First-tier Tribunal (Tax)

[2010] UKFTT 97 (TC)

TC00408

Appeal number: TC/2009/10182

NATIONAL INSURANCE CONTRIBUTIONS – tax under the benefits code and partial deduction under s 365 ITEPA 2003 – whether deductible for Class 1A NIC – yes – appeal allowed

FIRST-TIER TRIBUNAL

TAX

                                  ANTIQUE BUILDINGS LIMITED                 Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

DECISION NOTICE: full findings of fact and reasons for the decision

                                    TRIBUNAL: TRIBUNAL JUDGE JOHN F AVERY JONES CBE

Appeal decided on paper

CT Fellowes Limited for the Appellant

Jane Hodge, HMRC Appeals and Review Unit, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal by Antique Buildings Limited against a decision under s 8 of the Social Security Contributions (Transfer of Functions) Act 1999 made on 9 July 2007 that it is liable to pay Class 1A National Insurance Contributions (“NICs”) in respect of a helicopter provided for the use of Mr P G Barker, a director of the Appellant, for mixed business and private use during the period 6 April 2000 to 5 April 2005.  The parties provided skeleton arguments and asked for the appeal to be dealt with on paper.

2.       There was an agreed statement of facts as follows:

Point at Issue

(1)        When calculating the amount of Class 1A NICs the company is liable to pay for the period 6 April 2003 to 5 April 2006 can a deduction under S365 Chapter 3 Part 5 of the Income Tax (Earnings and Pensions) Act 2003 be allowed for the director’s business use of a helicopter made available to him by the company?

Antique Buildings Ltd (“the Company”)

(2)        The Company was incorporated on 29 July 1983. 

(3)        The Company trades as architectural consultants and specialists in the restoration of ancient timber frame buildings.

(4)        Peter Barker (“the Director”) is a director of the Company and the controlling shareholder.

Helicopter

(5)        The Company owns a helicopter. 

(6)        The helicopter was placed at the disposal of the Director in the period 6 April 2003 to 5 April 2006.

(7)        The Company made no charge to the Director for his private use of the helicopter.

(8)        The Director is the only person who uses the helicopter.

Income Tax

(9)        The Director has shown the helicopter benefit on his tax returns and made claims within S365 Chapter 3 Part 5 of the Income Tax (Earnings and Pensions) Act 2003 (which have been agreed by HMRC) for deductions in respect of the business use of the helicopter as shown below.

Class 1A NICs

(10)     All the conditions in S10(1) Social Security Contributions and Benefits Act 1992 are satisfied for the period 6 April 2003 to 5 April 2006.

NICs decision and appeal

(11)     On 9 July 2007 HMRC made a decision under S8 Social Security Contributions (Transfer of Functions) Act 1999, that the Company:

(a)        Is liable to pay Class 1A NICs in respect of a company owned helicopter that was made available to Mr P G Barker for business and private use during the period 6 April 2000 to 5 April 2006 and

(b)        Is liable to pay Class 1A NICs of £23,305.22 in respect of the helicopter for the period 6 April 2000 to 5 April 2006.

(c)        Has paid £7,063.90 Class 1A NICs in respect of the helicopter for the period 6 April 2000 to 5 April 2006.

(12)     On 3 August 2007 the company appealed against the S8 decision.

(13)     On 6 August 2009 the company accepted that its Class 1A NICs liability for the period 6 April 2000 to 5 April 2003 is as shown in the S8 decision.

(14)     If the Tribunal finds in favour of the appellant Class 1A NICs of £14,345.11 are payable for the period shown on the S8 decision, in accordance with the table below.

(15)      If the Tribunal finds in favour of the respondent Class 1A NICs of £23,305.22 is due, as shown in the S8 decision.

3.       The essential fact is that the Director was taxed on the helicopter benefit and was allowed partial deductions for business use.  The charge for personal benefit was not made good.  The issue is whether the deductions for business use are allowable for Class 1A NICs charged on the Company.

4.       From 2000 and until the rewritten legislation in the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), s 10(7) of the Social Security Contributions and Benefits Act 1992 provided:

“(7) For the purposes of this section—

(a) the amounts which for the purposes of the Income Tax Acts are or fall to be treated as emoluments received by an earner from any employment shall be determined (subject to paragraph (b) below) disregarding sections 198, 201, 201AA and 332(3) of the 1988 Act (deductions for expenses etc); but

(b) where an amount which is deductible in respect of any matter under any of those sections is at least equal to the whole of any corresponding amount which (but for this paragraph) would fall by reference to that matter to be included in those emoluments, the whole of the corresponding amount shall be treated as not so included.”.

