National Insurance Contributions – Artificial pay practices and their effect on SERPSMonday, July 26th, 2010
On 22 June 2010, the Upper Tax Tribunal, in the case Mason v HM Revenue & Customs, rejected an appeal brought by Mr. Mason against the Special Commissioner’s unfavourable decision in October 2008 respecting his SERPS payments.
Mr. Mason worked for 15 years on the North Sea oil rigs, between 1983 and 1998. On retirement, he found that the SERPS addition to his state pension was considerably lower than he had expected. The reason was that, unbeknown to him at the time, both he and his various employers had paid lower NICs as a result of what he now believed to be an artificial pay practice.
The practice involved paying his salary fortnightly. He worked “two weeks on, two weeks off” and was paid all of the pay for the work weeks in one fortnight and a small retainer in the second fortnight. 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 pay 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, and,
- when the second, much lower payment was paid, the earnings for NICs and SERPS purposes were less than the 2-week LEL, so no NICs were paid and there was no SERPS accrual.
Mr. Mason’s employers also paid lower NICs than they would otherwise have done.
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 DWP 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 DWP was aware of the practices and, if so, why they had not been counteracted 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
“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 decision of the Special Commissioner in October 2008 was not final and further information about the frequency of the payments made to Mr. Mason was requested. In June 2009, the First-Tier Tax Tribunal gave the final decision, which was to dismiss the appeal. Even though the payment method resulted in lower employee contributions, the use of fortnightly earnings period was correct. The decision continued to be critical of the DWP, stating:
“What was remiss, however, was for the authorities who were responsible for collecting NICs to ignore the feature that this pay practice, whilst not particularly artificial itself, had a very artificial effect on the calculation of NICs. The Regulations made it perfectly obvious that it was appropriate to adjust the pay periods in the case of pay periods involving very different amounts, and when the pay levels in this case were broadly at the level of 99 to 1, the NIC effect of the pay practice involved an enormous distortion.”
The Upper Tax Tribunal, sitting in Edinburgh in March 2010, considered further arguments made by Mr. Mason. However, as the evidence showed that his wage payments were, with few exceptions, consistently made fortnightly, the Tribunal decided that it had not been shown that the Special Commissioner and the First Tier Tribunal had made an error in law in arriving at their decisions. The appeal was refused.
Unlike the Special Commissioner and First-Tier Tribunal, the Upper Tax Tribunal declined to comment on the alleged failure to act by the DWP and HMRC, making it clear that it had no jurisdiction to take that into consideration in making its decision or to direct anyone to exercise such powers now.