Mason v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 23 October 2008 |
| Date | 23 October 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Howard M Nowlan
The Appellant in person
Ms R Shields, HM Inspector of Taxes,on behalf of the Respondents
National Insurance contributions - contributions reduced by artificial pay practice - resultant reduction in SERPS payable to the appellant - failure of the Secretary of State to counteract the artificial pay practice - whether the appellant has a genuine grievance - interim decision
A special commissioner gave an interim decision that NIC deductions and payments made pursuant to an artificial pay practice, resulting in two-week pay periods, were correctly calculated subject to the taxpayer being able to provide further evidence that all of the salary payable each month was taken into account on only one occasion in each four-week period for NIC purposes.
The taxpayer was employed as a senior electrician to work on various North Sea drilling rigs. He was employed by numerous different employers from 1983 to 1998 on the basis that in each month, he would work 12-hour shifts on the rigs for 14 days, with 14 days spent on the mainland without further duties for his employer. On the assumption that a second employee was working for the 12 hours when the taxpayer was on the rig, but off duty, and on the assumption that two replacement employees worked the shifts whilst the taxpayer was on the mainland, the rig operators were able to operate the rig at all times.
Instead of being paid monthly, the taxpayer was paid all of his salary, except for £69, at one point in the month, and then two weeks later he was paid what was described as a "retainer" of £69. The consequence of that was that for National Insurance contribution (NIC) purposes he was treated as having two-week rather than four-week pay periods. The various lower and upper limits governing whether salary was liable to deduction or payment of NICs were all adjusted by reference to the length of the pay periods.
The consequence for the taxpayer was that since his pay periods were technically two-week pay periods, with the bulk of his salary payments being bunched into every other payment, his salary would hit and exceed the upper limit level beyond which no NICs were due, effectively as if his real pay was at nearly double the actual rate of pay. Further, since the pay of £69 in every other pay period fell below the lower limit for NICs, no contributions were due in respect of that payment. The three NIC consequences of that pay arrangement were thus that it resulted in the taxpayer being treated as having two-week, rather than four-week, pay periods; it avoided NICs in respect of the retainer payments of £69 which fell below the lower limits, and it diminished (or roughly halved) the NICs strictly due on the bulk of the taxpayer's salary.
In 1986 a change was made so that employers became liable for secondary employers' NICs without any upper limit, albeit that the limit remained in place for primary employees' contributions. The consequence of that, and of the fact that all pay continued to be paid in the same manner, was that the pay practice ceased to have much effect as regards secondary employer contributions. It had a technical effect in that in contrast to the position that would have obtained, had the £69 been rolled up and included in one four-weekly payment of salary, the £69 continued to be exempt from secondary employer NICs because it fell below a lower limit which remained in place. There was however no avoidance of employer NICs by virtue of the salary, bunched into two-week periods, exceeding the upper limit because the upper limit was withdrawn. As regards employee contributions deducted from the employee's salary, albeit paid and only payable by the employer, there was no change. The practice continued to occasion a significant reduction in employee contributions.
On reaching retirement age, and starting to receive both his basic and his state earnings related pension (SERPS), the taxpayer discovered that his pension was considerably less than he might have expected, had he had four-week rather than two-week pay periods, because the pay practice had had the effect of reducing his past primary contributions on which the level of graduated SERPS was based.
The taxpayer appealed against a notice of decision issued by the Revenue which indicated the NICs made in respect of his past employment, and indicated (at the same figure of £12,156.69) the amount of contributions due. The taxpayer claimed that more contributions had been due in respect of his employment, so that he should be receiving considerably more in his SERPS pension than he was in fact receiving.
Whether the NIC deductions and payments actually made were correctly calculated in accordance with the regulations from time to time.
A special commissioner (Howard M Nowlan) (giving an interim decision) said that the figures seemed to establish that the calculations of NICs were all slightly inaccurate, but the figures did not tally either with the figures that one would expect to see if the two consecutive payments of salary had always been dealt with for NIC purposes in one period. Furthermore, it was not clear that that feature would apply for all relevant years, and with the various different employers, for whom the taxpayer worked between 1983 and 1998. Accordingly the commissioner would give an interim decision, and issue separate directions specifying what needed to be illustrated for the particular argument to prevail.
The taxpayer would have a further opportunity to advance the case that all of the salary payable in each month was taken into account on only one occasion in each four-week period for NIC purposes. That point apart, the appeal would be dismissed on the basis that the Secretary of State never directed that there should be any adjustment to the actual pay periods. There were two-week pay periods and, odd as the consequences of that might have been, it necessarily followed that the NICs actually accounted for were correctly calculated.
Ignoring the technical issue of whether there was a legal error in the collection of NICs that would enable the commissioner to allow the appeal, the taxpayer had a grievance. The pay practices were artificial; it seemed likely that they were intended to result in some avoidance of NICs, though that had not been proved; there appeared to have been an extraordinary failure on the part of those responsible for exercising the discretions and responsibilities vested in the Secretary of State, and latterly the Board of Revenue and Customs, to counteract a pay practice that was artificially reducing liability to NICs; and the taxpayer was not a party to the artificial avoidance of NICs, and was unaware that his SERPS pension would be adversely affected by the avoidance practices.
In common sense terms, the taxpayer would actually benefit unduly, were it possible to allow the appeal, assuming that would mean that higher primary Class 1 NICs should actually have been deducted from his salary by his various employers and accounted for to the Exchequer, so that his SERPS pension would be lifted to the level that would have applied had the contributions in fact been collected and accounted for. The result would then be that the taxpayer would have benefited in the first place by having had a higher net salary, and would now enjoy the pension that he would have received had he suffered the higher deductions as he should have done.
The result was that it would be just and appropriate, and indeed just and appropriate even if in the end the appeal had to be dismissed, for those in authority to rectify the unfairness that the taxpayer did suffer, and of which he chiefly complained. The taxpayer had in the past offered to settle his basic NIC grievance by now paying the primary contributions that should have been deducted from his salary, if he could now procure that his pension was at the level that would have applied had all the contributions been paid at the relevant higher levels. That was impractical and ignored interest factors, and the fact that SERPS pensions were not strictly "funded" in the way that money purchase private pensions were funded. What would make sense would be some arrangement under which the taxpayer's SERPS pension might be lifted to some mid-point that might reflect the fact that at least since 1986 the artificial pay practice did not materially reduce employer secondary Class 1 contributions.
1. This was an appeal by John Mason where he disputed the accuracy of the Notice of Decision, issued by HMRC which indicated the National Insurance Contributions ("NICs") made in respect of his past employment, and indicated (at the same figure of £12,156.69) the amount of contributions due. John Mason claimed that more contributions had been due in respect of his employment, so that he should now, as a person in receipt of basic and state earnings related pension ("SERPS"), be receiving considerably more in his SERPS pension than he was in fact receiving. This is because there is a direct relationship between past Primary Class 1 (i.e. employee) NICs and a past earner's later SERPS pension.
2. The low payment of NICs resulted from a distinctly artificial pay practice which I will describe below. This pay practice had apparently been either common or more likely the invariable practice for the payment of all off-shore workers, working on drilling rigs in the North Sea. It pre-dated the employment of John Mason in that sector but applied to him from 1983 to the date of his retirement in 1998. In that period he had numerous different employers and the same practice was followed by all. For the years 1983 to 1986 the practice resulted in low payment of both Class 1 Primary NICs (i.e. employees' contributions) and also Class 1 Secondary NICs (i.e. employer...
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