CG/2309/2002

1. Page references in this decision are to pages of the bundle of documents in front of me. This appeal by the Secretary of State succeeds. In accordance with the provisions of section 14(8)(a) of the Social Security Act 1998 I set aside the decision of the Nottingham tribunal of 14th June 2001 (reference U/42/045/2002/06480) as having been made in error of law. I substitute my own decision to the effect that the claimant is not entitled to automatic credits, and in particular is not so entitled in respect of thee tax years 1994-5 to 1998-9 inclusive.

2. National insurance Class 2 contributions are payable by self-employed earners at a flat weekly rate unless they have obtained an exception certificate on the grounds that income is below a prescribed level (sometimes referred to as “the exception limit”), which usually changes each tax year. Such a certificate can only be backdated for a maximum of 13 weeks prior to application. Written application may be made to recover overpaid contributions, but must be made by the end of the calendar year in which the tax year ends.

3. The claimant was born on 6th January 1935. At some stage he had left the United Kingdom but he returned in 1988. He was in business “buying and selling goods from abroad” (page 21). In 1988 he began trading a Limited Company (which I assume employed him) and continued to do so until 31st September 1995. From September 1993 he was also self-employed. In each of the 5 tax years from 1992-3 to 1996-7 inclusive he had nil taxable profits. In 1997-8 his taxable profits were above the national insurance Class 2 contributions exception limit. In subsequent tax years they were below that limit until 6th January 2000 when he reached the age of 65 and ceased to be liable for such contributions in any event. These facts are not disputed and have been supplied by the claimant’s accountant (pages 19 and 19A). 

4. It was not until 15th February 2000 that the claimant informed the Inland Revenue that he had been trading since 1988 (pages 21 and 21A). He had not at that stage paid any Class 2 contributions for the period from 1988 or made any application for an exception certificate. On 15th February 2000 he told the Inland Revenue that he had been self-employed since 1988 and initially the Inland Revenue asked for payment of contributions for the period from 1st November 1988 (pages 20 and 20A). When the claimant’s accountant explained the situation, the Inland Revenue limited its concern in this matter to the period 5th September 1993 to 8th January 2000 (the claimant’s 65th birthday). It granted an “absolute waiver of arrears” of class 2 contributions for the periods 5th September 1993 to 5th April 1997 and 12th April 1988 to 8th January 2000, but did “insist” on payment of £340.60 in respect of the intermediate period (pages 17 to 18). 

5. As I understand it, the Inland Revenue’s position is that because the claimant had not obtained any exception certificate (and had never applied for one), it was only by being granted waivers that he could be relieved of any requirement to pay the Class 2 contributions in respect of those periods when his taxable profits were below the prescribed level.

6. On 27th May, through his accountant, the claimant applied for automatic credits (sometimes referred to as “autocredits”) for the 4 years between his 60th and 65th birthdays in respect of which the claimant had been relieved of any requirement to pay the Class 2 contributions (page 10). 

7. Automatic credits in this case are governed by regulation 9A of the Social Security Credits Regulations 1975 as amended, which provides (so far as is relevant):

9A(1) For the purpose of entitlement to any benefit by virtue of a person’s earnings or contributions he shall, subject to the following paragraphs, be credited with such earning as may be required to bring his relevant earnings factor in respect of a tax year to which this regulation applies to the level required to make that year a reckonable year.

  (2) This regulation shall apply to the tax year in which a person attains the age of 60 and to each of the 4 succeeding tax years.

  (3) Paragraph (1) shall apply, in the case of a self-employed earner, only if he is –
(a)	liable to pay a Class 2 contribution in respect of any week in a tax year to which this regulation applies; or
(b)	excepted from liability to pay Class 2 contributions in respect of any week in a tax year to which this regulation applies by virtue of his earning being less than … [the exception limit] .

