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Cite as: [2008] STC (SCD) 1185, [2008] UKSPC SPC00707, [2008] STI 2098, [2008] UKSPC SPC707

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P A Holdings Ltd v Revenue & Customs [2008] UKSPC SPC00707 (29 August 2008)

SPC00707

THE SPECIAL COMMISSIONERS

P A HOLDINGS LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: THEODORE WALLACE

Sitting in public in London on 4 August 2008

Stephen Brandon QC and Rory Mullan, instructed by Speechly Bircham LLP, for the Appellant

Malcolm Gammie QC, instructed by the Solicitor for the Respondents

© CROWN COPYRIGHT 2008

DECISION ON APPLICATION

This decision contains my reasons for the direction released on 6 August 2008 following a hearing on 4 August, the direction being:

"That the question for determination and the appeal listed for November 2008 shall include the decision in respect of National Insurance Contributions."

The Respondents ("the Revenue") have issued separate decisions that certain sums paid to employees of Holdings in the three years to April 2003 were emoluments liable to income tax under PAYE and earnings on which Holdings is liable to pay Class I National Insurance Contributions. The Appellant ("Holdings") has appealed.

A hearing is listed for 10 days starting on 17 November 2008. The hearing was notified on 16 May 2008 for:

"Appeals against 3 section 8 Notices of Decision Dated 31/8/05

Each notice covering the period 6 April 2000 to 5 April 2003 inc.

Appeals against Regulation 80 Determination Dated 31/8/05

Years – 2000/01 – 2001/02 – 2002/03"

The section 8 notices related to the insurance contributions being under section 8 of the Social Security Contributions (Transfer of Functions, etc) Act 1999. The regulation 80 determinations were under the Income Tax (Pay as You Earn) Regulations 2003.

The reference in the hearing notice to section 8 notices dated 31/8/05 was incorrect because the notices issued on that date were to PA Consulting Services Ltd and not to Holdings. The section 8 notices to Holdings were dated 28 March 2007 and are also under appeal; the effect of the notices was that Holdings was liable to pay a further £7,862,751 in contributions.

The regulation 80 determination against Holdings was dated 31 August 2005, so that part of the hearing notice was correct.

The error in relation to the contributions appeal arose because when the Revenue referred the appeals to the Special Commissioners on 8 June 2007, although they showed Holdings as the Appellant they enclosed the 2005 section 8 notices to PA Consulting Services Ltd rather than the notices issued to Holdings on 27 March 2007.

The reference on Form 209B, which is a non-statutory form used by the Revenue, gave the details of the proceedings as:

"Appeal against Regulation 80 Determination and section 8 decisions for tax years 2000/01, 2001/02 and 2002/03."

It gave the appellant as Holdings and the questions for determination as,

"Whether income from the award of shares in Ellastone Restricted Share Plan is subject to PAYE tax and National Insurance.

The Form 209B was accompanied by directions which had been originally agreed by the parties before the section 8 decisions to Holdings on 27 March 2007 and made no reference to those decisions. The Appellant was apparently not informed by the Revenue that Form 209B was being submitted with the agreed directions.

Directions were given on 25 July 2007 in the same terms as the draft. These provided that seven other appeals all of which were under section 8 should be stayed until the appeals by Holdings in respect of PAYE were determined. The other appeals were by PA Consulting Services Ltd, Cubiks Ltd and various employees. None of those other seven appeals has in fact yet been referred to the Special Commissioners.

The directions required the Revenue to serve a Statement of Case "in respect of the Determination under appeal" and provided for the parties to endeavour to agree the questions for determination. The directions made no reference to the section 8 decisions in respect of Holdings.

On 17 August 2007 the Respondents served a Statement of Case which covered both the regulation 80 determinations and the section 8 notices issued to Holdings and stated that the issue was whether cash payments there described and made to employees of Holdings represented (1) emoluments for ICTA 1988 section 19 paid or treated as paid by Holdings and (2) earnings for national insurance in respect of which Holdings was liable as secondary contributor.

The directions required various steps to be taken by Holdings within 35 days of the Statement of Case including comments on the draft questions for determination. The Appellant was given two extensions.

On 26 November 2007 the Appellant served a statement disagreeing with the question for determination on Form 209B and contending that the question for determination was:

" Whether income received from shares by the beneficial owners of those shares, which were awarded in the Ellastone Restricted Share Plan, constituted dividends."

This question therefore excluded the insurance contributions issue.

On 18 January 2008 the Revenue suggested that the question was whether the payments were emoluments subject to PAYE and earnings subject to national insurance contributions or dividends liable under Schedule F only.

