Employee Benefit Trusts, National Insurance Contributions and County Court Action
The Inland Revenue (now HMRC) recognised the existence of Employee Benefit Trusts (EBTs) for many years. However, we only identified relatively recently that a significant number of employers had been contributing money to EBTs for the purpose of funding the payment of remuneration and provision of benefits to employees using arrangements designed to mitigate liability to pay National Insurance Contributions (NIC).
Around the same time, the Inland Revenue received legal advice on the effect of the Limitation Act 1980 in the context of recovery of NIC in circumstances where liability is either disputed or not disclosed because the employer contends that there is none. That advice caused a reappraisal of the Department's approach.
Protective claims for unspecified amounts
From existing enquiries, the Inland Revenue was aware of approximately 400 instances of employers having paid significant contributions to EBTs during the tax years 1997/98 and 1998/99. Potentially, the monies contributed may have been used to pay remuneration or provide benefits but we did not have sufficient information to be satisfied that any NIC liability due in that respect had been properly accounted for. Our legal advice was that for cases where NIC liability might relate to a payment made almost 6 years earlier the Inland Revenue should act to preserve our right to enforce recovery.
The only option to achieve this was to issue protective claims in the County Court involving unspecified amounts. Once a claim is issued, the Court rules provide a maximum of 4 months in which to serve the claim form with particulars of the claim. During that time, HMRC made every effort to specify the amount of the claim so that we could serve the claim form showing particulars of claim based on full information before the Court deadline; but in some cases we had to serve the claim form with particulars of claim that were based on an estimate.
HMRC only takes protective claim action shortly before the sixth anniversary of the earliest date on which the NIC liability fell due. If we are aware of unpaid NIC liability in subsequent years, HMRC will usually include those amounts in the protective claim.
At the time the Inland Revenue lodged protective claims in the County Court the fee for a claim for an unspecified amount was £800 (from 4 January 2005 it was increased to £1,700). It is non returnable. Therefore, although the action was necessary in respect of the possibility that there was unpaid NIC liability for the tax years 1997/98 and 1998/99, our advice was to ensure that the claim covered all completed tax years at the date of the action.
For any case where the Inland Revenue subsequently took the view that in any of the years covered by the unspecified claim there is unpaid NIC liability, we were required to serve the claim on the defendant. As the Inland Revenue has incurred the court cost of £800, that is the amount we are seeking to recover as part of the revised claim.
Correspondence with Chartered Institute of Taxation
The CIOT expressed concern that this might appear disproportionate either where the unpaid NIC liability is small or where the unpaid NIC liability relates to a year for which the Inland Revenue had no immediate need to take protective claim action. In particular, CIOT asked that HMRC might reconsider our position on recovery of the costs of claims in the County Court.
Whilst we fully appreciate the concerns expressed, HMRC's position is that it is right for those who enter into arrangements with a view to avoiding their tax or NICs liabilities to bear whatever costs are associated with doing so. Furthermore, any concession must fit with the principles that apply generally in our work. In particular, we must distinguish those who have paid from those who have not. That said, recognizing the particular circumstances in which these claims were made and the urgency of the action that had to be taken, HMRC has agreed the following limited concession.
The fundamental justification of the action to protect potential NICs liability is to secure payment if and when liability is accepted or otherwise established. The concession therefore focuses on how quickly the employer paid after he was required to consider the issue.
For EBT cases where
- the Inland Revenue issued the claim form for an unspecified amount (incurring the £800 fee), and
- the employer paid the actual amount of NICs and interest due within 14 days of the subsequent service of the particulars of claim
HMRC will undertake to forgo any court fees above the scale fees appropriate to the principal amount (i.e. NICs plus related late payment interest) paid. The extract from the County Court Fees (Amendment) Order 2003 below shows the court fees in force at the time these types of claims were issued. As an example, where the amount exceeded £50,000 but not £100,000, HMRC would expect the employer to pay the court fee of £600. In effect, the concession will extend to all claims where the amount involved did not exceed £150,000.
The concession will also be extended to those cases in which the liability is disputed if, where there proves to be a liability, the actual amount plus interest and the appropriate scale fees are paid within 14 days of final determination.
There is no further concession in respect of those cases where the liability is for a year that was not imminently going out of time for protective claim action. The reason the Inland Revenue included later years in the overall claim was primarily to avoid the potential multiplication of court fees inherent in separate court actions for each year. Furthermore, if NICs were due for those years, the amounts involved had still been unpaid for a considerable time beyond the proper date. Consequently, HMRC is entitled to take proceedings to recover them.
HMRC will endeavour to ensure that we apply the concession wherever appropriate without prompting. However, as a protection against oversight, any companies affected may wish to submit a request for application of the concession when making payment of the outstanding liability.
Section 117A of the Social Security Administration Act 1992 applies to proceedings before a court. In particular, where a decision under section 8 of the Social Security Contributions (Transfer of Functions etc) Act 1999 (ToFA) is necessary for the determination of the proceedings and such a decision has not been made, the court should adjourn the proceedings pending the making of a decision and the determination of any appeal brought against that decision.
CIOT also expressed concern that the wording of some enquiry letters sent out by the Inland Revenue following the lodgement of protective claims in the County Court involving unspecified amounts implied a restriction on the company's right of appeal.
The Inland Revenue in no way wished to suggest that having lodged protective claims involving unspecified amounts employers' rights of appeal were being suppressed. In every case, if a company disagrees with a decision in respect of the NICs liability issued under section 8 ToFA the company may then lodge and pursue a formal appeal to the Tax Appeal Commissioners.
MacDonald (HMIT) v Dextra Accessories Ltd & others
The 'What's New' article published on the HMRC internet site on 15 July explained HMRC's view of the implications of the judgment given in the House of Lords and what HMRC will be doing in response.
Those cases affected by the protective claim action may also be subject to enquiries relating to the calculation of business profits. HMRC intends to ensure that the tax outstanding is collected systematically and consistently and will co-ordinate enquiries accordingly.
The County Court Fees (Amendment) Order 2003 (operative until 3 January 2005)
Court fees for issuing a claim form where the amount:
- does not exceed £300 - £30
- exceeds £300 but not £500 - £50
- exceeds £500 but not £1,000 - £80
- exceeds £1,000 but not £5,000 - £120
- exceeds £5,000 but not £15,000 - £250
- exceeds £15,000 but not £50,000 - £400
- exceeds £50,000 but not £100,000 - £600
- exceeds £100,000 but not £150,000 - £700
- exceeds £150,000 or is not limited - £800