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Case Report: Marcia Willett Ltd [2012] TC 02301

[2012] UKFTT 625 (TC)

Judge Rachel Short, David Earle

Decision released 8 October 2012

Class 1A NICs –‘making good’ benefits in kind – interaction of income tax and NIC charges – statutory interpretation –secondary regulations cannot override primary statute.


The First-tier Tribunal decided that a taxpayer company's income tax liabilities under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), s. 203 were removed when it made good the benefits in kind it provided to its directors for the relevant periods. Thus, its class 1A National Insurance contributions (NICs) obligations were also removed. As the Social Security Contributions and Benefits Act 1992 (SSCBA 1992), s. 10 and ITEPA 2003, s. 203 were inter-dependent, a class 1A NICs charge could only arise when there was an income tax charge.


The taxpayer appealed against HMRC's decision the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (‘SS(TF)A 1999’), s. 8 concerning the payment of class 1A NICs for the five tax years 2002–03 to 2006–07, inclusive.

The taxpayer, which was a closely held family company, owned a property occupied by its two directors. The directors paid the bills relating to the property, but the taxpayer paid for structural repairs to the property. The taxpayer did not intend to provide benefits in kind to the directors, who did not regard themselves as enjoying benefits in kind. However, as a result of the discussions with HMRC, the taxpayer accepted that the structural repairs it paid during the relevant period amounted to benefits in kind chargeable under ITEPA 2003, s. 203.

On 6 May 2008, the taxpayer ‘made good’ the benefits in kind under ITEPA 2003, s. 203(2). That was by way of an adjustment to the directors' company loan accounts which resulted to the removal of the income tax charge for each of the relevant periods. Despite that, HMRC charged the taxpayer with class 1A NICs and income tax in respect of the said benefits in kind in accordance with SSCBA 1992, s. 10 for each of the relevant periods.

HMRC argued that the obligations under SSCBA 1992, s. 10 remained despite the fact the any related income tax charge had been removed. That was because the obligation under SSCBA 1992, s. 10 was determined as at the time of the due payment date under the Social Security (Contributions) Regulations 2001 (SI 2001/1004) (‘SS Regulations 2001’), reg. 71. Anything which happened subsequently could not alter the original charge. No provision in the NICs legislation confirmed that ‘making good’ removed a class 1A obligation. It was not possible to ‘make good’ an obligation to pay class 1A NICs.

The taxpayer argued that SSCBA 1992, s. 10 was dependent on the existence of a charge under ITEPA 2003, s. 203. If a ‘making good’ payment had removed the ITEPA 2003, s. 203 income tax charge, it should also remove the class 1A payment obligation. If there were no general earnings chargeable to income tax, there was nothing on which SSCBA 1992, s. 10 could bite.


Whether the taxpayer's class 1A NICs obligations were removed as a result of the removal of its income tax liability under ITEPA 2003, s. 203 when it ‘made good’ the benefits in kinds for the relevant periods.


Held, allowing the taxpayer's appeal:

The Tribunal held that SSCBA 1992, s. 10 and ITEPA 2003, s. 203 were inter-dependent and that a class 1A NICs charge could only arise when there was an income tax charge. It agreed with HMRC that there was no specific wording in ITEPA 2003, s. 203 which made it clear that a ‘making good’ payment had retrospective effect for the purposes of SSCBA 1992, s. 10. However, on a plain reading of ITEPA 2003, s. 203(2), a ‘making good’ payment extinguished an income tax charge ab initio; therefore, there were no general earnings or income tax charge to which SSCBA 1992, s. 10 could apply.

Regulations are made pursuant to the primary legislation. It is a principle of UK law that subordinate legislation cannot go beyond the scope of the primary legislation to which it is subordinate. In cases of doubt, subordinate legislation (in this case, SS Regulations 2001) must be construed in the light of the enabling act (in this case, SSCBA 1992) (Halsbury's Laws of England, Vol 96 at 1067, referring to authorities including Richards v Attorney-General of Jamaica [1848] EngR 705; 13 ER 730; (1848) 6 Moore PC 381). Furthermore, the primary legislation – SSCBA 1992, s. 10ZC – gives regulation-making power to allow class 1A contributions to be amended as a result of retrospective changes of law arising from changes made to the charging provisions of ITEPA 2003, s. 203.

Here, the Tribunal held that the ‘making good’ provisions at ITEPA 2003, s. 203 resulted in any taxable benefit and any income tax charge being extinguished and treated as never having arisen. Therefore, no chargeable benefit to which SSCBA 1992, s. 10 could ever attach and no class 1A payments could be due. It was not correct to limit the primary taxing provisions which allowed a taxpayer to extinguish a charge to tax by making a payment, by reliance on a subsidiary regulation, i.e. SS Regulations 2001, which imposed time limits by reference to which tax had to be paid.


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