[2010] UKFTT 608 (TC)

TC00849

Appeal number: TC/2010/00531

NATIONAL INSURANCE: whether the Appellant’s non-payment of  Class 2 contributions was due to the Appellant’s ignorance or error arising from his failure to exercise due care and diligence – Yes – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	Mr ANTHONY MARSHALL	Appellant

-	and 
-	
	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL:  MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE)
				LESLIE BROWN
								
Sitting in public at Employment Tribunal, Byron House, 2A Maid Marion Way, Nottingham NG1 6HS on 16 September 2010

The Appellant appeared in person

Mrs Lesley Rutherford and Mrs Lisa Storey of the National Contributions Office for HMRC 

© CROWN COPYRIGHT 2010

DECISION

Appeal
1.	The Appellant was appealing against HMRC decision dated 25 August 2009 which stated that
(1)	From 1 July 1984 to 12 July 2008 the Appellant was liable to pay Class 2 National Insurance Contributions.
(2)	From 1 July 1984 to 5 April 2002 the Appellant has not paid Class 2 National Insurance Contributions.
(3)	From 6 April 2002 to 12 July 2008 the Appellant has paid Class 2 Contributions.
(4)	His failure to pay Class 2 contributions from 1 July 1984 to 5 April 2002 was not attributable to ignorance or error on his part. However, if it was attributable to ignorance or error (which is denied) that ignorance or error was due to his failure to exercise due care and diligence.
(5)	Accordingly any class 2 contributions now paid in respect of the period 1 July 1984 to 5 April 2002 will be treated as not having been paid for the purposes of any contributory benefit.
2.	The Appellant disagreed with the decision because he wished to pay Class 2 contributions for the period from 1 July 1984 to 5 April 2002 to improve his State Pension entitlement. Currently he was entitled to 94 per cent of the basic State Pension.
3.	The various regulations dealing with Class 2 contributions impose time limits in which they can be paid. The purpose of the time limits is to prevent contributors in general from exercising options against the National Insurance fund by delaying the payment of contributions until the event against which cover is sought has already occurred. The National Insurance scheme operates on the principle of pay as you go so as to ensure fairness to the majority of contributors whose contributions are deducted regularly from their earnings.
4.	The time limit for Class 2 contributions payable in respect of a contribution week after 6 April 1983 is the end of the sixth year following the year in which liability for that contribution arises.
5.	HMRC have a discretion to treat a Class 2 contribution paid by a person after the six year time limit  as having been paid within the time limit if it is shown to the satisfaction of HMRC that
“…failure to pay the contribution before that time is attributable to ignorance or error on the part of that person or the person making the payment and that that ignorance or error [on the part of that person] was not due to any failure on the part of such person to exercise due care and diligence”. 
6.	HMRC refused to waive the six year time limit in the case of the Appellant contending that his failure to pay the contributions on time was not due to ignorance or error on his part. In the alternative the Appellant did not exercise due care and diligence. The Appellant challenged the decision on the grounds that he was not aware of the need to make Class 2 contributions because of the failure by the National Insurance Contributions Office and Inland Revenue to notify him of the requirement. Further he was not advised by DHSS of Class 2 contributions when he became self employed.
7.	The issue to be decided by the Tribunal is whether the Appellant’s failure to make the Class 2 contributions on time was due to ignorance or error on his part that was not itself due to a failure by him to exercise due care and diligence.
The Facts
8.	The Appellant was born on 7 July 1943.
9.	On 7 July 1958 the Appellant entered the National Insurance Scheme.
10.	In 1984 Class 2 contributions were paid by affixing a Class 2 stamp of the appropriate value to a contribution card or by monthly direct debit from a bank account. From 11 April 1993, payment by stamped card was abolished and replaced by a system where a self employed person would be sent a bill every 13 weeks.
11.	The Appellant’s National Insurance record showed that during his working life he made Class I National Insurance contributions in tax years up to and including the 1986-87 tax year. The record also showed that the Appellant made 29 benefit claims throughout his working life, of which 17 were made during the period from 6 April 1984.
