[2012] UKFTT 698 (TC)
TC02367
Appeal number:
TC/12/04656
National
Insurance; class 2 contributions; failure to pay; whether failure to pay
attributable to ignorance or error; whether ignorance or error due to failure
to exercise due care and diligence; Social Security (Crediting and Treatment of
Contributions and National Insurance Numbers) Regulations 2001, regulation 6;
Appeal dismissed.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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CATHERINE
THACKER
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE J GORDON REID Q.C., FCIArb.
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EILEEN A SUMPTER, W.S.
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Sitting in public at George
House, Edinburgh on 12 October 2012
The Appellant in person
Mr Steve Duke, Officer of
HMRC, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1.
This is an unfortunate case. The Appellant (Mrs Thacker), a
self-employed earner since at least 1989, has failed to pay Class 2 National
Insurance contributions. Having reached the age of 60 years, she discovered
that her weekly state retirement pension was not as much as she expected. Her
failure to pay these contributions is the reason. She now wishes to pay such
contributions with a view to enhancing her weekly pension. HMRC have decided that
any Class 2 contributions now paid in respect of the period between 1989 and
2004 should be treated as not having been paid for the purposes of any
contributory benefit such as the retirement pension. This is because HMRC,
while they accept that Mrs Thacker’s failure to pay was attributable to her
ignorance or error, contend that such ignorance or error was due to a failure
on her part to exercise due care and diligence.
2.
Mrs Thacker engaged in correspondence with HMRC, and they provided a
number of lengthy and clear letters explaining the legal background and why
they considered that her failure was due to her lack of due care and
diligence. Mrs Thacker appeals to this Tribunal.
3.
A Hearing took place at Edinburgh on 12 October 2012. Mrs Thacker
represented herself (assisted by her husband, Phillip). She gave evidence.
Mr Steve Duke, an HMRC Official, appeared on behalf of the
Respondents. He led the evidence of Lisa Storey, a senior HMRC official with
very considerable experience in and knowledge of the law and practice relating
to the administration and collection of Class 2 National Insurance
contributions. A bundle of documents and some authorities were produced.
There was no dispute about the authenticity of the documents. Mrs Thacker did
not take issue with the law as set forth by HMRC in the correspondence and in
their Statement of Case.
Legal Framework
Basic Structure
4.
Every self-employed person is liable to pay Class 2 National Insurance
contributions each week in which they are self-employed (Social Security Act
1975 s7(1), Social Security Contributions and Benefits Act 1993 s11(1)). This
is a weekly flat rate specified by regulations from time to time. For example
in the tax year 1989/90 it was £4.25; in the tax year 1992/1993 it was £5.35.
5.
Such a person is required to give notification of their self-employment
as soon as it starts (Social Security (Contributions) Regulations 1979 (SI 1979
No 591)), Regulation 53A, and Social Security (Contributions) Regulations 2001
(SI 2001 No 1004). Regulation 53A applied from 11 April 1993 (SI 1993/260).
Regulation 87 applied from 6 April 2001 and was subsequently amended in 2009 by
the Social Security (Contributions) (Amendment No. 3) Regulations 2009/600,
Regulation 5 with effect from 6 April 2009.
6.
The 1979 Regulations as originally enacted required a person liable to
Class 2 contributions, to apply to the Secretary of State (ie the DSS) for a
contribution card (Regulation 51). In 1989, the application had to be made to
the Department of Social Security (DSS).
7.
In 1989 the application was carried out by completing and sending a form
CF11 to the DSS. The form offered two ways of paying the contributions. The
first was by stamping a contribution card, which was sent out by the DSS on
receipt of form CF11; the stamps could be purchased at the post office; at
the end of each tax year, the card was handed in to the local office of the DSS
and a replacement card issued. The second method was by direct debit.
8.
That system changed in 1996. From April 1996 a joint registration form
was introduced, known as CWF1. That enabled a self-employed person to register
with the DSS and HMRC (at that time, the Inland Revenue) at the same time.
Before that date, separate registration with the Inland Revenue and the DSS was
required.
Time Limits and consequences of failing to meet them
9.
The National Insurance Scheme is essentially a pay-as-you-go scheme.
Regulations specify periods within which contributions have to be made. This
is necessary to prevent persons delaying payment until an event which triggers
an entitlement to benefit (eg sickness or retirement) occurs.
10.
