First-tier Tribunal (Tax)

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Cite as: [2009] UKFTT 259 (TC)

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[2009] UKFTT 259 (TC)

TC00207

Appeal number TC/2009/10162

Procedure – stay of proceedings – joining two appeals - national insurance contributions (NICs) – other appeal involving ongoing application for preliminary issue – Limitation Act defence in recovery proceedings

FIRST-TIER TRIBUNAL

TAX

YELLOW Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (NIC) Respondents

TRIBUNAL: JUDGE ROGER BERNER

Sitting in private in London on 25 September 2009

David Goldberg QC, instructed by Freshfields Bruckhaus Deringer, for the Appellant

Malcolm Gammie QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

ANONYMISED DECISION

1. The Appellant makes application for a limited stay of these proceedings. The Respondents apply for this appeal to be heard together with the appeal of another, related, company, Blue.

2. The Appellant was represented by Mr David Goldberg QC and the Respondents by Mr Malcolm Gammie QC.

Background

3. At various times between 6 April 1997 and 5 April 2000 options over shares in a company called Green (“the Options”) were granted by the Blue Employee Benefit Trust to various persons working for the Blue Group (“the Grantees”).

4. The Appellant states that in the 26-month period between 6 April 1997 and July 1999 (“the First Period”) all the Grantees were employed by the Appellant. Most (but not all) of the Grantees were seconded by the Appellant to Blue, but none of the Grantees were employed by Blue in the First Period. The Respondents have, for the purpose only of this appeal and that of Blue, accepted that this is the case. In the 10-month period from June 1999 to 5 April 2000 (“the Second Period”) some 214 (representing approximately two-thirds) of the Grantees were employed by Blue. The value of the Options exercised by Blue employees was relatively modest as compared to the value of the Options exercised by the Appellant’s employees.

5. The Respondents claim that the exercise of the Options gives rise to a liability to national insurance contributions (“NICs”). The original decisions of the Respondents in this respect, issued on 12 December 2002, covering both the First Period and the Second Period (“the Blue Decisions”) were that Blue is liable to pay primary and secondary Class 1 contributions in respect of earnings, being income from the exercise of unapproved share options. The Blue Decisions are in respect of a sample of two nominated Grantees who were employees of Blue in the Second Period but not in the First Period.

6. To protect their position, and that of the National Insurance Fund, under the Limitation Act 1980 in respect of the Blue Decisions, on 10 December 2003 the Respondents issued proceedings against Blue in the Central London County Court. These proceedings were then, on the application of the Respondents, adjourned pursuant to s 117A(5) of the Social Security Administration Act 1992, as amended, by an order of the District Judge made on 4 February 2004. The Order included permission to apply for further directions.

7. On 13 March 2009 the Respondents issued decisions (“the Appellant Decisions”) against the Appellant in respect of the same liabilities to NICs as those covered by the Blue Decisions. The claim in the Appellant Decisions is that it is the Appellant and not Blue which has the liability to pay NICs in respect of the exercise of the Options. The claim made against the Appellant (and in respect of which this appeal is concerned) is alternative to the claim against Blue.

8. Although in their decision letter of 13 March 2009 the Respondents stated that to protect their right to collect the (alleged) arrears of NICs from the Appellant, and any interest on those arrears, they must take action in the County Court, no such action had been taken at the date of the hearing of these applications.

9. In an application by Blue in its appeal against the Blue Decisions heard in this Tribunal by Judge Dr John Avery Jones CBE on 2 April 2009, Blue sought a direction that there should be a preliminary issue consisting of (1) Was Blue the employer of the Grantees who exercised Options? and (2) If Blue was not their employer, were they employed by a “foreign employer” so that Blue was a “host employer”? As noted by the judge in his decision (Blue v Revenue and Customs Commissioners [2009] UKFTT 141), the significance of these is that normally the person liable to pay NICs is the employer (s 7(1), Social Security Contributions and Benefits Act 1992). However, if the employer is a foreign employer (a person who does not fulfil the conditions as to residence or presence in Great Britain prescribed under s 1(6)(c) of that Act) the person liable is the host employer (the person to whom the personal service of the person employed is made available).