12.	HMRC records contained notes of a conversation between the Appellant and a HMRC Inspector on 7 April 2005 in which the Appellant stated that he had not signed on because he did not have enough contributions.
13.	On 25 April 2008 the Appellant registered as self employed from 4 July 1984 following receipt of a state pension forecast. The Appellant was required under the legislation to register almost immediately as a self employed earner. In 1984 he was required to notify Department of Health and Social Security of his self employed status. The legislation has always required self-employed persons to notify the appropriate body of their self-employed status. The fact that a person may complete a self employed tax return did not constitute notice of self employed status. 
14.	On 9 June 2008 the Appellant’s National Insurance Record was updated to show he was liable to pay Class 2 National Insurance contributions for the full period of his self employment. At the same time the National Insurance Contributions Office took action not to insist on payment of the Class 2 contributions that could be collected under the Limitations Act (that is contributions prior to six years preceding the debt being discovered).
15.	The missing Class 2 contributions which were the subject of this Appeal were for the tax years commencing 1984/85 to 2001/02 (inclusive).
16.	HMRC refused the Appellant’s offer to make up the missed Class 2 contributions on the grounds that the Appellant’s failure to pay was attributable to his ignorance or error, and that if there was ignorance or error on his part it was due to him not exercising due care and diligence. HMRC issued a formal decision to this effect on 25 August 2009 which was confirmed on review dated 15 October 2009.
17.	The Appellant was, however, allowed to pay Class 3 National Insurance voluntary contributions for the tax years 1996/97 to 1999/2000 (inclusive) due to a concession arising from the introduction of a new computer system which did not have the facility to issue shortfall letters. In these circumstances the Treasury agreed to extend the time limits for the payment of Class 3 contributions at the original rates for a set period of time.
18.	The Appellant stated that in 1984 he attended a DHSS organised course for persons on benefit interested in becoming self employed. The Appellant asserted that on the course he was not informed of the requirement to notify DHSS separately of his status. The Appellant argued that he completed tax returns declaring his self employed earnings and Class 4 National Insurance Contributions, which meant that HMRC must have known of his self employed status. He believed that his failure to make contributions was due to HMRC’s negligence in not advising him about the requirement to pay Class 2 National Insurance contributions.
19.	The Appellant’s National Insurance records showed that he was sent letters informing him that he had not paid sufficient contributions to qualify for benefits in the tax years 1988/89, 1989/90, 1992/93 and 1996/97 to 2000/01 (inclusive). The Appellant contended that he had not received the said letters. HMRC sent the letters from 1994 to 5 Primrose Way, Grantham which the Appellant left in 1992 when he moved to 13 Blackburn Close, Grantham. The Appellant submitted that HMRC must have known of his Blackburn Close address from 1999 when he took up part-time employment, and paying tax as an employee.
20.	HMRC adduced in evidence Notes on Self Employment which accompanied the self assessment tax returns for 1999/2000 and 2000/01. The Notes stated that
“Self-employed people are generally liable for the flat-rate Class 2 contributions…. Class 2 contributions give entitlement to certain contributory benefits including retirement pension. Benefit may be lost if Class 2 contributions are not paid or are paid late. If you have not already registered as self employed for National Insurance Contributions you can obtain more information about paying by ringing the Self Employment Services Call Centre on 0845 9154655 or by writing to the Inland Revenue National Insurance Contributions Office at (address given)”.
21.	The Appellant accepted that he received a tax return for 1999/2000 but he could not say whether he received the accompanying Notes.
22.	HMRC stated that the National Insurance authorities have always made available to the public printed information giving advice on National Insurance for the self employed. HMRC supplied the Tribunal with examples of the printed information available in 1984 (NI.4/Jan 84) and in 1993 (NP18 (CA 03) March 1993). HMRC also pointed out that in 2001 it undertook a concerted publicity campaign including press releases and radio broadcasts advising self-employed persons of the need to register as self employed, and of the penalty of ₤100 for late registration.
