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[2009] UKFTT 139 (TC)

[2009] UKFTT 139 (TC)

TC00107

Appeal number SC/3140/2008

National Insurance Contributions - Contributions reduced by artificial pay practice - Resulting 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 - Final Decision

FIRST-TIER TRIBUNAL

TAX

JOHN ALEXANDER LITHGOW MASON Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (National Insurance Contribution) Respondents

TRIBUNAL: HOWARD M NOWLAN

Initially sitting in public in Edinburgh on 24 September 2008 and dealt with subsequently through Directions and further Written Submissions

The Appellant in person

Ms R Shields, HM Inspector of Taxes, on behalf of the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

This has been a protracted case, and this decision deals simply with two points. Following the hearing, my Interim Decision was issued fairly shortly, in which I indicated that unless the Appellant could produce further evidence on one point, I would have to dismiss his appeal. I explained why all other points, other than the one reserved one, led to that conclusion. I also issued Directions on two different occasions, identifying precisely the further information that I would need, were I to have any chance of allowing the appeal.

A vast volume of further paper has been submitted to me, but I have to say, with some regret, that I must finally dismiss the appeal. The further information has not established the one point that would have enabled me to allow the appeal. Furthermore a relatively short, but entirely relevant, letter and enclosures from HMRC has very much sustained HMRC's case that the appeal should be dismissed.

The remainder of this decision will endeavour to do three things. I will first try to give just enough information so that the point remaining at stake is intelligible without reference to my initial Decision. I will then explain why I consider that the remaining point is resolved in favour of the arguments advanced by HMRC. Finally, and albeit of no relevance to this decision as such, I will (as I always promised that I would) state as clearly as I can the fact that this Appellant does appear to me to have a grievance. It is not one that I can rectify, but I know that the Appellant is progressing his crusade with Members of Parliament or of the Scottish Parliament, and with other official bodies, and it may be of assistance if, after a fairly long enquiry, I try to summarise the respect in which the Appellant appears to have been treated badly and unfairly. This commentary is of course irrelevant to this formal decision itself.

The Background

In the period between 1983 and 1998, the Appellant worked for various different employers, but always on off-shore drilling rigs. His common pattern of work was to be off-shore for a two-week period, and then to have a two-week period back in Aberdeen or elsewhere on the mainland, effectively as a rest period. A common way of paying him was to pay him on two occasions in each month. In the first, his basic pay would be calculated, at the daily rates for off-shore work set in his contract, and the pay-slip would then itemise various deductions for tax, pension and National Insurance contributions. They often also reflected a further deduction of £69, headed Retainer. The net amount was then paid into his bank account. Two weeks later, covering his rest period, he would then receive a further payment, and pay-slip. The pay-slip would generally then reflect the fact he was paid both the £69 retainer, plus further amounts, since the fact that the pay was so much lower in the second period would mean that he was entitled to some tax refunds. So the credit to his bank account would be for more than the £69, all generally explained on the pay slip.

This method of paying him had a curious impact on his and his employer's liability for National Insurance Contributions. The method of calculating when earnings exceeded the Upper Earnings Limit (beyond which further Class I contributions were no longer due) is all geared to different figures, according to the regularity with which employees are paid. Thus if an employee was paid weekly, and the Upper Earnings Limit was, say, a weekly wage of £500, the corresponding figures for employees being paid every two weeks, and every four weeks, would be £1000 and £2000 respectively. Notwithstanding the greatly differing amounts of pay paid to the Appellant on his two different "pay dates", he was still counted as having two-week pay periods. If thus his total monthly pay had been precisely £2,000 (i.e. £1931 and £69) in any realistic sense, his entire pay should have been liable to both employee and employer NIC contributions. Since, however, he was treated as having two-week pay periods, when he received his £1931, £931 escaped liability as being above the relevant Upper Earnings Limit.

