Mr Prosser QC contends that the third requirement for Contributions to be payable is that there must be an employer in the tax week in which the payment is made: "7(1) For the purposes of this Act, the "secondary contributor" in relation to any payment of earnings, to or for the benefit of an employed earner is— in the case of an earner employed under a contract of service, his employer;…
(2) In relation to employed earners who—
are paid earning in a tax week by more than one person in respect of different employments; or
works under the general control or management of a person other than their immediate employer,
and in relation to any other case for which it appears to the Secretary of State that such provision is needed, regulations may provide that the prescribed person is to be treated as the secondary contributor in respect of earnings paid to or for the benefit of an earner."
He contends that the reference is to earnings which are paid in a tax week (subsection (2)(a)) or to a person who works (subsection (2)(b)), both in the present tense. Mr Ewart contends that one cannot read the section literally because otherwise an unconnected employer at the time of payment by the former employer would be liable for Contributions. The references to "employed earner" and "earner employed under a contract of service" are references to the status by virtue of which the payment of earnings are received. The employer liable for Contributions is the employer in relation to the relevant employment in respect of which the person is an employed earner employed under a contract of service.
Mr Prosser QC pointed out that when section 4(4) of the 1992 Act was enacted section 313 itself did not apply to former employees because there was no charge unless the emolument was for a year in which the employment subsisted, see Bray v Best [1989] STC 159 , so that it was not absurd for Parliament to have limited section 4(4) to existing employees. Mr Ewart did not accept that Bray v Best applied and submitted that section 313 was a freestanding Schedule E charge under paragraph 5 of section 19 in the same way as section 148, see Nichols v Gibson [1996] STC 1008. In its original form in section 26 of the Finance Act 1950 it was a charge to surtax on an annual payment, not a Schedule E charge. He also said that the position was reversed for emoluments by paragraph 4A in section 19 at about the same time as section 4(4) was enacted in 1989. Mr Prosser QC in reply pointed out that the Revenue’s Manual at SE3602 did not consider the charge to be a freestanding one. Being a normal Schedule E charge like the charge on fringe benefits under section 154, it was restricted to current employees.
Mr Prosser QC further contended that the Revenue could not rely on the fact that there are regulations made in 1983 and 1984 under the Social Security Act 1975 that assume that there can be Class 1 Contributions on sums paid after the termination of employment:
"(a) Where—(i) the employment in respect of which the earning are paid has ended…the earnings period in respect of such payment of earnings shall,…be the week in which the payment is made." (regulation 3(4) of the Social Security (Contributions) Regulations 1979)
"(1) Where a person is, or is appointed, or ceased to be a director of a company during any year the amount, if any, of earnings-related contributions payable in respect of earnings paid to or for the benefit of that person in respect of any employed earner’s employment with that company shall…be assessed on the amount of al such earnings paid (whether or not paid weekly) in the earnings periods specified in the following paragraphs of this regulation.
(5) Where a person is no longer a director of a company and in any year after that in which he ceased to be a director thereof he is paid earnings in respect of any period during which he was such a director, then…(b) the earnings period in respect of all those earnings shall be the year in which they are paid." (regulation 6A)
Mr Ewart points out that the basis of the regulations was correct on the wording of the 1975 Act "any employment of his being employed earner’s employment." If Mr Prosser were right the consolidation Act of 1992 changed the law in a major way. He contends that if the Act is ambiguous it is permissible to construe it by reference to regulations. Lord Lowry in Hanlon v The Law Society [1981] AC 124 at 193 sets out a number of propositions derived from cases and textbooks, the first of which is:
"Subordinate legislation may be used in order to construe the parent Act, but only where power is given to amend the Act by regulations or where the meaning of the Act is ambiguous."
Finally, Mr Prosser QC contended that there was no machinery for determining the earnings period relating to the payments, which was consistent with his construction. Regulation 6A quoted above relates to "earnings in respect of any period during which he was such a director" which is not applicable here. Mr Ewart contended that if regulation 6A did not apply then regulations 3 or 4 must apply:
"(a) Where—(i) the employment in respect of which the earning are paid has ended… (iii) after the end of the employment a payment of earnings is made which satisfies either or both of the conditions specified in the next succeeding sub-paragraph, the earnings period in respect of such payment of earnings shall,…be the week in which the payment is made; (b) the conditions referred to in the preceding sub-paragraph of this regulation are that the payment is one which is…(ii) not in respect of a regular interval." (regulation 3(4) of the Social Security (Contributions) Regulations 1979)
"…where earnings are paid to or for the benefit of an earner in respect of an employed earner’s employment, but no part of those earnings is normally paid or treated under regulation 6 of these regulations as paid at regular intervals, the earnings period in respect of those earnings shall be a period of one of the following lengths—…(b) where it is not reasonably practicable to determine that period under the provisions of the last preceding paragraph…(ii) where the payment is made before the employment begins or after it ends, a week." (regulation 4)
Mr Prosser replied that regulation 3 did not apply because the payments were in respect of a regular interval, and nor did regulation 4 apply because they are paid at regular intervals.