8. On 22nd September 2000 the Inland Revenue refused to award the automatic credits claimed by the claimant (page 6 is the notification of this decision but I do not have a copy of the actual decision), apparently on the grounds that no exception certificates had been granted (page 7 – an indication which preceded the formal decision). On 16th October 2000 the claimant appealed to the tribunal against this decision of the Inland Revenue. The appeal tribunal considered the matter on 14th June 2001 and allowed the appeal. The Inland Revenue was not represented at the hearing (neither was the Secretary of State). The tribunal decided that the claimant was entitled to automatic credits for the tax years 1993-4 to 1996-7 inclusive, 1998-9, and the period to 8th June 2000. It is clear that, whatever else, the tribunal was in error in respect of the particular periods. The claimant became 60 on 6th January 1995, in the tax year   1994-5. The 4 succeeding tax years ended with the year 1998-9. The tribunal should not have considered any year outside the tax years 1994-5 to 1998-9 inclusive.

9. The Inland Revenue had argued that the grant of a waiver does nor remove (or except from) liability for Class 2 contributions. It only removes responsibility for the payment of arrears. The tribunal rejected this argument and took the view that the words “absolute waiver”

“can only be interpreted as removing legal liability. This would include responsibility for payment of arrears.”.

The tribunal found that since the claimant had no liability, he was entitled to automatic credits.

10. The tribunal failed to distinguish between (a) and (b) of regulation 9A(3). It also failed to note that what was granted was “absolute waiver of arrears” (page 18), rather than just “absolute waiver”, and that the claimant was not told that he had been relieved of liability but that “You do not have to pay the contributions due” (page 17). If the Inland Revenue was still writing in terms of “contributions due”, than it did not take the view that there had been a removal of legal liability. In my opinion this approach is correct and for these reasons (and for those indicated in paragraph 8 above) the decision of the tribunal was made in error of law.

11. On 1st July 2001 the Inland Revenue applied for the decision of the tribunal to be set aside on the grounds that it was erroneous in law (page 24). On 1st August 2001 the chairman of the tribunal refused to set aside the decision (page 30). On 8th January 2002 the Secretary of State applied for leave to appeal to the Social Security Commissioner against the decision of the tribunal. Leave was granted by the chairman on 10th April 2002. I regret that it has taken so long since that date for my decision to be issued. However, I am grateful to the parties for their assistance with legal points that I have raised in the interim.

12. The question of jurisdiction in the present case is a little complicated. Before a decision as to entitlement to automatic credits under regulation 9A may be made, there must be a decision as to liability or exception from liability to pay class 2 contributions. Section 8(1)(c) of the Social Security (Transfer of Functions etc) Act 1999 provides that it shall be for an officer of the Board of Inland Revenue (and therefore not for the Secretary of State):

8(1)(c): to decide whether a person is or was liable to pay contributions of any particular class and, if so, the amount that he is or was liable to pay.
 
13. It seems to me that, taking pages 6,7,17 and 18 together, there is convincing evidence that the Inland Revenue made a decision that the claimant was not excepted from liability, although he was relieved of having to pay certain arrears. Under section 11 of the 1999 Act there is a right of appeal against a decision made under section 8, but this is to the tax appeal Commissioners and not to the tribunal.

14. Decisions as to credits may be made by the Secretary of State, but the Secretary of State may also arrange for such decisions to be made by the Inland Revenue (section 17(1) of the 1999 Act). Where such a decision has been made the Secretary of State retains his role in relation to certain other matters, including appeals (section 17(2)). In relation to such decisions on credits the claimant has a right of appeal to the tribunal, and both the claimant and the Secretary of State have a right of appeal to the Social Security Commissioners. However, neither the tribunal nor the Commissioner has jurisdiction to decide whether the initial contributions decision was correct in law, although we do have jurisdiction to say whether a decision has been made and what it was. As I have indicated above, in my view the Inland Revenue did not make the contributions decision that the claimant argues that it had made. 

15. Accordingly, I have to conclude that as the claimant was neither liable to pay Class 2 contributions nor excepted from liability to pay them in the relevant tax years, there was no entitlement to automatic credits for those years.

16. The claimant has argued that literature from the Inland Revenue and from the Contributions Agency indicates that there is entitlement to credits for the relevant years if there is no liability to pay contributions. That may well be so, but I have explained why relief from a requirement to pay arrears is not the same a saying that there is no liability to pay contributions. I would also add that the relevant literature is not to be taken as the source of law – that is to be found in the legislation and regulations. I would add that if the claimant had made all of the notifications and applications for exception at the correct time, the situation might well have turned out differently. However, he did not do so and the final result in this case might be seen as a consequence of his failure to do so.

H. Levenson
Commissioner
8th April 2003