10. The decision of the judge was that there should not be a preliminary issue. That decision is now the subject of an appeal to the Upper Tribunal (Tax and Chancery), and I was informed by the parties that this is listed to be heard on 21 October 2009.

The applications

11. The Appellant applies for the following directions:

(1) That the proceedings before this Tribunal be stayed until the later of (i) the determination by the County Court as to whether any proceedings brought by the Respondents against the Appellant in the County Court in order to recover the NICs assessed can be brought out of time and (ii) a determination by the Tribunal as to whether Blue is liable for any NICs due in respect of employees of the Appellant by reason of it being a host employer pursuant to the Social Security (Categorisation of Earners) Regulations 1978 (“the Categorisation Regulations”).

(2) That the requirement in Rule 27(2) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 for the parties to send or deliver to the Tribunal and the other party a list of documents meeting the requirements in Rule 27(2)(a) and (b) be suspended until the later of (i) a determination by the County Court as to whether the proceedings brought by the Respondents against the Appellant in the County Court in order to recover the NICs can be brought out of time and (ii) the determination by the Tribunal as to whether Blue is liable for any NICs due in respect of employees of the Appellant by reason of it being a host employer pursuant to the Categorisation Regulations.

12. The Respondents oppose the Appellant’s application, and themselves apply, under Rule 5(2)(b), for this appeal to be joined and heard together with the appeal of Blue.

Discussion

13. In both this appeal and that of Blue the same issue of substantive liability to NICs arises, namely whether the exercise of the Options gives rise to that liability. The Blue appeal also raises what Mr Goldberg characterises as the “threshold issue” and Mr Gammie calls the “secondary contributor” issue, namely whether Blue is a host employer. That question will turn on whether the Appellant is, or is not, a foreign employer within the meaning of the Categorisation Regulations by virtue of either not fulfilling, or fulfilling, the relevant conditions as to residence or presence in Great Britain. If the Appellant does not have a presence in Great Britain and accordingly is a foreign employer then it will be Blue and not the Appellant that will be the secondary contributor; if the Appellant does have a presence in Great Britain and is not a foreign employer it, and not Blue, will be the secondary contributor. In that latter case, if the Appellant is liable for NICs as a secondary contributor, it is argued on behalf of the Appellant that the claim of the Respondents for recovery of that liability would be statute-barred under the Limitation Act 1980.

14. Mr Goldberg argued that, in the context of the Blue appeal, the conduct of the Respondents in proceeding against the Appellant was an abuse of process, and that the Appellant’s appeal proceedings should therefore be stayed. He submitted that, in seeking to join the two sets of appeal proceedings together, at a time when Blue’s appeal to the Upper Tribunal in respect of a preliminary hearing on the threshold issue was outstanding, the Respondents were attempting to pre-empt that decision and prevent Blue from obtaining the result it was seeking to achieve. There is, he argued, no need for a preliminary hearing in the case of the Appellant; if the Appellant is liable as a secondary contributor the only issue in the Appellant’s appeal will be the substantive issue. Mr Goldberg submitted that it is impossible sensibly to join one case where there is to be a preliminary hearing which may well dispose of the case, with another where there is no question of a preliminary hearing being appropriate.

15. Mr Goldberg argued further that the threshold issue in the Blue appeal, an issue which is absent from the Appellant’s appeal, is of itself sufficient to distinguish the two cases, so that they should not properly be joined. He accepted that, on the substantive issue of whether there is a liability, as opposed to the threshold issue of which company may be liable, there would be an investigation of the same facts, but he argued that the two companies, although in the same group, were separate companies and were entitled to be treated separately. In addition, he said that the appeals could be distinguished from one another by the fact that the Appellant would have a Limitation Act defence in any recovery proceedings, whereas Blue would not.

