Hudson Contract Services Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 07 November 2007 |
| Neutral Citation | [2007] EWHC 2561 (Ch),[2007] EWHC 73 (Ch) |
| Docket Number | Claim Number HC04C03856 |
| Court | Chancery Division |
| Date | 07 November 2007 |
[2007] EWHC 2561 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
His Honour Judge Mackie Qc
Claim Number HC04C03856
Mr Jolyon Maugham (Instructed by Michael Welch & Co) appeared for the Claimant.
Mr Philip Jones QC (Instructed by HM Revenue & Customs Solicitors Office) appeared for the Defendant
This is a claim by Hudson Contract Services Limited (“Hudson”), the Claimant, for repayment from HM Commissioners of Revenue & Customs (“the Revenue”), the Defendant, of £560,000 plus interest in respect of income tax and national insurance liabilities (“NICs”) for Workers in the building industry. The Claims are brought under what is sometimes called the Rule in Woolwich Equitable Building Society [1993] AC 70 (“ Woolwich”) and Regulation 52 of the Social Security (Contributions) Regulations 2001/1004. The formidable list of legal issues set out in the pleadings and skeleton arguments has been reduced and refined in the course of the trial which took place between 1 and 8 October 2007. I will deal in turn with the tax and national insurance regimes, the facts, the relevant questions of law, the parties' submissions and the court's conclusions.
I first summarise the regimes at some length as Counsel have placed some emphasis on the detail although, as the hearing developed, it seemed to me that the central issues did not much turn on the detail of the legislation. The regimes are helpfully set out in the skeleton argument produced by Mr Jones QC for the Revenue and I now reproduce this with some minor corrections helpfully put forward by Mr Maugham for Hudson and with some compression of my own.
The Regimes-Employees
Tax under Schedule E was charged on emoluments in respect of any office or employment: s.19(1) Income and Corporation Taxes Act 1988 (“ ICTA”). From the tax year 2003–4 provisions of ICTA were replaced to substantially the same effect by Income Tax (Earnings and Pensions) Act 2003.
S.203(1) ICTA provided that on the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax had to be deducted or repaid by the person making the payment, subject to and in accordance with regulations made by the Revenue (“Pay As You Earn” or “PAYE”). The regulations were to make provision for the person making the payment to make deductions in accordance with tax tables prepared by the Revenue: s.203(2)(a) ICTA. These tax tables had to be constructed with a view to securing so far as possible that the total income tax estimated to be payable in respect of any income assessable under Schedule E for any year of assessment (subject to a provisional deduction for allowances and reliefs) was deducted from such income paid during that year: s.203(6), (7) ICTA.
The general rule was that every person who was chargeable to income tax was required to give notice to the Revenue of that fact and if so required to make a return containing such information as might be required by the Revenue, including a self assessment of the amounts chargeable to income tax due: S.7(1), 8(1), s.9(1) TMA 1970. However, in summary, no such notice or return was required if all payments of income tax were taken into account through the PAYE system or the person concerned was a basic rate tax payer subject to PAYE on employment emoluments and the only other assessable income was bank or building society interest subject to deduction and dividends subject to deductions at the ordinary rate.
The relevant regulations made by the Revenue pursuant to s.203 ICTA in relation to employees were, at the time with which the present case is concerned, the Income Tax (Employments) Regulations 1993 (“ITER”).
Regulation 6 ITER required every employer on making a payment to any employee during the year to deduct from the employee's gross pay (or repay to the employee, as the case may be) tax in accordance with “the appropriate code”. The appropriate code was to be determined by an inspector who was to have regard, inter alia, to the reliefs from income tax to which the employee was entitled, any other income which was otherwise chargeable under Schedule E, any tax overpaid for any previous year which had not been repaid, any tax remaining unpaid for any previous year which had not otherwise been recovered, and such other adjustments as may be necessary to secure that, so far as possible, the tax in respect of the employee's emoluments for the year to which the code was to have effect was deducted from the emoluments paid during the year: reg 7 ITER. The code could be amended throughout the year to take into account changed circumstances: reg 12 ITER. The employer was required to pay to the Revenue the amount due within 14 days of the end of each income tax month (each income tax month commences on the 6 th day of each calendar month): reg 40 ITER. Nothing in ITER prevented an assessment (including a self assessment) being made in respect of income assessable to income tax for any year: reg 99 ITER. If the tax payable under the assessment was less than the total net tax deducted from the employee's emoluments during the year less any subsequent repayments made, the inspector might repay, and was required to repay if the person assessed so required, the difference to the person assessed instead of taking it into account in determining the appropriate code for the subsequent year: reg 101 ITER.
