[2013] UKFTT 244 (TC)
TC02658
Appeal number:
TC/2011/02613
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 - appellant took care to
appoint a recommended accountant to deal with the NIC matters – accountant
failed to correctly advise appellant - appeal allowed.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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DR JEREMY
SCHONFIELD
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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 SANDY RADFORD
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ANTHONY HUGHES
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Sitting in public at Bedford Square , London on 7 December 2012
Mr Chacko for the Appellant
Mrs Storey, officer of HMRC,
for the Respondents
© CROWN COPYRIGHT
2013
DECISION
1.
This is an appeal against HMRC’s decision that the appellant’s failure
to pay Class 2 National Insurance contributions for the period 28 March 1988 to
5 April 2003 within the prescribed period was attributable to the appellant’s
ignorance or error and that such ignorance or error was due to the appellant’s
failure to exercise due care and diligence.
2.
HMRC admitted that they had incorrectly quoted the start date as 28 March 1988 when in fact the appellant commenced self employment on 1 December 1986.
3.
As a result of HMRC ‘s decision any National Insurance contributions
paid by the appellant from 1 December 1986 to 5 April 2003 could not be treated as paid at an earlier date.
4.
The appellant wished to pay these contributions so that he would qualify
for a full State Pension when he retires. Paragraph 5A of Schedule 3 to the
Social Security (Contributions and Benefits) Act 1992 provided that, for the
appellant to receive a full pension, he needed to have paid sufficient Class 1,
2 or 3 contributions in a total of 30 years.
5.
The appellant and his wife and Mr Greenshields of HMRC provided witness
statements and gave oral evidence.
Legislation
6.
Section 7(1) of the Social Security Act 1975 which was consolidated by
section 11(1) of the Social Security Contributions and Benefits Act 1992 (“the
Act”) provides that every self-employed earner who is over the age of 16 is
liable to pay Class 2 National Insurance (NI) contributions for each week in
which they are self-employed.
7.
In accordance with Regulation 53A of the Social Security (Contributions)
Regulations 1979 and Regulation 87 of the Social Security (Contributions)
Regulations 2001, every person who becomes or ceases to be liable to pay a
class 2 contribution shall immediately notify the relevant date to the Board in
writing or by such means of electronic communication as may be approved.
8.
Originally payment was made by affixing a Class 2 stamp of the
appropriate value to a contribution card not later than the last day in the
week in respect of which the NI Contribution was due. This was in accordance
with regulations 54(1) and (2) of the Social Security (Contributions)
Regulations 1979. From 6 April 1975 a person could choose instead to pay every
month by direct debit from their bank account and from 11 April 1993, payment by stamped card was abolished and was replaced by a system where the
self-employed person would be sent bills every 13 weeks.
9.
The stamped contribution card had to be returned to the Department of
Social Security either by posting it to or handing it in at one of the
Department’s local offices within six days after the end of the period covered
by the card. This was in accordance with regulation 52(2) of the Social
Security (Contributions) Regulations 1979.
10.
There are strict time limits within which contributions must be paid. Under
regulation 4(3) of the Social Security (Crediting and Treatment of Contributions
and National Insurance Numbers) Regulations 2001, to count for State Pension, Class 2 contributions due for the
period from 6 April 1983 have to be paid before the end of the sixth tax
year following that in which they were due.
11.
In accordance with section 12(3) of the Act Class 2 contributions due
for periods from 6 April 1983 which are not paid until after the end of the tax
year following the one in which they were due, are payable at the highest rate
in force during the period from the week in which the contribution is payable
to the date the contribution is paid.
12.
The time limits are necessary because without them there would be
nothing to prevent contributors in general from exercising options against the
NI fund by delaying the payment of contributions until the event against which
cover is sought has already occurred. This would be contrary to the principles
of the “pay as you go” system on which the NI scheme is based and unfair to the
majority of contributors whose contributions are deducted regularly from their
earnings.
13.
Regulation 4(3) of the Social Security (Crediting and Treatment of Contributions,
and National Insurance Numbers) Regulations 2001, provides that for the purpose
of entitlement to any contributory benefit, a Class 2 NI contribution payable
for a contribution week after 6 April 1983 if paid after the end of the sixth
year following the year in which liability for that contribution arises, is
treated as not paid ; but if paid before the end of the sixth year, is treated
as paid on the date on which payment of the contribution is made.
