[2010] UKFTT 530 (TC)

TC00784
Appeal number:  TC/2010/03439

National Insurance Contributions – ability to back-pay voluntary contributions for missing years out of time – Regulation 32(1) National Insurance (Contributions) Regulations 1969 – failure to pay voluntary contributions at the time due to ignorance or error – whether due to failure to exercise due care and diligence – former member of Colonial Agricultural Service in Kenya – held that failure to make enquiries was not per se such a failure – held on the facts that ignorance or error not due to failure to exercise due care and diligence – appeal allowed	

FIRST-TIER TRIBUNAL
TAX

	JOHN REDMAN GOLDSACK	Appellant	

-and-

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (NIC)	Respondents	

TRIBUNAL:	KEVIN POOLE  (TRIBUNAL JUDGE)
ANGELA WEST	

Sitting in public in Southampton on 7 October 2010
the Appellant in person
Lisa Storey, Higher Officer for the Respondents

© CROWN COPYRIGHT 2010

DECISION
Introduction
1.	This is an appeal against the following decision of HMRC dated 17 July 2008 (confirmed by a letter from HMRC dated 15 March 2010):
“Your failure to pay National Insurance contributions as a non-employed person for the period 1 September 1955 to 31 May 1964 within the prescribed period is attributable to your ignorance or error, however, that ignorance or error was due to the failure on your part to exercise due care and diligence.
Accordingly, you are not entitled to pay contributions as a non-employed person for the period 1 September 1955 to 31 May 1964.”
2.	The period in question was while the Appellant was completing the final year of his training (in Trinidad) and subsequently working for Her Majesty’s Overseas Civil Service in Kenya.  Upon returning from Kenya to the United Kingdom in 1970 the Appellant became aware that there was a gap in his contribution record and paid the maximum then allowed to bring it up to date (which covered the period 1 June 1964 up to 31 May 1970).  He also paid full contributions from that time on.  However, the gap in his contribution record from 1955 to 1964 has the effect of reducing the state retirement pension which he now draws by approximately 15%.
3.	The Appellant became aware more recently that he might be permitted to “back pay” voluntary contributions in respect of other years during his period in Trinidad and Kenya sufficient to bring him up to full entitlement for state retirement pension and he therefore approached HMRC seeking to do so. 
4.	It is common ground that the only objection raised by HMRC to his entitlement to make these back payments arises from Regulation 32(1) of the National Insurance (Contributions) Regulations 1969 (“Reg 32”), which (so far as relevant) provides:
“Where a person was entitled to pay a contribution....... but he failed to pay that contribution in the period provided for payment.... and his failure is shown to the satisfaction of the Secretary of State to be attributable to ignorance or error on his part which was not due to any failure on his part to exercise due care and diligence, that contribution may be paid within such further period as the Secretary of State may direct.”
5.	As HMRC accepted that the Appellant’s failure to pay voluntary contributions for the period from 1 September 1955 to 31 May 1964 was attributable to ignorance or error on his part, the only question that the Tribunal was asked to decide was whether that ignorance or error was “due to any failure on his part to exercise due care and diligence.”
Background and history
6.	We find the following facts.  Notwithstanding the Appellant’s wry observation that his memory of events 60 years ago can be clearer than his memory of events last week, the historical evidence is necessarily somewhat patchy.  In addition to the Appellant’s evidence (given on oath), we had the assistance of Mr Alan Greenshields of HMRC in interpreting what their records told us. 
7.	The Appellant (whose date of birth was 15 August 1932) as a child formed the ambition of entering the Colonial Agricultural Service.  After completing his school education in July 1950, he was required to spend a year working full time on a farm in the UK before commencing to study for a degree in Agriculture.  
8.	At around the time he started work, he attended his local National Insurance office in Sutton on 13 October 1950 to register for NI, as required.  He has no memory of that meeting, from which he infers that it was a straightforward interview in which he was simply allocated his NI number and given his contribution card.  Mr Greenshields confirmed there was no process in place for any wider information to be given to new entrants about the NI system at the time of registration.  From this, we infer that the Appellant regarded registering for NIC as just “something that had to be done” in order to take up employment, and was given no information about the nature of the NIC scheme as a whole.
9.	We were given a copy of a National Insurance card (form CF 18) for the contribution year ended 5 June 1955, and Mr Greenshields said this was the same form (apart from the date-specific material) as would have been given to the Appellant when he first registered in 1950, and indeed in each subsequent year up to his departure abroad.  That card was folded like a leaflet.  The inside of the leaflet was mainly taken up with spaces marked for affixing the stamps and associated notes.  On the front of the leaflet there were spaces for name and address, signature by the cardholder and instructions for surrendering it; there was also a small footnote “For special contribution provisions – see page 4.”  Page 4 (the back of the leaflet) contained mainly instructions to the employer and the cardholder as to what must be done with the card.  Near the foot of page 4 was the following section:
“There are SPECIAL CONTRIBUTION PROVISIONS for:-
Men age 65 and under 70 who have retired or men age 70 and over – see Leaflet N.I.40.
Men in casual or subsidiary employment or employed only to an inconsiderable extent – see Leaflet N.I. 37.
Men paid at a weekly rate of 30s. or less and not receiving board and lodging – see Leaflet N.I. 40.
Self-employed and non-employed men whose income does not exceed £104 a year – see Leaflet N.I.27.
Men who go abroad – see Leaflet N.I.38.
These leaflets can be obtained at any local Pensions and National Insurance Office.”
10.	If the Appellant had later requested Leaflet N.I. 38 and read it carefully, it would have provided all the information he would have needed to protect his contribution record while he was abroad.
11.	After obtaining his first contribution card, the Appellant then worked as an agricultural employee full time for nearly a year.  His contribution record for the year ended June 1951 shows 37 weekly contributions paid, as well as 10 contributions credited.  The way the system worked, the contribution card was kept and stamped by the employer and then surrendered by the employer to the local National Insurance office at the end of the contribution year (the Appellant’s contribution year ended in June) in exchange for a replacement.  So the employee did not actually keep it, and only saw it when he first obtained it (before giving it to his employer) and, briefly, when he had to countersign it shortly before it was surrendered by the employer.  It was only when an employee left employment that he would be given his card to retain and pass on to his new employer (or surrender to the National Insurance office if he was still unemployed at the end of his contribution year).
12.	HMRC’s central record sheet (form RF 1), which was maintained clerically at their main office near Newcastle, shows that the Appellant’s card had been received and that because it carried insufficient stamps to count for a full contribution year, the Appellant was sent a form RF 168B on 23 July 1951.  
13.	We were shown a specimen of that form (which related to the subsequent contribution year, but Mr Greenshields confirmed the form would have been substantially the same).  This form (and the apparently associated form RF 166B – Contribution Record) simply showed how many contributions were recorded as having been received, and gave the opportunity to top up any missing contributions by affixing stamps and sending it back.  It said nothing about the consequences of failing to pay contributions, whether compulsory or voluntary.  
14.	It seems that in response to this form, the Appellant either visited or wrote to his local NI office, telling them that he was starting full time studies again as a student on 3 October 1951 – a note to that effect appears on his record sheet RF 1 and Mr Greenshields could not think of any other way that information could have been obtained.
15.	At the end of his “work experience” year (i.e. in October 1951), the Appellant started his three year degree course at London University.  He was expected to work on farms during university vacations, and did so.  He will have taken his contribution card back from his employer when he left in about September 1951, and then submitted it to his temporary vacation employers.  As a result of his vacation work, his contribution record shows that he paid 17 weeks of contributions between June 1951 and June 1952.  
16.	As a result of this low level of contributions, he would have been sent a different form in August 1952 after surrendering his card to the local NI office.  This was form RF 170B, and again Mr Greenshields provided us with a specimen.  This was a shorter form than the RF 166B/168B, and simply showed the level of contributions made during the year.  Again, it contained no statement as to the consequences of a shortfall in contributions.  The main text, apart from the simple record of contributions, was a “Notice to Married Women”, which provided a warning to them that they may lose certain important rights if they had less than 45 contributions to their credit in a year.
17.	As the Appellant carried on with his degree course and carried on with vacation work, he continued to accrue a few contributions in each year.  In the year to June 1953, he paid 14 weeks of contributions and was sent a further form RF 170B.  In the year to June 1954 (shortly before he completed his degree course at London University), he did not initially submit his contribution card at all.  In consequence, he was sent a form RF 172B on 27 September 1954.  Again, we were provided with a specimen.  That form is a simple “Notice that your contribution card has not been received” and simply points out that the central contribution record cannot be updated as a result.  It requests the return of the completed card or an explanation of its whereabouts.  Again, it contains no reference to the consequences of an incomplete contribution record.
18.	It seems that the Appellant submitted his 1953-54 contribution card in response to this notice and 5 weeks of contributions were placed on the central record as a result.
19.	In October 1954, the Appellant started a one year course at Cambridge University, the final academic stage of his training for his chosen career.  Her Majesty’s Overseas Civil Service paid the fees for the course and provided the Appellant with a small living allowance while he studied.  It was an intensive course, with no opportunity to work during vacations.  He completed it in August 1955 and within a month he was on a boat to Trinidad to complete the final practical year of training for his chosen career.  Again, he was paid a small allowance by HM Overseas Civil Service/ the Colonial Office and nothing more.