Correspondence continued between the parties as to the question for determination but the Special Commissioners were not informed that there was a problem as to whether the appeal covered the section 8 decisions in respect of Holdings. The hearing notice was issued on 16 May 2008, see paragraph 3 above. Eventually on 4 June 2008 the Special Commissioners were informed that there was a dispute as to whether the question for determination by the Special Commissioners includes insurance contributions. This preliminary hearing was accordingly fixed.

Mr Gammie said that the Form 209B submitted by the Revenue to the Special Commissioners covered both the Regulation 80 and the insurance contribution decisions regarding Holdings. The Revenue had not agreed that the only issues to be considered were the income tax issues. The direction agreed was merely to stay the proceedings specified there and did not mention the contributions decision in respect of Holdings. The Statement of Case covered both PAYE and contributions. The appeal concerned a scheme to secure payment of annual bonuses to employers free of the usual PAYE and national insurance liabilities. The Appellant was put to proof as to the whole scheme in any event. There was no purpose in separate hearings.

Mr Brandon said that the only appeals before the Special Commissioners were the 2005 appeals referred by the Revenue in June 2007; those were the appeals referred to in the direction which provided for all appeals other than the PAYE appeal to be stayed. He said that the question was perhaps whether a direction under regulation 7 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 should be made for the proceedings to be heard at the same time, however as yet there had only been an oral reference. He said that if the PAYE hearing proceeded alone in November it was not unlikely that taking account of the decision on the facts on that appeal, a further hearing on the contributions issue might not be necessary. He said that he did not dispute that the principle in Ramsay (WT) Ltd v Inland Revenue Commissioners [1982] AC 300 can be applied to insurance contributions. However he said that the Appellant would be prejudiced if insurance contributions were covered in the hearing involving different legislation, the preparation of more evidence and argument and a more protracted hearing. More documents would be needed in relation to insurance contributions. Even if the 2007 appeals were before the Special Commissioners, the balance of convenience was against hearing the contributions appeal in November.

Mr Gammie said that it did not appear that any additional evidence would be needed. He said that he was willing to withdraw any allegation of sham and said that there was no allegation of fraud. He said that whatever the previous position, there was before the Special Commissioners an application dated 4 June 2008 for the appeals against the decisions of 28 March 2007 to be determined at the same time as the PAYE appeal.

The above is a summary of the oral submissions at the half day directions hearing, both parties having submitted lengthy written submissions in advance.

Conclusions

I considered first whether as matters stood there was an appeal before the Special Commissioners in relation to the decision of 28 March 2007 in relation to the liability of Holdings to NI contributions.

As the law stands, although there is a right of appeal to the tax appeal Commissioners under section 11 of other Social Security Contributions (Transfer of Functions etc) Act 1999, the notice of appeal is required under section 12(2) to be given to the officer who gave the notice and not to the Special Commissioners. Under section 13(4) of that Act regulations made under section 56B of the Taxes Management Act 1970 apply in relation to such appeals. The relevant regulations are the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.

Notice of appeal was given by Ernst & Young on behalf of the Appellant with an election for the appeal to be heard by the Special Commissioners.

Neither the 1994 Regulations nor any other provision lays down any procedure, mechanism or indeed time limit for an appeal be notified to the Special Commissioners. The only provisions relevant to notifying the Special Commissioners are in regulation 3 which provides in paragraph (1):

"Any party to proceedings which are to be heard by the Special Commissioners may serve notice on the Clerk that he wishes a date for the hearing to be fixed."

This is somewhat irrational because directions are normally given and there is often a preliminary hearing. Under regulation 3(2) on receipt of notice under regulation 3(1) the Clerk is required, on being satisfied that the Special Commissioners have jurisdiction and that he has sufficient particulars of the proceedings and the issues, to send a hearing notice to the parties.

The Form 209B sent by the Revenue as a matter of practice is not a statutory form; it was accompanied by a copy of the decisions of 31 August 2005 with the election for the appeals to be heard by the Special Commissioners and details of the proceedings and the issue for determination (see paragraph 7 above). A copy of the Form 209B was sent to the Appellant by the Revenue on 8 June 2007 in response to a letter of 31 May 2007 which was not in the bundle.

As a matter of fact the Form did refer to the appeal of Holdings against the section 8 decisions for the years 2000/01 to 2002/03. Although the Revenue failed to enclose the decision of 28 March 2007 enclosing instead decisions of 31 August 2005 in relation to PA Consulting Services Ltd, the details of the proceedings in the Form covered the subject matter of the 28 March decision against which Holdings had appealed. The question for determination covered National Insurance as well as PAYE.