Since 6 April 1983, for Class 2 contributions to count towards the basic
State retirement pension, they must be paid by the end of the sixth year
following the year in which liability for that contribution arises. If they
are not so paid, then the contribution is treated as not paid towards
basic State retirement pension. If they are paid before the end of that
sixth year, the Class 2 contribution is treated as paid on the date made
(Social Security (Crediting and Treatment of Contributions and National
Insurance Numbers) Regulations 2001 regulation 4(3)); these provisions were
formerly enacted in regulations 38(1A)(a) and 38(2) of the Social Security (Contributions)
Regulations 1979. Regulation 38(2) provided for a two year time limit. The
time limit changed over the years but as no payments have been made the changes
do not matter.
Relief from Consequences
11.
Regulation 6 of the Social Security (Crediting and Treatment of
Contributions and National Insurance Numbers) Regulations 2001, as amended,
provides inter alia that
(1) In the case of a
contribution paid by or in respect of a person after the due date, where-
(a) the contribution is
paid after the time when it would, under regulation 4 or 5 above, have been
treated as paid for the purpose of entitlement to contributory benefit; and
(b) it is shown to the
satisfaction of an officer of the Inland Revenue that the failure to pay the
contribution before that time is attributable to ignorance or error on the
part of that person or the person making the payment and that that ignorance
or error was not due to any failure on the part of such person to exercise due
care and diligence
an officer of the Inland Revenue
may direct that, for the purposes of those regulations, the contribution shall
be treated as paid on such earlier day as the officer considers appropriate in
the circumstances, and those regulations shall have effect subject to any such
direction.
Available Guidance
12.
Various Departmental leaflets have been available to the public for many
years from the Department of Social Security and other offices. These have
been available in a variety of forms over the years since at least 1989. These
generally describe the National Insurance Scheme. Some make specific reference
to Class 2 contributions.
13. Leaflet FB30
dated April 1989, and entitled Self Employed - A guide to your National
Insurance Contributions and Social Security benefits notes at page 4 that as
a self-employed person you pay a fixed amount of Class 2 contributions no
matter how much you earn a week unless you have applied for a certificate of
exception…. When you start work as a self-employed person, tell your local
Social Security office (and the tax office), and ask for form CF 11 to
complete. The leaflet also notes that payment can be made by direct debit
or by weekly NI stamps. It refers to other leaflets such as NI 41 for more
information. It also points out that there are strict time limits within which
contributions have to be paid to count for benefits
14.
Leaflet NI 41 entitled National Insurance for Self Employed People
(issued by the Department of Health and Social Security), which was available
from April 1988 states inter alia that Class 2 contributions have to be
paid weekly. It refers to the effect of non-payment and refers to another
leaflet which deals with that topic in more detail (leaflet NI 48). A later
version of this leaflet was produced in 1991 (NP 18) and again includes
information on inter alia liability to pay Class 2 contributions (pages
8-11) and time limits and their consequences
15.
NI 48, (issued by the DSS) dated August 1989, entitled National
Insurance - Unpaid and late paid contributions (also issued by the DHSS),
again notes the requirement to pay Class 2 contributions by the self-employed,
and the consequences of failure to pay by the due date.
16.
For the tax year to 5 April 1990 and subsequently the Inland Revenue
provided Notes to help taxpayers understand their tax assessment. These notes
include clear references to Class 2 contributions, the liability on the part of
self-employed persons to pay them, their connection with contributory benefits
such as the retirement pension, and the consequences of failure to pay such
contributions timeously.
17.
From tax year 1996/1997, self-assessment returns contained Notes with
information about Class 2 contributions. The Notes record that self-employed
people are generally liable for the flat-rate Class 2 contributions and refer
to and give contact details for the National Insurance Contributions Office
(NICO) for further information about registration. The Inland Revenue ran two
publicity campaigns about Class 2 contributions, one of which was in January
and February 2001. The later one was in 2005.
Facts
18.
Mrs Thacker has been self-employed since at least 26 November 1989.
That precise date comes from HMRC records which we accept as accurate on this
point. Since then, she has carried on business in Haddington, East Lothian,
under the name Bathroom World (Lothian) providing what she described as a
retail bathroom and fitting service. She has a number of employees. She is
registered for VAT. She has not hitherto had any difficulties in relation to
the payment of income or other direct tax. Nor has she had any significant
problems with the administration of and accounting for VAT. Indeed, HMRC did
not suggest otherwise.
19.
Since 1989, her business accounts and personal income tax returns have
been prepared and submitted on her behalf by professional accountants. The
first was Wallace Dempster, a chartered accountant who carried on business in
the East Lothian area. He prepared and submitted her accounts and returns
between about 1989 and 1997. He is retired. For about the last 15 years, Mrs
Thacker’s accounts and returns have been prepared and submitted on her behalf
by Dickson and Co CA, East Linton.