20.	On 30 September 1955, the National Insurance office sent a further form RF 172B to the Appellant, because his 1954-55 contribution card had not been submitted to them.  The Appellant was either on passage or actually in Trinidad by that date and never received that form.  It is assumed (as the NI records show that a blank contribution card was submitted in response) that the Appellant’s parents dealt with this in his absence.
21.	The Appellant completed his final “practical training” year in Trinidad in July or August 1956, sailed back to the UK and following what he described as “a quick change and collection of new kit”, he sailed almost immediately for Kenya.  He was committed to a four year tour of duty (indeed, if he left during the first two years, he would have to pay his own passage home).  He arrived in the Autumn of 1956, shortly before the last major leader of the Mau Mau insurrection was caught, and the insurrection itself was in its last throes, though the emergency formally continued until 1960.
22.	The Appellant threw himself into his work without thinking about UK National Insurance contributions.  He paid Kenyan taxes (including Hospital Tax) and contributions to the East African Widows and Orphans Pension Fund.
23.	It was only when the Appellant returned to the UK in 1970 that his employer (the UK Government, through the Overseas Development Agency) informed him that he could pay back contributions to top up his contribution record for six of his “missing” years since 1955.  He paid these contributions in full.  He only became aware much later of the possibility of further payments under Reg 32, and approached HMRC promptly after he found out about his possibility.  This approach culminated in the present appeal.
Issue for determination
24.	As mentioned above, the only issue we are asked to determine is whether, in the light of the evidence we have heard and the facts stated above, the Appellant’s “ignorance or error” (to which his non-payment of contributions is agreed to be attributable) is “due to any failure on his part to exercise due care and diligence”.
Submissions from the parties
25.	The Appellant did not direct us to any authorities.  His case was put on the basis that there were no obvious pitfalls that he had failed to address, this was simply an issue of which he had no knowledge and no means of knowledge; given that fact, how could he be said to have failed to exercise due care and diligence?  
26.	If there was any “failure to exercise due care and diligence” here, he said, it was on the part of the UK government, through HM Overseas Civil Service/ the Colonial Service.  He referred to the “Circular Telegram of 15 August 1948” (mentioned in the case of Kearney cited below).  It was clear that there was an appreciation in the higher echelons of HM Government that employees being sent to work abroad in the colonies should be informed of the NIC implications, yet through either incompetence or obstructiveness in the Colonial Office in Kenya, this information was not passed on to the people who actually needed it (including the Appellant).  Mrs Storey accepted that this is a known problem with Kenya at the relevant time, and HMRC do not dispute this.
27.	Whilst we accept that this is part of the factual background (and is perhaps indicative of where the UK government felt responsibility should lie for informing expatriate employees of their situation), it does not in our view have a direct bearing on whether the Appellant exercised due care and diligence.
28.	Mrs Storey directed us to three authorities.  First, there was the decision of Dr Avery Jones, a Special Commissioner, in Mrs Adedolapo Fehinola Adojutelegan v Derek Clark (Officer of the Board) SpC 430, released on 21 September 2004.  Mrs Storey directed us to the passage in which Dr Avery Jones said this:
“Exercising due diligence involves the positive step of making enquiries.  Mr Williams contended that while the National Insurance authorities try to keep a contributor informed of what he needs to know to maintain his contribution record, it can do this effectively only if the contributor personally contacts them.  The Appellant had failed to make any enquiries and therefore had not exercised due diligence. 
...
If she had never heard of National Insurance I would readily agree that it could not be said that she had failed to exercise due care and diligence if she had made no enquiries about it.  However, she was not ignorant about the existence of the NI scheme and must have known the basic principle that benefits were in some way related to contributions.
...
I follow the principle in Walsh that she should have made some enquiries.  I entirely accept Mr Adojutelegan’s point that the facts here are not comparable to that case as she was living abroad and so it was harder to make enquiries.  But it was not impossible.
...
Doing nothing is not the exercise of due care and diligence.  Had she made an enquiry she would have been told there was a six-year time limit for paying contributions.  Her ignorance of this was due to her failure to make enquiries, which is a failure to exercise due care and diligence.”
29.	Second, she referred us to the statement of Dr David Williams in the Special Commissioners’ case of Rose v HMRC SpC (2006) at [48]:
“The evidence is that Dr Rose was aware at the time of his choices, or at least he would have been aware of them had he read the leaflets he was sent and had he made the reasonable enquiries that those leaflets should have prompted.  He chose at that time not to enquire or not to pay.  In the current context of the current question of protecting his NI record, he chose not to exercise due care and diligence in protecting his contribution record.”
30.	Finally, she referred us to a passage in the judgment of Lady Justice Arden in the recent leading Court of Appeal case of Kearney v HMRC [2010] EWCA Civ 288 at [54] (a case in which Mr Kearney had succeeded in his appeal):
“I would observe that the result in this case should not be thought to reduce the importance of the duties imposed on those who are liable to pay NIC’s or who have the option to do so.  Ignorance is not an excuse save in limited circumstances.  It is a person’s own responsibility to pay NIC’s and, if he or she fails to do so at the right time, he or she may lose the chance to pay them later on the basis of ignorance at the appropriate time of the need to pay.  The facts of this case are unusual, and, while of course this judgment deals only with this appeal, I would observe that facts like these may not often occur.”
Review of the law
31.	The Kearney case was predominantly concerned with the question of whether an effective finding by the General Commissioners (to the effect that Mr Kearney’s ignorance of his ability to pay contributions was not due to his lack of due care and diligence) was so perverse that no reasonable Commissioners, acting judicially and properly instructed, could have made that finding.  In doing so, the Court of Appeal laid down some general guidance as to the approach to be followed in such cases before finding that, in Kearney, “the conclusion to which the Commissioners came is in my judgment one to which they could properly come.”
32.	We therefore consider that the guidance given by the Court of Appeal in Kearney is the crucial authority; any comments made in the earlier decisions must all be read in the light of that guidance and disregarded to the extent they are inconsistent with it.
33.	The first point arising from this is an obvious one, and it is one that Mrs Storey accepted in argument:  In the light of Kearney, it can no longer be maintained that a failure on the part of an appellant to make enquiries about maintaining his contribution record must, a fortiori, amount to a failure to exercise due care and diligence, as Dr Avery Jones appeared to be suggesting in Adojutelegan.
34.	The overall approach endorsed by the Court of Appeal (at [34]) is:
“...to treat all relevant circumstances as factors which have to be balanced together to reach an assessment or evaluation on a case-by-case basis as to whether due care and diligence was exercised and, if not, whether the failure was the cause of the contributor’s ignorance...”
This general approach requires the Tribunal first to identify “all relevant factors”, then carry out a balancing exercise on all the factors identified, before reaching an “assessment or evaluation” as to the exercise of due care and diligence.  If it is found that there was a failure to exercise due care and diligence then a final step is required, to decide whether the error or ignorance was caused by that failure.
35.	So what are the “relevant factors” which must be weighed in the balance in this way?  Lady Justice Arden gave some guidance on this (at [35] to [37]):
“... I do not think it is possible to produce a definitive list of relevant factors.  However, they would include the contributor’s age and any relevant physical disability or incapacitation.  Thus [counsel for HMRC] accepted that a 19-year-old student might be in a stronger position to show that he had exercised due care and diligence when he took no action to pay contributions than an older person in employment....
Knowledge of the NIC scheme is also likely to be a very important factor, but it may have to be established what the source of his knowledge was and generally the degree of knowledge....
The decision-maker also has to look at the circumstances as they stood at the time....”
36.	To the above list, we would add “the extent and nature of the action or inaction of the Appellant (particularly in relation to the making of enquiries) at the relevant time or over the relevant period, bearing in mind the extent of his knowledge of the NIC scheme”.  This is because when Lady Justice Arden said (at [36] of Kearney):
“... there cannot logically be an absolute rule that, if the contributor has knowledge of the existence of some aspect of the NIC scheme, he can never show that he exercised due care and diligence unless he made further enquiries about his rights or obligations”
she was clearly contemplating that in some circumstances, knowledge of “some aspect of the NIC scheme”, combined with a failure to make “further enquiries about his rights or obligations” could amount to a failure to exercise due care and diligence.  It must also be borne in mind that she went on to say:
“Nonetheless, it will be an unusual case in which a person is able to show that, while he made no contributions even after learning the basic features of the NIC scheme, he nonetheless exercised due care and diligence”
and this passage emphasises that the degree of knowledge of the NIC scheme held by the contributor is important, not just in its own right but also (and perhaps more importantly) in determining the extent of any further enquiries which he should have made.
Our findings on the relevant factors in this case
37.	We find that the Appellant was suffering from no disability or incapacity at any relevant time.