14.
Regulation 6 of the Social Security (Crediting and Treatment of
Contributions and National Insurance Numbers) Regulations 2001 provides that contributions
paid outside the time limits prescribed in legislation may only be treated as
having been paid on an earlier date if it can be shown to the satisfaction of the
board that failure to pay within the prescribed period is attributable to
ignorance or error on the part of the insured person and that ignorance or
error was not due on to any failure on his/her part to exercise due care and
diligence.
Background and facts
15.
From around 1986, the appellant did an increasing amount of freelance
academic work, and decided to become self-employed as a freelance academic. He
consulted an accountant, George Dub of Dub & Co, who was recommended to
him, as to what he needed to do. The appellant confirmed that Mr Dub seemed
to be doing a good job and was thorough and solicitous.
16.
As a self-employed person, the appellant is and was liable to pay two
kinds of NIC: graduated Class 4 contributions under section 15 of the Social
Security (Contributions and Benefits) Act 1992, collected by the Inland Revenue
and (now) by HMRC; and significantly lower flat-rate Class 2 contributions
under section 11 of that Act, collected originally by the Department of Health
and Social Security (“DHSS”), its precursors and successors, but since 1999 by
the Inland Revenue and then HMRC.
17.
On 28 March 1988 Mr Dub wrote on the appellant’s behalf to HMRC to
register as self-employed. However, no-one wrote to the DHSS or its equivalent
at the time.
18.
Between then and 2009, the appellant and his wife properly paid tax and
Class 4 NICs to HMRC. They used Dub & Co to prepare their tax returns.
The appellant, however, did not pay Class 2 NICs. He was never asked for them
because the DHSS and subsequently the Department of Social Security, who were
responsible for their collection, were unaware that he was self-employed.
19.
In 1999, responsibility for collection of Class 2 NICs was transferred
to the Inland Revenue. While the Inland Revenue would normally have sent out
reminders to people like the appellant who were not making contributions this
was not done in this case.
20.
This was because the appellant’s National Insurance record stated that
he was abroad. It is not known why the record stated this as it was clear from
the appellant’s statement of account that from 1979 to 1988 the Class 1 NICs
were recorded as paid because of his employment in the UK.
21.
In 2009, the appellant’s wife Tamar, who is and was also self-employed,
received a letter from HMRC telling her that when she ceased to receive child
benefit she would cease to be credited with Class 2 NICs, and that she ought
therefore to make arrangements to pay them.
22.
The appellant and his wife had not previously been aware that they might
be required to pay Class 2 as well as Class 4 NICs, and consulted George Dub.
He wrote on their behalf to register to pay Class 2 NICs and to pay the
outstanding contributions. He was told that only the last six years’
contributions could be counted towards benefits, and he paid those
contributions.
23.
The appellant registered his self-employment for National Insurance
purposes on 12 January 2010. He provided a start date of 2 April 2000 at that time.
24.
When HMRC received the completed registration form, the appellant’s National
Insurance record held an “open abroad” notation on it.
25.
HMRC wrote to the appellant to ascertain the date of his return to the UK and amended his record accordingly.
26.
HMRC noted the appellant’s National Insurance record of his
self-employment start date and sent a bill on 2 February 2010 for outstanding Class 2 contributions from 2 April 2000 to 6 February 2010. The appellant commenced paying by direct debit from 7 February 2010.
27.
The appellant made a payment of £858.05 on 3 March 2010 which covered the period 6 April 2003 to 6 February 2010. He did not pay the outstanding amount
for the period 2 April 2000 to 5 April 2003 as he had been made aware that this
would not count towards his state pension entitlement.
28.
HMRC subsequently waived this period and informed the appellant of this
on 12 April 2012.
29.
The appellant disputed that he was out of time to pay from 2 April 2000 to 5 April 2003 stating he did not receive notification that he had to pay.
30.
Following a number of letters of explanation, HMRC sent a formal
decision to the appellant on 24 November 2010 covering the 2000-2001 to
2002-2003 tax years.
31.
