HM Revenue and Customs v Benchdollar Ltd and Others

Approved Judgment

Hearing dates: 4 th– 5th June 2009

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Briggs :

This judgment follows the simultaneous trial of 14 claims by the Commissioners for Her Majesty's Revenue and Customs (“the Revenue”) for unpaid National Insurance Contributions from the defendant employers. The claims were originally made in the Newcastle upon Tyne County Court but, because all of them raise common issues of limitation and estoppel, they have been transferred to the High Court and ordered to be tried together. The evidence before me suggests that these 14 cases represent the tip of a substantial iceberg, amounting in total to more than 70 cases, with an aggregate potential value to the Revenue in excess of £3 million, the outcomes of which are likely to turn on the same issues.

The Common Factual Background

With effect from 6 ^th October 1985 the upper limit for an employer's liability for secondary Class 1 National Insurance Contributions (“NICs”) was removed, with the consequence that, thereafter, employers faced a substantial increase in their NIC liabilities in relation in particular to higher paid employees. This led to the devising of numerous schemes for the avoidance or minimisation of employers' NIC liability, the common feature of which was that they sought to take advantage of the exclusion from the definition of relevant earnings of payments in kind (see Regulation 19(1)(d) of the Social Security Contribution Regulations 1979).

Generally, these schemes featured a three-cornered arrangement under which the promoter of the scheme sold valuable assets to the employers, the employers transferred them as purported payments in kind to employees, and the employees turned them into cash by selling them back to the promoters. The types of asset used included platinum sponge, gold coins and book or trade debts. Thousands of employers used these schemes, and the 14 cases before me relate to their use by one or more of the defendant employers during the tax years 1994/95 through to 1997/98. Thereafter, amending legislation brought the use of these schemes to an end.

Issues as to an employer's liability to pay NICs fall to be resolved (like issues as to liability for tax) by means of the statutory scheme, pursuant to which (at least after 1999) a decision as to liability fell to be made by an officer of the Revenue, subject to appeal to the General or Special Commissioners, and thereafter to the High Court on a point of law. Determinations and appeals occurred in respect of thousands of cases and, mainly as the result of the identification of appropriate test cases, the Revenue were, in the end, uniformly successful in establishing that the schemes were ineffective in eliminating or reducing the relevant employers' NIC liabilities.

Claims by the Revenue for recovery of employers' NICs, which are made by litigation in the ordinary way, are subject to a 6 year limitation period, pursuant to section 9 of the Limitation Act 1980 as actions “to recover any sum recoverable by virtue of any enactment”. Time runs from the date upon which each relevant payment of NICs became due. It is common ground that NICs become due and payable on the 15 ^th day after the end of the income tax month during which the relevant earnings were paid to the employee. Income tax months run from the 6 ^th of each calendar month to the 5 ^th day of the following month.

The running of time under section 9 in relation to claims against employers for NICs is not postponed by the existence of appeal proceedings before the General or Special Commissioners concerning liability. Rather, section 117A(5) of the Social Security Administration Act 1992 (as amended in 1999) provides that where an appeal against liability has been brought but not determined then:

“The court shall adjourn the [recovery] proceedings until such time as the final decision is known; and that decision shall be conclusive for the purpose of proceedings.”

It readily became apparent to the Revenue that issues as to liability for NICs in cases where employers were relying upon payment in kind schemes would be unlikely to be finally determined before the General or Special Commissioners, or on appeal to the High Court, before the expiry of the limitation period affecting recovery of all or at least part of the NICs in issue. Entirely understandably, the Revenue did not view with enthusiasm the prospect of having to commence and then have adjourned for substantial periods thousands of recovery claims all round the country, while entirely separate litigation was proceeding to resolve questions of liability. The process of issuing and then adjourning thousands of claims involved potential both for wasted costs and time-consuming administration, both for the Revenue and for the employers concerned. In most cases employers might be expected to pay arrears if their liability was established, so that the issue of recovery proceedings purely to ward off the limitation period would be likely to be a disproportionately expensive and cumbersome procedure.

Accordingly, the Revenue looked for some more cost-effective and proportionate way of preserving their potential recovery claims from becoming statute barred, pending the resolution of the liability issues. To a litigation lawyer, the obvious solution is what is generally known as a “tolling agreement”, namely a contract between the parties to the relevant dispute that the defendant will not raise a limitation defence to a claim started after the expiry of the limitation period, during a specific further period identified in the contract. Tolling agreements are a common feature in the resolution of commercial disputes, all the more so since the general recognition among the litigation community of the desirability of seeking to settle disputes, if at all possible, without recourse to court proceedings, which is a fundamental plank of the reforms to civil procedure introduced by Lord Woolf.

Unfortunately, the Revenue devised their own home-made scheme for the avoidance of the running of time under section 9 of the Limitation Act, based upon the erroneous notion (about which proper legal advice was not taken at the time) that advantage could be taken of section 29(5) of the Act by the obtaining from employers of written acknowledgments of the Revenue's claim, on terms which were expressed not to constitute an acknowledgement of liability. The Revenue were also persuaded that by accepting payment by an employer of £1 on account of an NIC claim from an employer expressly denying liability, the same result could be achieved. While it is just about possible to discern from the language of section 29(5) of the Act how the Revenue came to form those mistaken views, it is now common ground that they were indeed erroneous, and that neither of the methods which I have described were on their face effective to postpone the running of time, so as to cause the right of recovery to be treated as having accrued on and not before the date of the relevant acknowledgement or payment.

For the purposes of the cases before me, counsel helpfully analysed the way in which the attempt to take advantage of section 29(5) manifested itself in the correspondence between the parties as falling into three broad types. I must describe each of them in a little detail.

In Type (1), the Revenue wrote to the employer (and/or its agent) referring to the fact that the issue as to liability for the NIC claimed might take a considerable time to resolve, and continued:

“Since we are bound in the collection of National Insurance arrears by way of the Limitation Act, we are required to obtain a protective writ, in order to protect the [relevant] tax year debt from becoming time barred. However, if you or your authorised agent were to provide either a signed acknowledgement of the debt or make a payment or part payment of the debt, the Limitation period would run from the date of the acknowledgement or payment/part payment and there would therefore be no requirement at this stage for us to obtain a writ.

If this is the course of action you would prefer to take, please sign and return the enclosed declaration as soon as possible.

It should be emphasised that this would be an acknowledgement of the debt, and not an admission of liability.

We look forward to hearing from you.”

The enclosed declaration was in the following form:

“ FOR PURPOSE OF THE LIMITATIONS ACT 1980

Re

[name of employer]

Section 29(5) of the Limitations Act 1980 (fresh accrual of action on acknowledgement or part payment), states,

“Where any right of action has accrued to recover,

(a) any debt or liquidated pecuniary claim

and the person liable or accountable for the claim acknowledges the claim or makes payment in respect of it, the right shall be treated as having accrued on and not before the date of the acknowledgement or payment.”

We, on behalf of/as the defendants, hereby acknowledge the claim of the Inland Revenue for National Insurance Contributions for the years [identified], for the purpose of S29[5] of the...