38.	The Appellant was born on 15 August 1932.  He was therefore approximately 23 years old at the time he left for Trinidad in 1955.  But his involvement in paid employment up to that time had been limited to his one year of “work experience” starting when he was 18 and then his vacation work during his first degree course.  He was effectively a student with some experience of the workplace on a series of farms.
39.	Up to September 1955, the Appellant clearly knew of the existence of the NIC scheme, but his knowledge of it was extremely limited.  We find that he had been given no material information about it by the National Insurance office or anyone else in authority.  He had no understanding of its long term implications for him.  He had made no claims for any benefit under it.  He regarded it simply as part of the background of being in employment, a process he was required to go through whose sole or main consequence was a deduction from his earnings akin to tax.  We are satisfied he was not aware of a direct link between NI contributions and entitlement, over 40 years later, to a state retirement pension.
40.	The only indication available to him at any time to the effect that there were issues he should consider if he were planning to work overseas was the brief note “Men who go abroad – see Leaflet N.I.38” on the back of the annual contribution card which was in his possession whenever he was not working.  We accept his evidence that he has no recollection of ever reading that note.  Having seen him give evidence before us, we are quite satisfied that he is by nature an honest, careful and diligent man.  Had he been given any reasonable indication of the possible implications of working abroad, we have no doubt he would have acted on them – as indeed he did when he first became aware of the gap in his contribution record upon his return to the UK in 1970.
41.	The Appellant admits that he took absolutely no action in relation to his NI contributions in the lead up to his departure or while he was abroad in Trinidad or Kenya.  But he explains this by saying that he simply had no knowledge or means of knowledge that there were any enquiries he should have been making.  His employers had said nothing to indicate there was an issue he needed to be considering (even though it now appears they were well aware of it and there were internal instructions for it to be brought to the attention of employees in the position of the Appellant).  The only indication from the National Insurance office was a bland seven word note, giving no hint of the potential importance of the issue, right at the end of the annual NI contribution card.
42.	HMRC had at one stage maintained (in their letter dated 6 February 2008) that the Appellant should have been aware of the “large scale publicity” that surrounded the introduction of the National Insurance scheme in 1948.  The inference was that the Appellant should thereby have been put on notice to make enquiries in the period leading up to his departure from the UK in September 1955.  This argument was not persisted with at the hearing, and rightly, in our view.  The Appellant would have been under 16 and still at school in 1948 and the publicity referred to could not in our view have had any impact on him of the type argued for by HMRC.
Balancing of the relevant factors and assessment/evaluation
43.	The main factor adverse to the Appellant in this case is that he did nothing by way of enquiry about his contribution options in the period leading up to his departure from the UK or while he was overseas.  But this has to be considered in the context of our findings about what the Appellant actually knew about the National Insurance scheme at the time and the very “low key” and unspecific way in which it was brought to the attention of insured persons generally that there may be issues to consider if they went abroad.  
44.	Also, it must be borne in mind that the Appellant at the time was a young man in his early 20’s, completing a lengthy period of training, study and work experience, who was finally about to achieve his long-held ambition of serving overseas in the Colonial Civil Service.  In the brief period between the completion of his academic studies at London University and embarking for Trinidad, he would quite understandably have been thinking of little more than the forthcoming adventure and completion of his course, and upon his subsequent return from Trinidad and almost immediate re-embarkation for a four-year tour of service in Kenya, he would no doubt have been in an even more excited and distracted frame of mind.
45.	Against that background he failed to follow up an obscure note on the back of his previous NI contribution cards (which he may or may not even have read, and which was certainly not couched in terms likely to attract attention to its potential importance) and he failed to apply his mind generally to the question of whether there was anything he should be doing in relation to the making of NI contributions while he was abroad.  Did this amount to a failure on his part to exercise due care and diligence?  In our view, in the circumstances outlined to us, it did not.
Conclusion
46.	It follows that we find the Appellant’s failure to pay NI contributions while he was overseas during the period from 1 September 1955 to 31 May 1964 was clearly attributable to ignorance or error on his part, but that the ignorance or error in question was not due to any failure on his part to exercise due care and diligence and accordingly his appeal must succeed.
47.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 29 OCTOBER 2010