During the course of correspondence that followed the appellant told
HMRC that his accountant had contacted the Tax Office on 28 March 1988 to advise that he had commenced self-employment on 1 December 1986.
32.
Following his appeal to the Tribunals Service on 3 April 2011, Dr Schonfield applied for a stay in proceeding to seek legal advice.
33.
As a result, he asked HMRC to extend the period covered in the formal
decision to include the period from 28 March 1988.
34.
HMRC issued the varied decision, subject of this appeal, on 20 December 2011.
Appellant’s submissions
35.
Mr Chacko submitted that the question before the Tribunal was whether
the appellant failed to exercise due care and diligence. In Mr Chacko’s
submission, it was clear that he did exercise due care and diligence because he
acted responsibly given his limited knowledge of the tax and social security
system.
36.
Mr Chacko submitted that whilst HMRC had referred to a number of cases,
since the decision of the Court of Appeal in HMRC v. Kearney [2010] STC 1137, these older cases should be seen as illustrative rather than as
laying down rules about the meaning of “due care and diligence”.
37.
He submitted that in Kearney Arden,LJ had explained the test as
follows:
[27].. … lack of
care means lack of concern, whereas diligence means a failure to apply oneself
to the issue… it is not possible to define all the circumstances that will meet
the second condition [being the requirement to
exercise due care and diligence]. In part what is due care and diligence in
any set of
circumstances will depend on the obligations of the person being considered.
[29] … there is at least in general a duty to make
some enquiries and in appropriate circumstances to follow them up… these
enquiries need not necessarily be made of the NICO [National Insurance
Contributions Office, now HMRC]. The
enquiries might be sufficiently made if they were made of the employer or a
trade union.”
38.
The appellant’s failure to pay Class 2 NICs was not due to any lack of
concern on his part as to whether or not he paid the correct contributions.
When he discovered that there was a possibility that he had been failing to
make payments, he promptly sought advice and informed HMRC.
39.
Mr Chacko submitted that neither had the appellant failed to apply
himself. As he had no financial or legal expertise, he enquired of a
professional advisor as to what he needed to do, choosing this advisor on the
basis of favourable recommendation. He submitted that this was exactly the sort
of thing a diligent taxpayer without relevant legal knowledge ought to have
done.
40.
He submitted that from then until 2009, the appellant had no reason to
suspect a problem with his NIC payment. While the notes accompanying his self
assessment returns mention Class 2 NICs, the appellant was paying an accountant
to sort out his tax returns and therefore would pass this information on to Dub
& Co. In the circumstances, it would have been surprising for the
appellant to read through the full notes to his tax return.
41.
Mr Chacko submitted that if HMRC had written to the appellant indicating
that there could be a problem with his contributions or tax, this would have
been responded to promptly. This is exactly what happened when the appellant’s
wife received a letter mentioning her Class 2 contributions record. No such
letters were sent. HMRC’s National Insurance Manual guidance on “care and
diligence” at NIM23005 states that whether or not HMRC has sent warnings about
the consequences of late payment is a matter relevant to whether or not a
taxpayer has acted with care and diligence, and this was approved by Arden LJ
in Kearney.
42.
Mr Chacko submitted that the appellant was aware of the need to make
national insurance contributions, but thought that he was doing so as he was
paying Class 4 NICs (in much larger amounts than the Class 2 NICs he was
failing to pay). Therefore there was no reason for him to be suspicious about
his contribution position.
43.
Mr Chacko referred to HMRC’s citing of the case of Walsh v. Secretary
of State (28 March 1994, unreported), where Mr Walsh, who was self employed
but had failed to pay Class 2 NICs, claimed that he thought that he was only
required to pay Class 4 NICs and Owen J held that he had not exercised due care
and diligence. Mr Chacko stated however that in that case Mr Walsh had known
that he was obliged to pay Class 2 NICs, having worked on national insurance in
the Civil Service and had in fact been stamping his National Insurance card
(which was the way at the time that contributions were recorded) until he lost
it. Mr Walsh was only ignorant of his obligation because he had forgotten
about it. In those circumstances, the fact that he was paying Class 4 NICs was
not a satisfactory explanation for his belief that he was paying all the NICs
he was supposed to pay. Mr Chacko submitted that the appellant’s case was
quite different.