The law was changed in 1986 whereupon the Upper Earnings Limit was withdrawn so far as Secondary or employer contributions was concerned. Thus the odd practice ceased to reduce the liability for employer contributions, but it continued to reduce the liability for employee contributions.

The NIC Regulations did enable the Secretary of State to modify the effect of the rules concerning pay periods, and the various limits. Most relevantly, the rules appear to have contemplated precisely the point that was relevant in this case, namely that there might be great differences in the rates of pay in different periods, and in this situation the Secretary of State could very easily have required NICs to be calculated, in the case of the Appellant, as if he had had four-week pay periods, with the two amounts of pay then being aggregated of course. Since no such adjustment was called for by the Secretary of State, the pay periods remained as two-week pay periods, and as the duration of the pay periods was not changed, I have had to conclude that the Appellant's NICs were correctly calculated.

The significance of this whole issue is that, as I understand it, the level of the Appellant's SERPS pension is entirely geared to the amount of "employee" contributions, and so it has been greatly reduced from the figure that he expected, and that he would have received had he been treated as having four-week pay periods, such that greater employee NIC deductions would have been made.

The one remaining issue

In my Interim Decision, I reached the conclusion that there was one basis on which the Appellant might have been able to claim that he did have four-week pay periods. Were he successful in demonstrating that, my tentative assumption was then that, subject to verification, he would be able to say that the wrong (and insufficient) amounts of NICs had been collected; and as it was the Secretary of State's responsibility to collect the amounts legally due, it seemed likely that the higher SERPS pension should be payable.

The outstanding point was geared to Regulation 19 of the Social Security (Contributions) Regulations 1979 which said that one should ignore pay, when paid, if it had already been taken into account in an earlier period for NIC purposes. Thus if NICs had been calculated in the first of the two-week pay periods in respect of £2000, rather than the actual amount of £1931, such that the deferred £69 had been taken into account for NIC purposes in the earlier period, then one would ignore the actual payment of the £69. Once that was ignored, it would appear that the Appellant would have automatically been treated as having four-week pay periods, regardless of whether the Secretary of State gave a direction to modify the period or not, and then the wrong amounts of NICs would have been collected. It seemed very improbable that the Appellant would be able to demonstrate that this had occurred but the Appellant suggested that he could, and he has made countless efforts to do so.

I regret to say that the Appellant has not established this. Ideally what would have been demonstrated was that there were countless pay-slips for the period with the major payment, showing a deduction for the deferred retainer, but nevertheless calculating the NIC due as if the retainer had not been deducted. The pay slips that HMRC have verified in their letter of 18 March 2009 all appear to do one or other of two things. They either show that the calculated NICs have been calculated correctly by reference to my example figure of £1931, or for the later periods they appear to show that the employer had anyway switched over to four-week pay periods so that the point altogether dropped away. I have not actually seen any evidence of the NICs for a period when the major amount of salary was paid, recording a deduction for NICs that was explicable only on the basis that the £69 deferred payment (payable two weeks later) had actually been taken into account for NIC purposes in the earlier period. No-one now knows whether the strange retainer payment system was artificially designed to achieve these reductions in NIC payments. When they resulted in a reduction in both employee and employer contributions, it may very well be that the pay structure was deliberately designed to reduce the liability for NICs. Other possible explanations for the system were canvassed at the hearing. The only significance of this point is that if the practice was designed as an artificial one, designed to reduce liability for NICs, it does seem very improbable that companies would have pursued the artificial practice, and then artificially added back the deferred bonuses and taken then into account in calculating liability for NICs, before they were actually paid.

The Appellant has produced a great volume of material, much of which seems to me to be irrelevant, and the remainder of which only seems to suggest that there are various oddities in the calculation of NIC liability that, at this distance in time, no-one can quite explain. None of these oddities however ties in with the simple feature of having to show that the £69 payments were in fact aggregated with salary in earlier periods, and NICs then accounted for on the aggregate amount. That is what the Appellant had to demonstrate, and I regret to say that he has failed to do so.