20.
As at 1989 and subsequently Mrs Thacker was aware of the general nature
of the National Insurance Scheme and that self-employed persons had to pay flat
rate contributions by stamping a card or by direct debit. If, as she claimed,
she and her accountant completed and submitted form CF 11 to the DSS notifying
them that she was a self-employed earner, she made no enquiries whatsoever,
when she received no response from that or any other department about Class 2
contributions. She was aware that she had not received a card for stamping.
She was aware that Class 2 contributions were not being debited from any of her
bank accounts. Whether her accountants (or either of them) were aware that she
was not stamping a national insurance card relating to Class 2 contributions or
that she was not paying such contributions by direct debit is unclear.
21.
When Mrs Thacker attained the age of 60 years, she became eligible to
receive the State retirement pension. She was disappointed with the weekly
amount she received and made enquiries. These enquiries led to her eventual
registration as a self-employed earner for National Insurance purposes in
August 2009. This, in turn, led HMRC to send her a demand for payment of
unpaid Class 2 contributions.
22.
On 4 August 2009 HMRC demanded £4,671.05 from Mrs Thacker. This related
to outstanding Class 2 contributions between 26 November 1989 and 10 April 2004.
23.
Mrs Thacker did not pay this amount. Accordingly, the arrears from
26 November 1989 to 5 April 2003 were waived as the obligation to pay them
had prescribed (HMRC appeared to operate a six year [English] limitation period
rather than the conventional five year period of prescription generally
applicable in Scotland).
24.
By letter dated 13 October 2009 to HMRC, Mrs Thacker’s accountant
asserted that the reason why Mrs Thacker had not received Class 2 contribution bills
was due to an administrative failure in HMRC’s offices. He recorded that
he was well aware of the difference and necessity to pay Class 2
contributions. He pointed out that Class 2 contributions are not
allowable for tax purposes and accordingly an accountant has little interest in
how those are paid. Many clients pay these from a personal account to which
we, as accountants, may have no access.
25.
On or about 27 October 2009, HMRC demanded £753.10 from Mrs Thacker.
This related to the period between 6 April 2003 and 25 April 2009, although this
was not explained at the time. Mrs Thacker’s accountant complained about this
by letter dated 11 November 2009. An explanation was given by HMRC in their
letter dated 27 November 2009.
26.
Mrs Thacker did not pay this sum until 4 March 2011. By that stage the
arrears for the period 6 April 2003 to 10 April 2004 had been waived. It was
too late to pay Class 2 contributions to count for retirement pension for
the tax year 2003/2004. The late payment was not attributable to ignorance or
error on the part of Mrs Thacker. The sum of £121.90 attributable to that
period remains unallocated on the Appellant’s national insurance account. HMRC
have offered to refund that sum but the Appellant has not yet accepted that
offer.
27.
By letter to HMRC dated 28 June 2011, the Appellant enclosed copies of
various documents. These were a contracting-out application dated 14 July 1991
relating to the Plumbing and Mechanical Services (UK) Industry Pension Scheme,
a contracting-out certificate dated 18 December 1997 and a letter to HMRC from
her local Citizens Advice Bureau dated 27 August 2010. Further correspondence
ensued in the course of which the Appellant produced, a copy of an Inland
Revenue Construction Industry approval dated 14 July 1999 together with an
extract from leaflet IR 116, a copy of an application for an Occupational
Scheme dated 3 June 1991 which notes her status as a sole
proprietor. These documents were intended to show in some way that HMRC ought
to have appreciated that she should be paying Class 2 contributions and should
have demanded payment for them from her. She also produced an Inland Revenue
approval of her application for a Subcontractors Tax Certificate (CIS 6) dating
from 1999. An accompanying leaflet notes that the Inland Revenue states that
it will check that tax and NI contributions have been paid before issuing the
Certificate. However this relates to Class 4 contributions not Class 2.
28.
By letter dated 20 October 2011, Wallace Dempster wrote to the National
Insurance Contributions and Employers Office. He stated inter alia that
his recollection of the position in November 1989 was that Mrs Thacker, an
employee of my company at the time, and myself spent time completing all the
application forms required to satisfy both of the departments (sc the DSS
and the Inland Revenue) involved as we were very aware of the importance of
both forms.
29.