44.
He submitted that the appellant knew that he did not understand his tax
and national insurance obligations. He therefore sought advice from a
professional advisor, and relied upon that. He had no reason to suspect that
he was not properly paying NICs. This is entirely diligent behaviour for a
self-employed person with no legal or financial background.
45.
He submitted that there could be no requirement that advice be sought
from HMRC (or, previously, the DHSS or the Contributions Office). In Kearney at paragraph 29 Arden LJ made this point. In as much as HMRC contended
that due care and diligence require advice to be checked with HMRC, he
submitted that this could not be correct.
46.
He submitted therefore that the appellant’s ignorance of the requirement
that he pay Class 2 NICs did not stem from failure to exercise due care and
diligence on his part, and the appeal should be allowed.
47.
Alternatively he submitted that if the appellant did fail to exercise
due care and diligence, he should still be permitted to pay Class 2 NICs for
the 2001-2 and 2002-3 tax years under Regulation 6B. This allows late payment
to have effect for contributions purposes where the contribution “was paid after the due date by virtue of an official
error….”
48.
He submitted that the official error was that HMRC had mistakenly failed
to send letters to the appellant at the end of each of the years 2000-1, 2001-2
and 2002-3, to tell him that there was a shortfall in his contributions. They
did this because they believed, in error, that the appellant was abroad despite
his regular payment of Class 4 NICs. Had HMRC not made this mistake, they would
have told the appellant of his failure to make payment, and after that date the
appellant would have paid his Class 2 NICs as they fell due.
49.
Mr Chacko submitted that therefore the appellant’s appeal should be
allowed in respect of the period after HMRC would have sent him a letter
reminding him of his liability, if they had not been in error as to whether or
not he was in the UK.
HMRC’s submissions
50.
HMRC submitted that the appellant was self employed from 1 December 1986
and liable to pay a Class 2 NI contribution as a self-employed earner in
accordance with section 7(1) of the Social Security Act 1975 which was
consolidated by section 11(1) of the Social Security Contributions and Benefits
Act 1992.
51.
HMRC submitted that the appellant should have notified the then
Department of Health and Social Security (DHSS) immediately that he had started
self-employment in December 1986 in accordance with Regulation 53A of the
Social Security (Contributions) Regulations 1979 but he failed to do so.
52.
HMRC submitted that before April 1996, a person was required to register
separately for both tax and NI purposes. For NI a person had to complete form
CF11. Although the appellant registered for tax purposes, he did not register
for NI before 2010.
53.
HMRC submitted that there were numerous leaflets available at all DHSS
offices at the time the appellant became self-employed. These provided guidance
for the self-employed and explained what NI they needed to pay. The Inland Revenue also ran a number of
publicity campaigns to inform the self-employed of the need to register their
liability to pay Class 2 NI.
54.
HMRC submitted that the appellant
had assumed that by paying Class 4
NI, he was doing all that was required. Had he contacted the Department of
Social Security to confirm his assumption he would have been told he had to
register to pay Class 2 NI before he did so in January 2010.
55.
HMRC submitted that when the
appellant registered for tax
purposes he would have received notes and guidance with his tax return and from 1996-97 with his self assessment return. The
notes included information about Class 2 NI contributions and advised of the
need to register with the DSS.
56.
HMRC contended that whilst
the appellant may have been ignorant of the need to pay Class 2 NICs when he
became self-employed, there was sufficient information given or available to
him to alert him to his liability or at least direct him to make enquiries
about his position.
57.
HMRC submitted that the appellant relied upon advice sought for and
given by his accountant. HMRC submitted that the appellant did not check that
the advice given was accurate and now appeared to be asserting that the advice
he was given by his accountant was incomplete or incorrect. HMRC had seen no
response from the accountant to explain this and HMRC submitted that the
appellant might wish to seek an explanation from his accountant which was the
route suggested by Judge Reid in HMRC v Thacker.
58.
HMRC referred to the case of Bernard
David James Walsh v Secretary of State for Social Security in which Mr Justice Owen stated in his decision:
“It
is pointed out that there is no corresponding duty on the Secretary of State to
ensure that payments are made. In these circumstances it is argued (in my
judgement correctly) that the primary liability to pay is on the self-employed
earner”
59.