Reasons for the decision
It is common ground that a literal construction of these sections is not appropriate. One must identify a relevant employer, so that if a person has two employments the Contributions are paid by the relevant employer and if the person has a new employer that employer is not liable for Contributions (assuming they are payable) on payments made by a former employer. This is clear from section 6(4):
"Except as provided by this Act, the primary and secondary Class 1 contributions in respect of earnings paid to or for the benefit of an earner in respect of any one employment of his shall be payable without regard to any other such payment of earnings in respect of any other employment of his."
Mr Prosser QC makes a powerful case that the Act consistently looks to the employment in the tax week in question. It is certainly possible to read the Act in this way. But the context of the wording is important. The defined expressions employment, earnings and earner set out in paragraph 10 above all apply to both employment (in the non-defined sense of work under a contract of service) and self-employment (in the defined sense), and so it is necessary to describe work under the former as employed earner’s employment. I therefore agree with Mr Ewart that the purpose of the definition of employed earner is to differentiate between employment (in the non-defined sense) and self-employment, and not to impose any temporal restriction to a person who is currently employed.
As there is ambiguity whether the present tense is intended to have a temporal significance I consider that it is permissible to look at the pre-consolidation wording of section 6 " being employed earner’s employment" to confirm that that is the sense in which the words are used. The existence of Regulations made under the former Act providing for an earnings period after the employment has ceased is in accordance with this interpretation. It is not likely that by changing the wording from being to which is and leaving the regulations to continue that a consolidation Act changed its meaning in such a significant way as to exclude liability for Contributions on payments in respect of a former employment.
The power in paragraph 8(1)(o) of Schedule 1 has been exercised to deal only with self-employed where it might be difficult to determine whether if there was little or no activity the self-employment was continuing. If it were a fundamental principle that there must be a subsisting employment so that payments made before or after employment were not liable to Contributions it would surely have been exercised in the employment field.
On the question whether section 313 of the Taxes Act is a freestanding Schedule E charge or whether it is subject to the Cases of Schedule E it seems to me that Mr Prosser QC is right. It is a case of something being "treated as emoluments" which is the formula used for fringe benefits in section 154 and in many other charges such as sections 134, 144A, 149, 164 and 648. By section 313(6) it applies to an office or employment within Cases I or II of Schedule E which is inconsistent with its being a freestanding charge. Having come to that conclusion I looked for confirmation (not as a aid to construction) at the Income Tax (Earnings and Pensions) Bill currently before Parliament. This Tax Law Rewrite Bill treats section 313 payments as part of general earnings in the same way as other items treated as earnings (the modernisation of "emoluments") to which the Cases of Schedule E apply, and not as specific employment income (the successor to the freestanding charge) which has no territorial limits except in accordance with the terms of the charge. In any case, as Bray v Best was reversed at about the same time as section 4(4) of the 1992 Act was originally enacted I do not find this point helpful in deciding whether section 4(4) applies. The fact that other cases of something being "treated as emoluments," such as section 154, are limited to current employments does not mean that all items treated as emoluments are so limited, as is the case with section 160(3) dealing with loans where the employment has terminated.
The draftsman of section 4(4) of the 1992 Act had to incorporate payments taxed under section 313 of the Taxes Act into the Contributions legislation. He deliberately excluded payments in kind in section 313(4) because they were not at the time liable to Contributions. He did not make any other changes to a section that applied in terms to a person who holds, has held, or is about to hold an office or employment. If an employed earner were restricted to someone currently employed he would surely have made a further modification to restrict the application of the section rather than merely applying Contributions to "any sum paid to or for the benefit of an employed earner which is chargeable to tax by virtue of section 313." Accordingly I consider that Contributions are payable on the payments in question.
As to the earnings period, I agree with Mr Prosser QC that regulation 6A does not apply because the payments are not "earnings in respect of any period during which he was such a director." They are earnings in respect of periods after he ceased to be a director. The payments are made in respect of the periods first from 22 December 1994 to 31 December 1995 and then two periods of a year, 1996 and 1997; they were paid on 3 January 1995 (£500,000), 30 December 1995 (£500,000) in respect of the first period, 3 January 1996 (£200,000) and 30 December 1996 (£800,000) in respect of 1996, and 1 January 1997 (£200,000), being the first payment in respect of 1997. These are neither paid at regular intervals, the December and following January payments being made within a few days of each other followed by an interval of almost a year, nor in respect of a regular interval because the first period exceeds a year, although it might be said that the payments for the following two years were in respect of a regular interval of a year. Accordingly, paragraph 4, and possibly paragraph 3 (except for the first period), apply and either way the earnings period is a week. I might add that if the payments had been made six monthly it is difficult to see that either regulation would have applied.
Accordingly I dismiss the appeal in principle.
J F AVERY JONES
SPECIAL COMMISSIONER
SC3086/02
Authorities referred to in skeletons and not referred to in the decision:
Maradana Mosque v Badi-Ud-Din Mahmud [1967] 1 AC 13
Pocock v Steel [1985] 1 WLR 229
Jones v 3M Healthcare [2002] EWCA 304
Chesterfield Football Club Ltd v Secretary of State for Social Services [1973] QB 583
Vandyk v Minister of Pensions and National Insurance [1955] 1 QB 29
Frankland v IRC [1997] STC 1450
Shilton v Wilmshurst [1991] 1 AC 686
George v Ward [1995] STC (SCD) 230
IRC v Mcguckian [1997] 1 WLR 991
Nichols v Gibson [1996] STC 1015
Dimond v Lovell [2002] 1 QB 216