By letter dated 25 November 2011 to Mrs Thacker, HMRC set out in detail
their views and issued the following decision:-
1 Your
failure to pay class 2 National Insurance contributions for the period from 26
November 1989 to 10 April 2004 within the prescribed period was attributable to
your ignorance or error, however, that ignorance or error was due to a failure
on your part to exercise due care and diligence
2 Accordingly
you are not entitled to pay class 2 National Insurance contributions for any
period from 26 November 1989 to 10 April 2004.
30.
Mrs Thacker appealed against that decision. She contacted Haddington
Citizens Advice Bureau who wrote to HMRC on her behalf. Thereafter, HMRC
rejected her Appeal by letter dated 4 January 2012. There was further
correspondence and a suggestion that Mrs Thacker had appealed to this
Tribunal. There was no record of such an appeal at that stage
(January/February 2012).
31.
Thereafter, HMRC noticed an error in their decision dated 25 November
2011 and wrote to Mrs Thacker about it on about 14 March 2012 (the date on the
letter was wrong [9 February 2012] and should probably have been 14 March
2012). They pointed out that Mrs Thacker was allowed to pay Class 2
National Insurance contributions for any period prior to 10 April 2004, but
that any such payments outside the prescribed time limits would not count
towards future benefits. Enclosed with the letter was a further decision,
dated 14 March 2012, in the following terms:-
That the decision issued on
26 November 2011 is varied as follows:-
1 That
from 26 November 1989 to 10 April 2004 you are liable to pay Class 2
National Insurance contributions.
2 That
from 26 November 1989 to 10 April 2004 you have not paid Class 2 National
Insurance contributions.
3 Your
failure to pay Class 2 National Insurance contributions for the period 26
November 1989 to 10 April 2004 within the prescribed periods was attributable
to your ignorance or error, however that ignorance or error was due to a
failure on your part to exercise due care and diligence.
4 Accordingly
any Class 2 contributions paid for that period will be treated as not having
been paid for the purposes of any contributory benefit.
It is
this decision which is the subject of appeal to this Tribunal.
32.
Mrs Thacker currently receives a State retirement pension of about £36
per week. If her Appeal is successful, she considers that the arrears of
contributions which she proposes to pay will, if treated as paid for the
purposes of entitlement to contributory benefit, increase her retirement
pension by about £30 per week. No precise figures are available.
Discussion
33.
There is really little dispute on the facts or the law. Mr Duke drew our
attention to a number of cases which have discussed ignorance and/or error and
lack of due care and diligence.
34.
We were referred to Walsh v Secy of State for Social Security 28/4/94
Owen J, failure to pay Class 2 contributions due to the failure to exercise
due care and diligence), Adojutelegan v Clark SCD SpC 430J Avery Jones
21/9/04 (SC3063/04) (proposal to pay Class 3 contributions late for purposes of
qualifying for a retirement pension), HMRC v Thompson 2005 EWHC 3388
(Ch) 8/11/05 Patten J (failure to pay Class 2 contributions), Rose v
HMRC 4/12/06 Sp Com Dr David Williams(failure to pay Class 3
contributions).
35.
From these cases, the following emerges:- (1) The primary liability to
pay Class 2 contributions lies with the self-employed earner; (2) there
is no corresponding duty on HMRC or any other government department to ensure
that payments are made; it is not for them to chase up potential
contributors; (3) there are two tests to be satisfied; the first is that the
failure to pay the contribution timeously is attributable to ignorance or
error; demonstrating that the failure to pay is attributable to ignorance or
error is a relatively onerous requirement; the second is that the ignorance or
error must not be due to any failure to exercise due care and diligence; (4)
the onus therefore lies on an appellant to show where appropriate that that
ignorance or error was not due to any failure on his part to exercise due care
and diligence; (5) the exercise of due care and diligence normally will result
in payment on the due date, absent a good excuse for not doing so; financial,
personal or organisational difficulties will not, in themselves, amount to such
an excuse; (6) ignorance of the law and, in particular, the detail and effect
of the regulations and the consequences of non-payment are not such an excuse;
(7) the exercise of due care and diligence involves the positive step of making
enquiries; thus doing nothing is not the exercise of due care and diligence.
36.
Adojutelegan holds that the Tribunal’s jurisdiction is fully
appellate (paragraph 5) with which we agree, while in Walsh the
court appeared to think the jurisdiction was supervisory. In the present Appeal
the material before HMRC was sufficient to entitle them to conclude that her
ignorance or error was due to her failure to exercise due care and diligence.
