T10: National insurance contributions
Unlike taxes, there is no assessment procedure for class 1 NICs, with accompanying time limits. Instead, NICs give rise to a statutory debt and the basic time limit is six years from the date when the cause of action accrued.
"(1) An action to recover any sum recoverable by virtue of any enactment shall not be brought after the expiration of six years from the date on which the cause of action accrued.
(2) Subsection (1) above shall not affect any action to which section 10 of this Act applies." (Limitation Act 1980, s.9)
"(1) Except as otherwise expressly provided in this Act, and without prejudice to section 39, this Act shall apply to proceedings by or against the Crown in like manner as it applies to proceedings between subjects.
(2) Notwithstanding subsection (1) above, this Act shall not apply to—
(a) any proceedings by the Crown for the recovery of any tax or duty or interest on any tax or duty;" (Limitation Act 1980, s.37(1) - (2))
"There are some important points to bear in mind when trying to collect and enforce payment of Class 1A NICs.
- The Limitation Act 1980 does not apply to Scotland.
- The Limitation Act 1980 does not absolve the debtor from National Insurance debt that is due and payable.
- The Limitation Act does not allow us to enforce payment of Class 1A NICs which were due to be paid more than six years ago unless there has been deliberate concealment or fraud, see DMBM527140. Class 1A NICs due to be paid by 19 July 2003 became six years old on 19 July 2009. We cannot take action to enforce payment unless there has been deliberate concealment or fraud.
- HMRC can make a County Court claim to protect NICs and interest due on the NICs as long as a claim is issued within six years. Such claims are referred to as protective claims. The debtor cannot then successfully argue against a claim for NICs and interest on the grounds that it was out of time.
- If unpaid Class 1A NICs are within three months of the end of the limitation period described above, ask Debt Management to make a protective claim, see DMBM527150 and DANSP15800." (NIM17605)
Commencement of the time limit
Acknowledging the debt restarts the limitation period
Acknowledgement of a debt restarts the limitation period. It follows that if there is a chance of the limitation period passing before recovery, the taxpayer should be careful not to acknowledge any potential NICs debt.
Deliberate concealment extends the limitation period
"(1) Subject to subsection (3) subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either—
(a)the action is based upon the fraud of the defendant; or
(b)any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or
(c)the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent." (Limitation Act 1980, s.32(1))
Limitation period does not extinguish the debt (only making it unrecoverable)
The debt is not extinguished after the limitation period expires, it simply becomes unrecoverable. As a result, taxpayers should be careful to make sure any payments made to HMRC are attributed to specific, recoverable debts.
(1) This section applies to contributions which a body corporate is liable to pay where:
(a) The body corporate has failed to pay the contributions at all … and
(b) The failure appears to the Inland Revenue to be attributable to … neglect on the part of one or more individuals who, at the time of the … neglect were officers of the body corporate (“culpable officers”)
(2) The Inland Revenue may issue and serve on any culpable officer a notice (“a personal liability notice”) :
(a) Specifying the amount of the contributions to which this section applies (“the specified amount”);
(b) Requiring the officer to pay to the Inland Revenue:
(i) a specified sum in respect of that amount; and
(ii) specified interest on that sum; and
(c) Where that sum is given by paragraph (b) of subsection (3) below, specifying the proportion applied by the Inland Revenue for the purposes of that paragraph
(3) The sum specified in the personal liability notice under subsection 2(b)(i) above shall be:
(a) In a case where there is, in the opinion of the Inland Revenue, no other culpable officer, the whole of the specified amount…” (SSAA 1992 s.121C)
(1) No appeal shall lie in relation to a personal liability notice except as provided by this section.
(2) An individual who is served with a personal liability notice may appeal against the Inland Revenue’s decision as to the issue and content of the notice on the ground that:
(a) the whole or part of the amount so specified under subsection (2)(a) of subsection 121C above (or the amount so specified as reduced under subsection (7) of that section) does not represent contributions to which that section applies;
(b) the failure to pay that amount was not attributable to any … neglect on the part of the individual; or
(c) the individual was not an officer of the body corporate at the time of the alleged … neglect; or
(d) the opinion formed by the [Inland Revenue] under subsection (3)(a) … of that section was unreasonable.
(4) On an appeal under this section, the burden of proof as to any matter raised by a ground of appeal shall be on the [Inland Revenue].
(5) Where an appeal under this section:
(a) Is brought on the basis of evidence not considered by the Inland Revenue, or on the grounds mentioned in subsection 2(d) above; and
(b) Is not allowed on some other basis or grounds
And is notified to the tribunal, the tribunal shall either dismiss the appeal or remit the case to the Inland Revenue to consider whether to vary their decision as to the issue and content of the personal liability notice.” (SSAA 1992, s.121D).
Failure to pay (not failure to deduct)
“In relation to the NICs, the position differs in the following way. As Mr Slater submitted in Mr West’s grounds of appeal, for reg 86 to operate, the director has to know that the employer has wilfully failed to pay the NICs, rather than to deduct them.” (West v. HMRC  UKFTT 536 (TC), §50).
Burden on HMRC to prove neglect and causation
“The burden of proof rests with HMRC to establish that it was as a consequence of the Appellant’s negligence that NIC contributions went unpaid by L Wear.” (O’Rorke v. HMRC  UKFTT 566 (TC), §54, Judge Amanda Brown).