The Form 209B did not however stand alone. The covering letter read as follows,

"Enclosed please find appeal to the Special Commissioners on Form 209B. I also enclose the agreed Directions, the Notices of Decision and Determination and a letter dated 5 September 2005 from Messrs Ernst & Young addressed to HM Revenue and Customs wherein they give notice of their appeal and elect that the appeal be heard by the Special Commissioners.

I await a copy of the Direction in due course."

As already stated the section 8 decision to Holdings was not sent and the directions made no reference to that decision.

It was quite clear from the Statement of Case dated 17 August 2007 settled by counsel that the Revenue considered that the appeal before the Special Commissioners covered the contributions decision dated 28 March 2007. Paragraph 2 referred expressly to that decision and paragraphs 23 to 35 were directed to insurance contributions.

On initial reading, regulation 3(1) of the 1994 regulations is merely permissive enabling a party to apply for a hearing date. Regulation 3(2) however requires the Clerk on receipt of a notice under regulation 3(1), on being satisfied of certain matters including sufficient particulars of the proceedings, to issue a hearing notice. Regulation 26 requires notices to be in writing. The implication must be that before issuing a substantive hearing notice the Clerk should have received a notice under regulation 3(1) with sufficient information to satisfy him as to the matters in regulation 3(2). That does not mean that nothing can be done before a regulation 3 notice. However, in practice papers are required if an appeal is to be registered.

In my judgment the notice under regulation 3(1) in the present case encompassed all the material sent to the Clerk including the decisions, notices of appeal and the draft direction. In respect of the contributions appeal those were contradictory which eventually led to the hearing notice dated 16 May 2008 making no reference to the March 2007 decision.

Fortunately I did not have to decide whether that was sufficient notice to bring the March 2007 decision before the Special Commissioners because of the letter of 4 June 2008 which included the following:-

"If the question as to National Insurance Contributions is not before the Special Commissioners for determination then HM Revenue and Customs would wish to apply for that question to be determined at the same time in respect of revised decisions issued on 28 March 2007 and appealed on 5 April 2007. I enclose for your information the decisions and appeal letter."

In my judgment that letter did constitute notice under regulation 3. The result was that from receipt of that letter the appeal by Holdings in respect of the contributions was clearly before the Special Commissioners.

However that did not answer the question whether that appeal should be heard with the PAYE appeal listed for November given that the hearing notice for November did not encompass the March 2007 decision. That depended on whether it is appropriate for the proceedings to be heard together within regulation 7.

Both appeals involve what the Revenue describe as an "off-the-shelf scheme … to avoid PAYE and NIC liabilities on the payment of annual discretionary cash bonuses to its employees." The Appellant contends that they were dividends to be taxed under Schedule F and not emoluments or earnings.

The factual contentions by the Revenue in the Statement of Case apply equally to both income tax and insurance contributions. Although Mr Brandon said that more documents would be needed in respect of insurance contributions, I found it difficult to see how there would be any substantial addition to the documents otherwise necessary. Since the Ramsay principle is essentially a principle of statutory construction, some consideration of the contributions legislation will be needed, however I did not consider that will add materially to the PAYE issue.

In my judgment there is a clear benefit in both the PAYE and insurance contribution proceedings being heard by the same Tribunal at the same time. If it transpires that there are potential differences between the proceedings, it is desirable that the one Tribunal should consider those differences.

Mr Brandon said that if the PAYE appeal was decided first then taking account of the decision on the facts on that issue a further hearing on the contributions might not be necessary. That argument cuts both ways, since it lends support to Mr Gammie's contention that if both proceedings are heard together it will not materially complicate the hearing.

A further objection to separate hearings is that it is not clear that the findings of fact in the one appeal would be binding in the other. The application of issue estoppel in tax appeals has long given rise to difficulties.

If I was satisfied that there was any substantial risk of prejudice to the Appellant in the proceedings being heard together that would have been a strong reason against the Revenue application, particularly since the problem arose from the way in which the Revenue referred the matter in June 2007. Such prejudice could include material additional costs, particularly given that the ability to recover costs before the Special Commissioners is highly restrictive.

At paragraph 34 of its submissions dated 1 August 2008 the Appellant stated that it cannot be certain that the factual issues are similar and has not to date "taken detailed advice on what it is required to prove to succeed in relation to the 2007 Decision."

Since this hearing was notified on 12 June 2008 in response to the Revenue letter of 4 June, the Appellant had ample time to consider what material to put forward in support of the contention that it would be prejudiced by the proceedings being heard together. The only concrete matter advanced was the need to consider the insurance legislation. It was not suggested that there is any difference in the present context between emoluments and earnings.

I was not satisfied that there was any substantial risk of prejudice and accordingly made the direction recorded at paragraph 1 above.

THEODORE WALLACE

SPECIAL COMMISSIONER

RELEASED: 29 August 2008

SC 2007/3142