National Insurance Contributions – Artificial pay practices and their effect on SERPSMonday, November 17th, 2008
In an interim decision given by the Special Commissioner on 23 October 2008 in the case Mason v HMRC, the Special Commissioner ruled that he was unable, pending further information, to uphold Mr. Mason’s appeal on statutory grounds but expressed the view that Mr. Mason has a “real, and very unfortunate, grievance” against the Secretary of State for Work and Pensions and HMRC.
When he retired, Mr. Mason found that the SERPS addition to his state pension was considerably lower than he had expected. The reason was that, when he worked for 15 years on the North Sea oil rigs, both he and his various employers paid lower NICs as a result of an artificial pay practice which, unbeknown to him at the time, had the effect of reducing his SERPS entitlements.
The practice involved paying his salary in two instalments each month. He was paid all of his salary except for £69 (in the case of one particular payslip produced to the tribunal) at one point in the month and, two weeks later, he was paid a “retainer” of £69. As a result, under the provisions of what is now Regulation 3(1) of the Social Security (Contributions) Regulations 2001 (SSCR), the earnings period for each payment was two weeks. The effect was that,
- when the bulk of the salary was paid, the earnings for both NICs purposes and for SERPS accrual was the amount between the 2-week LEL (as this preceded the introduction of the ET) and the 2-week UEL, with the result that Mr. Mason paid lower primary NICs and had lower surplus earnings for SERPS than if the earnings period had been four weeks
- when the second, much lower payment was paid, the earnings for NICs and SERPS purposes were less than the LEL, so no NICs were paid and there was no SERPS accrual.
What are now Regulations 30 and 31 of SSCR make provision for HMRC (Secretary of State for Work and Pensions at the time Mr. Mason was in employment) to act where an employer’s method of calculating NICs is an “abnormal pay practice” or results in “avoiding or reducing liability”. For example, Regulation 31(1) states:
“If an officer of the Board is satisfied that–
(a) a practice exists as to the making of irregular or unequal payments of earnings; and
(b) by reason of the practice the liability for earnings-related contributions is avoided or reduced,
he may, and if requested to do so by either the earner or the secondary contributor shall, decide whether to issue a direction to secure that the same contributions are payable as would be payable if the practice were not followed.”
Mr. Mason argued that, because the Secretary of State and, latterly, HMRC must have been aware of the practice but had failed to act, they were at fault in not counteracting the practice and should now collect the underpaid contributions and increase his SERPS addition accordingly.
The Special Commissioner was unable to do any more than consider whether NICs had been deducted in accord with the Regulations, and he confirmed that they had. He was unable to comment on whether the Secretary of State was aware of the practices and, if he was, why he had not counteracted them and, in any case, he had no jurisdiction to say that the Secretary of State should have stopped the practice. He was not uncritical however, commenting that
“I am unable to say how it was that this practice was able to continue for such a very long period, and that whatever the explanation, the responsible authorities appear for one reason or another, or for extraordinary ignorance, to have failed to stop it, and not thus to have acted in a remotely praise-worthy manner.”
“There appears to have been an extraordinary failure on the part of those responsible for exercising the discretions and responsibilities vested in the Secretary of State, and latterly the Board of HMRC, to counteract a pay practice that was artificially reducing liability to NICs”
The Special Commissioner felt unable, however, to reject the appeal outright as one argument put forward by Mr. Mason had not been resolved. It appears that the small “retainer” was actually paid by Mr. Mason’s employers at the same time as the rest of the salary, even though is was treated separately for NICs two weeks later. It could be argued therefore that, as no part of the salary had actually been paid in one of the two-week earnings periods, the earnings period should have been four weeks. If that were the case, and no evidence had been produced to support it, then all of the NICs calculated by the employers would have been wrong and the appeal would succeed. The Special Commissioner’s decision will not, therefore, be confirmed until that issue is resolved.
Mason v HMRC
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