An interesting debate took place in Marcia Willett Limited v HMRC TC 2301 relating to the application to a charge to NIC on benefits in kind in circumstances where there is no charge to income tax.
The company provided benefits to the directors but the benefits were made good by the taxpayer and Section 203(2) ITEPA 2003 applied to eliminate any change to income tax. That is hardly unusual – so one might wonder what the problem was. It was because HMRC took the view that benefits in kind also give rise to Class 1A NIC but there is nothing in the NIC legislation which refers to making good, so irrespective of the income tax position, the Class 1A contributions remained payable.
The Tribunal concluded that there can be no charge to Class 1A NIC where there is no income tax charge. They dismissed HMRC’s arguments saying that they offended the principles of statutory interpretation. (Others might suggest that it offended against common sense and fairness as well.)
HMRC said that NIC refunds cannot be made when a subsequent event occurs which may alter the amount on which NIC is originally assessed. The Tribunal did not see why this should be the case. They observed that the general structure of UK tax legislation is that a tax liability can be affected by future events; losses can be carried back to an earlier period, tax returns can be kept open for 12 months or longer and HMRC can amend tax returns on the basis of facts discovered after the event.
The Tribunal decided that the making good by the taxpayer meant there could be no chargeable benefit to which a charge to NIC could be imposed.
There was more in this case than a simple criticism of an unfair approach by HMRC. The issues surrounding “making good” were interesting. The benefits provided by the company to the directors had been made in the years 2002 to 2007 but it was only on 6 May 2008 that the directors made good the benefit by an adjustment to their directors loan accounts. There was no dispute that this had the effect of removing the income tax charge for each of the relevant periods.
The Employment Income Manual sets out the view of HMRC on this subject as under:
“The legislation does not set a time limit on the making good. This will usually happen shortly after the expense is incurred by the person providing the benefit. But you need not object to a belated making good if it is done within a reasonable time of the employee becoming aware that the chargeable benefit can be reduced in whole or in part by reimbursing the expense incurred by the provider. What constitutes a reasonable time will depend on the facts of the case. Do not allow a decision for making good which takes place after a charge to tax on the benefit concerned has become final and conclusive.”
In the case of Marcia Willett, it must obviously have been the case that these conditions were satisfied but it shows just how long you might have to make good a benefit under Section 203.
Unfortunately, this will not always be the case. Completely different rules apply to earnings which arise from “notional payments” (such as payments by intermediaries, readily convertible assets or restricted securities) where there is a PAYE deduction obligation on the employer. This can be eliminated by the employee making good the relevant amount – but the making good has to be effected within 90 days (Section 222 ITEPA 2003). And just to be helpful, HMRC adopt a different interpretation for “making good” for this purpose.
The Upper Tribunal have just released their decision in the case of Hok  UKUT 363. It may be remembered that Hok Limited was late in paying its PAYE and became liable to a penalty. The First Tier Tribunal said that HMRC acted neithery fairly nor in good conscience in deliberately waiting until 4 months had passed before issuing a penalty notice by which time the penalty had multiplied from £100 to £400. The penalties were quashed on the grounds that HMRC fell very far below the standards of fair dealing and conscionable conduct to be expected of an organ of the State.
The Upper Tribunal have allowed the appeal by HMRC essentially on the grounds that the penalty was properly due under the law and the First Tier Tribunal had no power to quash it – they were assuming a judicial review function which was beyond their authority.
I am sure they are right – but there is something very wrong here. Surely HMRC cannot say that the penalty was clearly prescribed by statute and even if their conduct was unfair there is nothing anybody can do about it. Similarly it must be right to say that Parliament knew what it was doing when it passed the legislation and that it intended to leave supervision and conduct of these penalties to HMRC. However, it cannot seriously be suggested that Parliament intended HMRC to apply the legislation in an unfair and unconscionable manner.
Surely somebody in appropriate authority must understand that when the Courts describe HMRC’s conduct as unfair and unconscionable this is seriously damaging to their reputation and the prospect of compliance by the majority of taxpayers. For HMRC to say that they do not recognize that they acted in this way – and worse to say even if they did, it doesn’t matter – makes the position incalculably worse.
We are not dealing here with some dodgy scheme by some rich, fat cat, banker or foreign person (I am going for the full set of perjorative characteristics here) trying to get out of paying their fair share of tax, just someone who was late in making their PAYE payments.