as the South East Cheshire Training and Enterprise Council. Its business consisted of the provision or placement of apprentices and other trainees with employers and the supervision of their training. At the relevant time its staff numbered about 200 of whom about 160 were Training Advisers. The Training Advisers 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 Advisers 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 the taxpayer's staff as necessary but most of them were paid to the Training Advisers. The taxpayer's "Travel Policy", which was part of the 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 business travel 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 rationale put forward by the taxpayer 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.
It was common ground that the payments of 12, 13 or 40p per mile did not attract NICs and the taxpayer did not account for NICs on them. However, it treated the lump sums as subject to NICs and accounted to HMRC for them. The issue was whether it should have done so: the taxpayer said not, with the consequence that it was entitled to a refund; HMRC said that it correctly accounted for the NICs, and that no refund was due.
The FTT considered first whether the lump sums paid to the employees as motoring expenses were earnings on ordinary principles. It stated that, if they were earnings, that was the end of the matter and they were subject to NICs; but, if they would not otherwise be earnings, they were deemed to be earnings under reg. 22A of the Social Security (Contributions) Regulations 2001 if they were relevant motoring expenditure (RME), as defined in reg. 22A(3), except to the extent of the qualifying amount (QA) within reg. 22A(4). The taxpayer's case before the FTT was that the payments were not "otherwise … earnings" within reg. 22A but they were, for the purposes of reg. 22A, RME and so exempt from NICs to the extent of the QA. The FTT's conclusion was that the lump sum payments were not earnings.
The Upper Tribunal held that the FTT had erred in law by asking itself the wrong question or, at least, an inadequate question. The Upper Tribunal held that the payments were not of relevant motoring expenditure and they were accordingly emoluments of employment liable for NICs so that the taxpayer's claim for reimbursement failed. The taxpayer appealed arguing that the FTT had been entitled to conclude that the lump sums were not earnings, on ordinary principles; alternatively, if they were earnings an amount equal to the QA under reg. 22A(4) was to be disregarded for NIC purposes.
Held, allowing the taxpayer's appeal:
1.The proper structured approach to the issues in the case seemed clear. The first question was whether the lump sum payments were earnings for NIC purposes on ordinary principles. If they were not, then the taxpayer succeeded in its claim for reimbursement because either the payments were not RME and so the deemed earnings provisions of reg. 22A of the 2001 Regulations did not apply; or, if they were RME, the taxpayer had limited its claim to reimbursement to the QA. If, on the other hand, the lump sum payments were earnings for NIC purposes on ordinary principles, then other questions arose: the first being whether para. 7A of Pt. VIII of Sch. 3 to the 2001 Regulations was implicitly limited to RME. If it was not, then again that was the end of the matter and the taxpayer succeeded in its claim for reimbursement. If it was implicitly limited to RME, then it had to be determined whether the payments were RME or not.
2.Two things were immediately apparent from that structured approach. First, the taxpayer's scheme for travelling allowances was not an obviously abusive one where the intention or effect was to avoid all payment of NICs on the lump sum allowances or artificially to escape payment of income tax. HMRC had not claimed that there was no element at all of genuine compensation for business travel expenditure in the lump sum payments. There was no doubt that the taxpayer's employees had incurred expenditure for business travel in their cars. HMRC's case was merely that the linkage was not sufficiently close between the amount of the payment and actual use for business purposes and so there was an element of profit, or potential profit, for the employees. The taxpayer was not, however, seeking reimbursement of more than the 40p per actual business mile specified as the QA in reg. 22A(4) and as the approved amount in ITEPA 2003, s. 230(2). Further, the effect of ITEPA s. 70 and 72 was that the taxpayer's employees would pay income tax on the entire amount of the allowances save to the extent that they could invoke an exemption under ITEPA 2003, s. 229 to 232 up to 40p per business mile. The effect of HMRC's analysis and submissions was to eliminate entirely any right to reimbursement of NICs in respect of any genuine element of compensation for travelling expenses in the lump sum payment. Secondly, the FTT had been correct in its approach of deciding, first, whether the lump sum payments were earnings for NIC purposes on ordinary principles and, having found that they were not, in treating that as decisive in upholding the taxpayer's claim to reimbursement. The first question on the appeal was whether the FTT made an error of law in reaching its conclusion on the earnings point. If it made no error of law, then the Upper Tribunal had no jurisdiction to overturn the decision of the FTT and to re-make it, as it purported to do.
3.In a case where an employer established a general scheme for reimbursement of employees' travelling expenditure, then in determining whether the allowances were to be treated as the taxable earnings of the employees because they involved a profit element, or were to be ignored because they were reimbursement of expenditure, a broad brush approach was necessary in view of the practical constraints of devising a scheme that could apply to a number of different employees and was administratively workable. The test was not whether the allowance produced a mathematical equivalence with the expenditure; rather, the question was whether the scheme was constructed in a genuine endeavour to produce an equivalence between the allowance and the expenditure and to apply with approximately equal justice to all within its scope. (Donnelly (HMIT) v Williamson [1982] BTC 11 applied.)
4.HMRC's case was that the FTT had failed to address the Donnelly test and, had it done so, the FTT could only properly have come to the conclusion that the payments failed the test. However, neither side had cited Donnelly to the FTT. Nor did HMRC advance before the FTT an argument that, even if the lump sum payments were not part of the employees' salaries, they nevertheless were earnings for NIC purposes because they involved an element of bounty or profit for the employee. It was hardly surprising,...
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