As regards NICs, S.6(1) of the Social Security Contributions and Benefits Act 1992 (“ SSCBA”) provided that where in any tax week earnings were paid to or for the benefit of ‘an earner’ in respect of any one employment of his which was ‘employed earner's employment’ a primary and a secondary Class 1 NIC was payable. The primary Class 1 NIC was the liability of the earner and the secondary Class 1 NIC was the liability of ‘the secondary contributor’ (commonly referred to as, respectively, ‘the employee's NICs’ and ‘the employer's NICs’). An ‘employed earner’ meant a person who was gainfully employed in Great Britain either under a contract of service, or in an office with emoluments chargeable to income tax under Schedule E: s2(1)(a) SSCBA. This was in contrast to a ‘self-employed earner’, who was a person gainfully employed otherwise than in employed earner's employment: s2(1)(b) SSCBA. A ‘secondary contributor’ in relation to any payment of earnings to or for the benefit of an employed earner was, in the case of an earner employed under a contract of service, his employer: s7(1) SSCBA. Para 3(1) Sch 1, SSCBA provided that where earnings were paid to an employed earner and in respect of that payment liability arose for primary and secondary Class NICs, the secondary contributor was liable in the first instance to pay also the earner's primary contribution, on behalf of and to the exclusion of the earner, and primary Class 1 NICs paid by the secondary contributor on behalf of the earner were to be taken to be contributions paid by the earner. However, para 3(3), Sch 1, SSCBA provided that a secondary contributor was entitled, subject to and in accordance with regulations, to recover from an earner the amount of any primary Class 1 NICs paid or to be paid by him on behalf of any earner, and regulations were to provide for recovery to be made by deduction from the earner's earnings, and for it not to be made in any other way.
Para 6(1) Sch 1 SSCBA stated that the Revenue could make regulations for Class 1 NICs to be paid, accounted for and recovered in a similar manner to PAYE income tax. The relevant regulations are to be found in the Social Security (Contributions) Regulations 2001 (“SSCR”). These came into force for the tax year 2001–02. However they were largely consolidating regulations and, for present purposes, there is no need to refer to the predecessor provisions. Reg 67(1) SSCR provided for Class 1 NICs to be paid, accounted for and recovered in like manner as PAYE income tax. Reg 67(2) provided that the provisions in Sch 4 (which contained provisions derived from ICTA and the ITER) shall apply to and for the purposes of earnings-related contributions. Sch 4, para 10 provided that the employer must pay the primary and secondary Class 1 NICs due in respect of each income tax month within 14 days of the end of every income tax month.
Reg 52 SSCR provided for the return of contributions paid in error. Reg 52(1) provided that contributions paid in error by a person or a secondary contributor had to be returned by the Revenue to that person or secondary contributor, as the case may be, if application was made to that effect to the Board. Reg 52(5) provided that contributions paid by a secondary contributor on behalf of any person in error and not recovered from that person might be returned to the secondary contributor instead of to that person, but if so recovered might be returned to that person or, with his consent in writing, to the secondary contributor. In other words, where the secondary contributor has ‘recovered’ the wrongly paid primary Class 1 NICs by deduction from the remuneration of the employee the repayment of the amount paid in error has to be made direct to the employee, unless the employee has consented to the payment to be made to the employer.
The Regimes—self-employed
The requirement to deduct sums for PAYE applied where the payee was an employee, (i.e. where there was a contract of service, not where there was a contract for services) or was treated as an employee. The self-employed paid tax under Schedule D Case I on the profits of their trade through the self assessment process.
However, pursuant to Part XIII, Chap 4, ICTA, special provisions existed for subcontractors in the construction industry. These applied to a contract relating...
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