Neglect means failing to act as a reasonable man would
" Therefore, in considering whether the failures were attributable to the Appellant’s neglect, I apply an objective test: did the Appellant meet the standard to be expected of a reasonable and prudent man in those circumstances?" (Howick v. HMRC  UKFTT 208 (TC), Judge Bailey)
“As a consequence of the Appellant’s own appeal at an earlier stage in these proceedings the Upper Tribunal (which is binding on this Tribunal) has determined by reference to the judgment of Alderson B in Blythe v Birmingham Waterworks Co (1856) 11 Exch 781 that the word neglect in section 121C SSAA has its ordinary meaning. It is an objective standard of conduct rather than an subjective state of mind. Neglect is “the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent or reasonable man would not do”.” (O’Rorke v. HMRC  UKFTT 566 (TC), §55, Judge Amanda Brown).
Paying others whilst not paying PAYE/NICs
" I agree with HMRC that the Appellant was in a position to ensure that the NICs that were due from S P Surface Finishers Limited were paid over to HMRC. The Appellant had access to the monthly Knight Company reports that informed him of the amount of PAYE and NICs to pay and the deadline for payment. The Appellant was aware from management reports that no PAYE or NICs was being paid each month, and the Appellant chose who was paid and when. Although the Appellant says that he was not previously involved in the operation of PAYE and NICs, most people have a basic understanding of the way that PAYE and NICs are deducted from wages and paid over to HMRC. The Appellant had previously been an employee and would have had such deductions from his own wages. A reasonable and prudent man would have understood that PAYE and NICs must be paid to HMRC each month, and would have ensured that both were paid. The Appellant fell short of this standard.
 The Appellant has argued that S P Surface Finishers Limited’s failures to pay the PAYE and NICs due were due to the usual unpredictability of commercial life. I do not agree that this was the case. Although there were times when S P Surface Finishers Limited had cashflow issues, the company was able to make payments to other people, and I agree with HMRC that the bank statements demonstrate that the Appellant could have chosen to pay (at least some of) the NICs to HMRC. In addition, the factoring arrangement with Pulse Cashflow Finance 2 Limited gave S P Surface Finishers Limited a source of funds that it could draw upon when it had cashflow difficulties. The reasonable and prudent man would have used this factoring arrangement to ensure that S P Surface Finishers Limited’s statutory responsibilities were met." (Howick v. HMRC  UKFTT 208 (TC), Judge Bailey)
Failing to make adequate provision for NICs following previous business failures
" When A1RP started trading, Mr Eames was well aware that there were substantial risks involved with the business as he had had two previous companies undertaking the same type of business fail owing substantial amounts to HMRC. We note his misplaced optimism that profits would come from growth of the business as A1RP was to tender for a police contract but also note that he could not say when he would have expected that contract to have been awarded or indeed when any profits from that contract could have been expected. As such, we are not satisfied that he had mitigated the risks to any extent in A1RP by comparison to the business model which failed in his previous companies.
 Mr Eames did not suggest that he was not aware of the obligation to ensure that PAYE and NICs amounts were required to be paid over to HMRC each month. Mr Eames stated in writing to HMRC that he accepted that he should have made all of the payments on time and that he did not do so.
 This failure to account to HMRC for NICs deducted from payroll amounts began shortly after his previous company had failed, owing money to HMRC in similar circumstances. We consider that a prudent and reasonable taxpayer in these circumstances would have made sure that they met their NICs obligations from the outset and continued to do so." (Eames v. HMRC  UKFTT 119 (TC), Judge Fairpo)
Paying money to connected companies in priority
" We consider that a prudent and reasonable person, knowing that amounts deducted from payroll were owed to HMRC, would not use those funds to pay connected companies and themselves in priority to HMRC. Mr Eames was endeavouring to support his companies through non-payment of tax; HMRC is not a short-term lender to be called on by taxpayers at will to support connected (or, indeed, unconnected) businesses. We consider that a prudent and reasonable person would not conduct business in this way. They would comply with their statutory duty to ensure that funds deducted for NICs from employees are paid to HMRC on time each month." (Eames v. HMRC  UKFTT 119 (TC), Judge Fairpo)
Seeking time to pay arrangement does not avoid neglect
" We consider that allowing a company to accrue a large NICs debt before seeking a payment arrangement, and then failing to ensure that the company made the required current payments such that the net debt to HMRC increased despite payment of instalments on those arrangements, is not a reasonable course of action and therefore in this case the seeking of a time to pay arrangement does not mean that there was no neglect by Mr Eames." (Eames v. HMRC  UKFTT 119 (TC), Judge Fairpo)
Company law director duties relevant
“It is for this Tribunal to determine whether the acts or omissions of the Appellant represent the conduct of a reasonable and prudent man carrying out his responsibilities as a director of L Wear…The statutory duties of a director are set out in section 170 – 177 CA. They include the duty to exercise reasonable skill and care (s174) a duty to act in the best interests of the company and not to create a personal conflict of interests (s175).” (O’Rorke v. HMRC  UKFTT 566 (TC), §§56…57, Judge Amanda Brown).
“The overwhelming inference we draw from the evidence put forward by HMRC and by Mr Pawley in particular is that the company was set up deliberately to distance the NIC (and PAYE) obligations from its clients and was set up so that it could meet the obligations for net wages and payments to ADS Accountants but not to pay HMRC anything… By his own admission the appellant did what a prudent and reasonable man would not have done and failed in his duty as a director to ensure that HMRC was paid that which it was required to pay, in large part on behalf of its employees and failed to ensure that the company was in a position to pay.” (Denmark v. HMRC  UKFTT 669 (TC), §§44…47, Judge Richard Thomas).
Sole director liable for whole of unpaid amount
" As the Appellant was the only officer of S P Surface Finishers Limited during the period 13 April 2015 to 5 August 2016, it is appropriate for the sum specified in the Personal Liability Notice to be equal to all of the NICs that were due from S P Surface Finishers Limited in that period and that remain outstanding." (Howick v. HMRC  UKFTT 208 (TC), Judge Bailey)
Commencement of the time limit: employees
A special question arises when the employee is liable to pay the NICs due to r.86