16. It was in relation to the limitation issue that Mr Goldberg reserved his most trenchant criticism of the Respondent’s position. He took me through the Appellant’s limitation defence, including an analysis of the Respondent’s arguments, in Mr Gammie’s skeleton, on possible mitigation or extension of the limitation period. Mr Goldberg said that the Respondent’s claim against the Appellant was not only stale but sterile. The Respondents had taken no proceedings in the County Court in respect of recovery from the Appellant. If the Respondents were to take such proceedings they would be met with a defence that the Limitation Act prevents such recovery. In Mr Goldberg’s submission the Respondent’s claim against the Appellant has not been made genuinely for the purposes of collecting NICs from the Appellant but for the improper and collateral purpose of forcing litigation and cost unnecessarily on Blue and the Appellant.

Should this appeal be joined with that of Blue or stayed behind Blue’s appeal?

17. As matters stand in Blue’s appeal, and subject to the appeal before the Upper Tribunal in relation to the preliminary issue, both the substantive issue and the secondary contributor issue are to be heard at the same time. Mr Gammie argued that the proceedings in the Blue appeal will necessarily involve the Appellant for two reasons. First, the Appellant participated in the scheme as the formal contractual employer of all the employees in the First Period and of some of them in the Second Period. Even in relation to the Second Period alone an investigation or decision will, one way or another, involve some inquiry as to the facts in the First Period. Set in the context of the appeals overall, the joining of the appeals would not put the Appellant to huge expense, in time or money. The substantive issue would have to be determined in any event for the Second Period in relation to Blue.

18. The second reason put forward by Mr Gammie as to why the Appellant would necessarily be involved in the Blue appeal is that the secondary contributor issue involves showing whether or not the Appellant has a presence in Great Britain. That, he submitted, would involve evidence as to the activities of the Appellant.

19. Subject to the limitation issue, which I consider later in this decision, on the question whether this appeal should be joined with that of Blue, or stayed behind Blue’s appeal, I agree with Mr Gammie. It is correct that the Appellant and Blue are separate companies, but, leaving aside the limitation issue, in my view it is entirely appropriate in these circumstances that these appeals should be joined and heard together. The appeals arise out of the same facts, the substantive issue is the same in both appeals, and if a liability to NICs is found to arise it will be a liability of either Blue or the Appellant. The Blue appeal will involve factual analysis that will include the question whether the Appellant has a presence in Great Britain. For this reason it will in my view be more convenient, and avoid delay and expense, if the appeals of Blue and the Appellant are heard together.

20. The limitation defence that the Appellant would put forward in any recovery proceedings against it if the Appellant is found to be liable to the NICs is not to my mind a factor that can distinguish this appeal from that of Blue before this Tribunal. This Tribunal has no jurisdiction in relation to claims of limitation, and any limitation defence available to the Appellant will have no part to play in a substantive hearing of the issues in this appeal.

21. I do not accept Mr Goldberg’s argument that the application of the Respondents to join this appeal with that of Blue has a collateral or improper purpose of seeking to deprive Blue of the benefits it continues to seek before the Upper Tribunal if that Tribunal directs that the threshold issue be heard separately as a preliminary issue. It does not seem to me that the Respondents’ application can have any such effect. If the Upper Tribunal allows Blue’s appeal on the preliminary issue point so that there will, on that footing, be a hearing of the secondary contribution, or threshold, issue in relation to Blue, Blue’s appeal on the substantive issue will be deferred. But if this appeal is joined with that of Blue, that will not prevent the secondary contribution issue being heard as a preliminary issue; the effect will simply be that both the joined appeals on the substantive issue will be deferred. Furthermore, as the preliminary issue itself involves determination of the factual position of the Appellant, I can only conclude that any determination of the preliminary issue would not be prejudiced by the joining of the Appellant’s appeal with that of Blue.

22. Nor do I accept that the issue by the Respondents of the decision in respect of the Appellant was an abuse of process. That decision seems to me naturally to follow from the arguments raised by Blue on the secondary contributor issue. Mr Goldberg accepted that the Respondents may pursue alternative remedies in many cases, but in the cases of the Appellant and Blue he argued that, given the history and form of the proceedings, the Respondents ought properly to pursue Blue first, and only if they fail should they be allowed to turn to the Appellant. For the reasons I have explained earlier, I do not agree with Mr Goldberg on this.