The Real Grievance

I tried to summarise the respect in which I thought that the Appellant had a real grievance in my Interim Decision, in case he wished to show the relevant paragraphs of that Decision to any of the various MPs or officials to whom he has explained his case. I will try to do so again now.

The Appellant appreciates that, insofar as he received more net salary because fewer employee NIC deductions were made than might more realistically have been made, he does not have a particular grievance. He may still feel, as I am sure he does, that various employers treated him badly in that they may well have instituted artificial pay practices that now reduce his pension, and when he asked on one occasion years ago whether that would be the result, he was told that it would not be. He almost certainly feels that the Secretary of State and the relevant officials were very remiss in not adjusting the pay periods, as they could have done, and as I think they should have done. But insofar as he had extra net salary, his grievance is fairly modest.

The respect in which the grievance may be much more serious is all geared to the fact that after only three years in the total period from 1983 to 1998, the pay practice had no effect on the employer contributions, so that in no sense were the employer contributions halved, or materially reduced by the practice. They were paid in respect of his total earnings.

For the purposes of the strict part of this decision, it is immaterial to me to know:

• whether it is in fact the case that the level of SERPS pension is entirely geared just to the record of employee NIC contributions, rather than both employer and employee contributions;

• whether, albeit that the state pension is not a funded pension at all, there is some way in which employer contributions are ear-marked to fund benefits distinct from pension, whilst employee NICs are somehow more directly related to later SERPS pension benefits; and

• whether the state is in fact benefiting from the Appellant's misfortune in that from 1986 onwards the state has received unreduced employer contributions in respect of the Appellant's entire salary, whilst the reduction in employee contributions may have had a disproportionate effect in reducing his SERPS pension.

Referring to the middle bullet point in 16 above, it is certainly my understanding that if the Appellant had opted out of the state pension, then he would have been able to contribute at least some proportion of both the employee and employer NIC contributions into some form of private pension. That seems to suggest that there must be some genuine grievance here. Where the state has had fewer employee NICs, to that extent the Appellant can hardly complain about a fair and matching reduction in SERPS pension. To the extent that the state has had the full employer contributions ever since 1986, however, it would appear to be unjust if that feature has had no impact on somewhat lifting the amount of the Appellant's SERPS pension.

I might finally make two observations. None of us now knows the origin of this pay practice, and it may have been an artificial one, designed to reduce liability for NICs. In the case, however, of workers who worked "two weeks on and two weeks off", it was not that artificial. After all, the workers were paid when they worked and basically not paid when they had their "weeks off". What was remiss, however, was for the authorities who were responsible for collecting NICs to ignore the feature that this pay practice, whilst not particularly artificial itself, had a very artificial effect on the calculation of NICs. The Regulations made it perfectly obvious that it was appropriate to adjust the pay periods in the case of pay periods involving very different amounts, and when the pay levels in this case were broadly at the level of 99 to 1, the NIC effect of the pay practice involved an enormous distortion.

I can well imagine that it will be difficult to rectify any injustice that there may be in this case, particularly in the present economic climate. However the two features that make me think that someone should do something to rectify the unfairness in this case are that:

• the points in 16 and 17 above seem to suggest to me that the Appellant has been unfairly treated, and that the state has benefited from his misfortune (though I accept that there are many aspects of which I am ignorant, and I cannot possibly say with certainty to what degree he has been prejudiced, and the state benefited); and

• those responsible for over-seeing the fair and realistic calculation of NICs appear to me to have been very remiss when dealing with the NIC affairs of people in the position of the Appellant, because they failed to act in a way that the Regulations enabled them to act, and in a way that would perfectly obviously have achieved a more sensible outcome.

I should finally say that whilst I have failed to understand many of the arguments that the Appellant has advanced, I do applaud him and respect him for the way that he, as an electrical engineer, has conducted his case and his campaign.

HOWARD M. NOWLAN

TRIBUNAL JUDGE

RELEASE DATE: 9 June 2009