HMRC referred to the case of In
Philip Langley Rose v HMRC – in which Dr David Williams stated in his
decision:
“The
evidence is that Dr Rose was aware at the time of his choices, or at least he
would have been aware of them had he read the leaflets he was sent and had he
made the reasonable enquiries that those leaflets should have prompted. He
chose at that time not to enquire or not to pay. In the current context of the current
question of protecting his NI record, he chose not to exercise due care and
diligence in protecting his contribution record”
60.
HMRC also cited the cases of HMRC
v Thompson 2005 EWHC 3388 (Ch) and Adojutelegan v Clark SCD SpC 430J
in which Special Commissioner Avery Jones stated that:
“Exercising due diligence involves the positive step of
making enquiries. Mr Williams contended that while the National Insurance
authorities try to keep a contributor informed of what he needs to know to
maintain his contribution record, it can do this effectively only if the
contributor personally contacts them. The Appellant had failed to make any
enquiries and therefore had not exercised due care and diligence”.
“Doing
nothing is not the exercise of due care and diligence. Had she made an enquiry
she would have been told there was a six-year time limit for paying
contributions. Her ignorance of this was due to her failure to make enquiries,
which is a failure to exercise due care and diligence.”
61.
HMRC submitted that although Mr
Chacko had suggested that the case law cited by HMRC should be seen as
illustrative rather than as laying down the rules about the meaning of due care
and diligence, HMRC contended that whilst the facts varied, the test on due
care and diligence had remained consistent in each case.
62.
HMRC submitted that although Mr Chacko had quoted Lady Justice Arden’s
explanation of the test on due care and diligence in the Court of Appeal
case Mr John Joseph Kearney v HMRC, it was clear from Lady
Justice Arden’s explanation that there was a requirement to make some enquiries
in order to exercise diligence. In her summing up Lady Justice Arden
stated:
“I would observe that the result of this
case should not be thought to reduce the importance of the duties imposed on
those who are liable to pay NICs or who have the option to do so. Ignorance is
not an excuse save in limited circumstances. It is a person’s own
responsibility to pay NICs and, if he or she fails to do so at the right time,
he or she may lose the chance to pay them later on the basis of ignorance at
the appropriate time of the need to pay. The facts of this case are unusual,
and, while of course this judgement deals only with this appeal, I would
observe that facts like these may not often occur.”
63.
Finally HMRC contended that there was no error
made which prevented the appellant from meeting his liability. Had he
registered his self employment or contacted the Department for advice he would
have been told about his liability and would have been issued with a card or
billed accordingly. HMRC submitted that it could not be held responsible for the
appellant’s failure to meet his legal obligation.
64.
HMRC submitted that the appellant had
provided no evidence to show that he made enquiries about his National
Insurance liability and has stated that he made no attempt to confirm that his
assumptions about the payment of NI were correct. As Lady Justice Arden pointed
out, it is a person’s own responsibility to pay NICs and it is clear that the
appellant failed to meet that liability.
Findings
65.
We found the appellant and his wife sincere and honest when providing
their evidence.
66.
We found that on becoming self employed the appellant exercised due care
and diligence by appointing an accountant to deal with all matters which arose
in connection with his self employment.
67.
We found that before appointing Mr Dub the appellant exercised due care
and diligence by seeking a recommendation as to which accountant was most
competent to deal with these matters.
68.
We found that as a result of the appellant seeking professional help, it
was most unlikely that he would research the matter further himself. We found
that there was not sufficient information given to him to alert him to his
liability or direct him to make enquiries about his position.
69.
We found that unusually HMRC did not send out any reminders because
their records were faulty and showed that the appellant was abroad although
HMRC at the same time were receiving Class 1 NIC’s from the appellant.
70.
We found therefore that the appellant’s failure to pay Class 2 National
Insurance contributions from the start of his self employment to 5 April 2003 was attributable to the appellant’s ignorance which was not due to his
failure to exercise due care and diligence.
Decision
71.
The appeal is allowed.
72.
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.
SANDY
RADFORD
TRIBUNAL JUDGE
RELEASE DATE: 18 April 2013