23. Mr Goldberg referred me to Reichhold Norway ASA and another v Goldman Sachs International [2000] 1 WLR 173, a case which concerned whether a stay of UK proceedings should be ordered where there was concurrent arbitration in another jurisdiction by the plaintiff, but against another party. The proceedings overlapped to a considerable extent, and the arbitration could be expected to reach a conclusion within a relatively short space of time, once it had been taken out of abeyance by the plaintiff. In the Court of Appeal Lord Bingham CJ, with whom Otton and Robert Walker LJJ agreed, gave the only reasoned judgment, upholding the direction of Moore-Bick J in the High Court staying the plaintiff’s action pending determination of the arbitration. It seems to me to be clear from Lord Bingham’s judgment that a stay such as that sought in those proceedings would be granted only in rare and compelling circumstances, that there must be very strong reasons for granting a stay and the benefits which are likely to result from doing so must clearly outweigh any disadvantage to the other party. Applying those criteria, and for the reasons I have given, I do not consider that there is any basis on which I ought to order a stay of this appeal behind that of Blue.

24. Subject therefore to the limitation issue, I consider that this appeal should not be stayed but should be joined with that of Blue, and that the appeals should be heard together.

Should this appeal be stayed until determination of the Limitation Act issue by the County Court?

25. Time runs under s 9 of the Limitation Act 1980 even during the conduct of appeal proceedings before this Tribunal. However, s 117A(5) of the Social Security Administration Act 1992 (as amended in 1999) provides that, in a case such as that of the Appellant, where an appeal has been brought but not determined, “… the court shall adjourn the proceedings until such time as the final decision is known; and that decision shall be conclusive for the purpose of the proceedings”.

26. It seems to me that the purpose and effect of s117A(5) are clear: the appeal proceedings in this Tribunal have priority over recovery proceedings, and any recovery proceedings must be deferred until such time as there has been a final determination of the appeal proceedings. This accords with both logic and common sense. Until an appeal has been determined there can be no debt to recover in the County Court proceedings, and such proceedings before a determination of the appeal would be otiose. In my view s 117A(5) imposes a mandatory requirement on the County Court to adjourn its proceedings, and on this basis it seems to me unlikely that the court would determine any issue in those proceedings, including that of limitation, before the appeal has been determined. I do not agree with Mr Goldberg that the limitation issue can be regarded as a separate matter not affected by s 117A(5) on the basis that this Tribunal will not address limitation. Limitation is a defence to the claim on the debt; if the claim on the debt (if and when made) must be adjourned, I cannot myself see any room for limitation to be decided by the County Court until that adjournment comes to an end. Nor do I consider that the direction of the District Judge in the Blue recovery proceedings giving permission to apply for directions suggests otherwise; such a direction does not in my view detract from the imperative of s 117A(5).

27. It was common ground that questions of limitation are outside the jurisdiction of this Tribunal. In view of that I do not consider that it is open to me to base my decision on these applications on any view I might take as to the merits or otherwise of the respective arguments on limitation that might be raised in the recovery proceedings. My decision rests on my view that any recovery proceedings would have to be adjourned pending determination by this Tribunal of the Appellant’s appeal, that the limitation issue could not be determined before that time, and that consequently it is not appropriate for a stay to be directed.

Decision

28. For the reasons I have given, I dismiss the Appellant’s application, and I uphold the application of the Respondents. I direct that this appeal be joined with the appeal of Blue (reference ******), and that the two appeals be heard together.

29. In the Appellant’s application it was stated that, if the direction it sought were not to be granted, it intended to apply for an extension of time within which it is required to send or deliver a list of documents. The Respondents have agreed in principle to such an extension. It was suggested that the parties should seek to agree appropriate directions, and accordingly I will not at this time make any direction in this respect. Either party may apply for further directions as are necessary.