It is common ground that at the time Class 1A NICs were payable on the full amount of the benefit of having the helicopter provided to the Director.  The policy must have been that when in 2000 the scope of benefits in kind was expanded for NIC purposes beyond cars and fuel benefits, it would have been too difficult to allow deductions for business use unless the deduction was of the whole amount, that is that there was no private use or the cost of any private use was made good before the date for payment of Class 1A NICs.

5.       ITEPA rewrote the employment income provisions of the Taxes Act and changed the charge on what used to be emoluments into one on employment income divided into general earnings (comprising (1) earnings, and (2) amounts treated as employment income, for example under the benefits code) and specific employment income (dealt with in Parts 6 and 7 of the Act).  Deductions were dealt with in Part 5 of the Act divided into Chapter 2 (deductions for employee’s expenses), chapter 3 (deductions from benefits code earnings), chapter 4 (fixed allowances for employees’ expenses), Chapter 5 (deductions for earnings representing benefits or reimbursed expenses), and chapter 6 (deductions from seafarers’ earnings).  The employment income with which we are concerned is benefits code earnings, and the deduction that was allowed was under Chapter 3 of which s 365 provides:

“365 Deductions where employment-related benefit provided

(1) A deduction from earnings is allowed if—

(a) the earnings include an amount treated as earnings under Chapter 10 of Part 3 (taxable benefits: residual liability to charge) in respect of a benefit, and

(b) had the employee incurred and paid the cost of the benefit, the whole or part of the amount paid would have been deductible under Chapter 2 or 5 of this Part.

(2) The deduction is equal to the amount that would have been so deductible.

(3) For the purposes of this section, the cost of the benefit is determined in accordance with sections 204 to 206.”

Thus a deduction is allowed if on the hypothesis that the employee had incurred and paid the cost of the benefit himself, the amount paid would have been deductible under Chapters 2 or 5.

6.       Section 10(7) of the SSCBA was amended by ITEPA to read:

“(7) In calculating for the purposes of this section the amount of general earnings received by an earner from an employment, a deduction under any of the excluded provisions is to be disregarded.

This subsection does not apply in relation to a deduction if subsection (7A) applies in relation to it.

(7A) Where—

(a)     a deduction in respect of a matter is allowed under an excluded provision, and

(b)     the amount deductible is at least equal to the whole of any corresponding amount which would (but for this section) fall by reference to that matter to be included in the general earnings mentioned in subsection (7),

the whole of the corresponding amount shall be treated as not included.

(7B) For the purposes of subsections (7) and (7A) “excluded provision” means—

(a)     any provision of Chapter 2 of Part 5 of ITEPA 2003 (deductions for employee's expenses), other than section 352 (limited deduction for agency fees paid by entertainers), and

 (b)     any provision of Chapter 5 of Part 5 of ITEPA 2003 (deductions for earnings representing benefits or reimbursed expenses).”

The effect is that a deduction under Chapters 2 and 5 of Part 5 of ITEPA is not allowed for Class 1A NICs unless the amount deductible is equal to the whole of the general earnings, thus in principle preserving the existing policy in the light of the changes made in ITEPA. 

7.       The issue is whether this applies to a deduction that is actually made under Chapter 3 on the basis that the expense would have been deductible under Chapters 2 or 5 on the hypothesis that the employee had incurred the benefit himself.

8.       The Appellant contends that the deduction is not under Chapters 2 or 5 as it is under Chapter 3, and since Chapter 3 is not an excluded provision there is no restriction on the deduction.

9.       HMRC contend that as the deduction under Chapter 3 was on the basis that it would have satisfied Chapters 2 or 5, which are excluded provisions, there is no deduction under s 10(7).

10.    While the policy is in favour of HMRC’s interpretation, I prefer the Appellant’s plain words approach.  There was in fact a deduction under Chapter 3 which is not an excluded provision.  It is merely that the deduction would have passed the test for deductibility in Chapters 2 or 5 if the facts had been hypothetically different.  That is not “a deduction under any of the excluded provisions” within s 10(7) and it is not therefore to be disregarded.

11.    Accordingly I allow the appeal.  The Class 1A NICs payable are accordingly as set out in paragraph 3(14) above.

12.    I should mention that by the Social Security Contributions and Benefits Act 1992 (Modification of Section 10(7B)) Regulations 2007 the matter was corrected by adding ss 363 to 365 of ITEPA to the list of excluded provisions with effect from 6 April 2006.  The Explanatory Memorandum stated that this was to put it beyond doubt that the consequential amendments made by ITEPA replicate the original provisions relating to mixed use benefits.

13.    HMRC has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN F AVERY JONES

TRIBUNAL JUDGE

RELEASE DATE: 1 March 2010