Mrs Thacker took no positive steps to make enquiries about Class 2 or any other
class contributions either by herself or through her accountants. Neither
appeared to have done so.
37.
It is clear, and it is not disputed that, having regard to her status as
a self-employed person, and the nature of her business and its turnover over
the years since 1989, Mrs Thacker ought to have paid Class 2 contributions each
week either by direct debit or by stamping the appropriate national insurance
card and handing it in to the DSS each year. It is also clear that her failure
to do so was not a deliberate act on her part in the sense that she was
intentionally seeking to avoid making such payments. Her failure was plainly
attributable to ignorance or error (except in relation to the period
2003/2004). It does not matter which, although we incline to the view that it
was error rather than ignorance.
38.
Mrs Thacker was not ignorant or at least cannot be regarded as ignorant
about the existence of the National Insurance Scheme. She had professional
advisers preparing her accounts and income tax returns. Any reasonably
competent accountant would have been aware of the National Insurance Scheme and
the obligation on self-employed earners to pay Class 2 contributions.
39.
Mrs Thacker asserts that in 1989 she completed and submitted with the
assistance of her accountant, form CF11. The letter from her accountant to some
extent supports that assertion, but even if we accept that evidence, it does
not help her. If anything, it makes matters worse. It shows she was aware of
the need to register with the DSS or DHSS. It shows that she was aware of the
need to pay Class 2 National Insurance contributions because she was or was
about to become a self-employed earner. When she received no response to her
notification, she did nothing. She must have known that she was not paying
Class 2 contributions. She was not stamping a card and returning it each year
for a new one. Her accountants were not doing so on her behalf. There would
be no regular direct debits paid through her bank account. Had she exercised
due care and diligence, she would have made appropriate enquiries either with
the Inland Revenue, the DSS, or DHSS, or instructed her accountant to do so on
her behalf.
40.
All the documents which Mrs Thacker produced about her dealings with the
Inland Revenue and various occupational pension schemes are, unfortunately for
her, to no avail. They do not relate to Class 2 contributions. They do not
amount to notification of her liability to pay Class 2 contributions in
accordance with the statutory provisions.
41.
It may seem surprising, that the omission to pay Class 2 contributions
was not picked up by Mrs Thacker’s accountants. Such accountants would, one
would think, be aware that Class 2 contributions were payable even if Mrs
Thacker was unaware. The sums payable are not large, but the fact of
non-payment, we think, should have been apparent from any reasonable examination
of Mrs Thacker’s books and records. If the assumption was that she was paying
by direct debit, the presence or absence of such debits from her bank
statements ought to have been apparent. If the assumption was that she was
paying by stamping a national insurance card each week, the cost of each weekly
stamp ought to have featured somewhere in her records. However, these
accountants did not attend or give evidence and one of them has pointed out
that accountants have little interest in how Class 2 contributions are paid and
that some clients pay through personal accounts to which accountants may have
no access to those accounts. Beyond these assertions, which may or may not be
well founded, they have had no opportunity to explain themselves. Mrs Thacker
may give them that opportunity in the light of our decision.
42.
It is clear on the evidence that Mrs Thacker made no enquiries either by
herself or through her accountant. She or perhaps her accountant should have
done so. Her ignorance or error was due to her failure to make enquiries,
which is a failure to exercise due care and diligence. On the evidence before
us, we therefore reach essentially the same conclusion as HMRC. We are not
satisfied that the Appellant’s failure to pay Class 2 contributions was not the
result of her failure to exercise due care and diligence. The only exception
to that relates to the year 2003/2004 (see paragraph 26 above). In relation to
that year, Mrs Thacker does not pass the first of the two tests specified in
regulation 6(1)(b) of the 2001 Regulations.
Result
43.
The Appeal must therefore be dismissed. We do this with some regret as,
on the evidence, we are prepared to accept that Mrs Thacker has worked hard to
maintain her business, and paid all other relevant taxes. It is unfortunate
that her basic retirement pension will be at a lower level than it would
otherwise have been, particularly as she apparently has the funds to make up
the shortfall. We understand that some voluntary Class 3 contributions could
be made but this is a more expensive exercise.
44. This document contains full findings of fact and
reasons for the decision. Any party dissatisfied with this decision has a right
to apply for permission to appeal against it pursuant to Rule 39 of the
Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The
application must be received by this Tribunal not later than 56 days after this
decision is sent to that party. 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.
J
GORDON REID Q.C., FCIArb.
TRIBUNAL JUDGE
RELEASE DATE: 12 November 2012