Reasons
23.	The Appellant’s case essentially comprised two propositions, namely:
(1)	The relevant authority had not informed him of the requirement to register separately as a self employed person and pay Class 2 National Insurance contributions. In those circumstances he was ignorant of his obligation to make Class 2 contributions.
(2)	During the disputed years he completed self assessment tax returns for self-employment and made Class 4 contributions on the profits. HMRC must, therefore, have known that he was self-employed and should have advised him of the under payment of Class 2 contributions.
24.	For the Appellant to succeed with his Appeal he must bring himself within the exception  of regulation 6(1) of the Social Security (Crediting and Treatment of Contributions and National Insurance Numbers) Regulations 2001, which states that
“…failure to pay the contribution before that time is attributable to ignorance or error on the part of that person or the person making the payment and that that ignorance or error [on the part of that person] was not due to any failure on the part of such person to exercise due care and diligence”. 
25.	Regulation 6(1) comprises two separate limbs, both of which must be met by the Appellant to enable him to make late payments of Class 2 contributions.  The burden of proving that the two limbs of regulation 6(1) have been satisfied rested on the Appellant (see Mr Justice Owen in Walsh v Secretary of State for Social Security (28 March 1994, unreported), QBD, at page 10).
26.	The first limb to be overcome by that Appellant was that his failure to pay was due to ignorance or error on his part. Patten J in Revenue and Customs Commissioners v Thompson  [2007] STC 240 at paragraph 15 explained the first limb in the following terms:
“In order for the taxpayer to demonstrate that the exception in regulation 6 of the 2001 Regulations applied, It seems to me that, in order for a taxpayer to be able to demonstrate that a failure to pay National Insurance Contributions was attributable to ignorance or error, in broad terms he needs to prove one of two things: either he must show that he had a total ignorance of the existence of the National Insurance regulations and of his statutory obligation to make payment, or he must be able to point to particular circumstances existing at the time when the payments fell due which in effect robbed him of a knowledge and understanding that the payments fell due at that time. There may of course be cases where that test would be satisfied. One can easily imagine that, in the case of somebody who suffers, for example, a serious mental breakdown or some physical or mental difficulties of that kind, they may be robbed of any real sense or appreciation of the need to make the payments which fall due. But those cases, by their very nature, are likely to be rare and there is no suggestion that those conditions applied in the present case”.
27.	In order for the Appellant to overcome the ignorance limb he must prove on the evidence his total ignorance of the National Insurance regulations and of his statutory obligations to make payment. The Tribunal finds that the Appellant made contributions to the National Insurance scheme, albeit as an employed earner, and that he made benefit claims which he knew were linked to his National Insurance contributions. In view of those findings the Tribunal decides that the Appellant was not totally ignorant of the National Insurance regulations. 
28.	The Appellant’s evidence on a potential error on his part was that HMRC was aware of his self employed status because he completed self employment tax returns which assessed him for Class 4 contributions. HMRC had an obligation to advise him of the separate requirement to notify the relevant authority of his self employed status. In those circumstances he was unaware of the requirement to give a separate notification of status and make additional Class 2 contributions.
29.	Mr Justice Owen in Walsh v Secretary of State for Social Security (28 March 1994, unreported), QBD at page 13 dealt with  a similar contention made by the Appellant in Walsh:
“… He (Mr Walsh) says, ‘in those circumstances, and with my knowledge, I was entitled to rely upon the fact that I was not chased up. It encouraged me in my error. When I realised that I was paying Class 4 contribution, I thought that this must be all that was required of me’. That was reinforced by the fact that there were no visits from the Inspector despite his extensive power”. 
30.	Mr Justice Owen noted that it was said that Mr Walsh had no right to make that assumption. In any event Mr Walsh still had to overcome the due diligence limb of regulation 6(1):
31.	Despite Mr Justice Owen’s reservation regarding payments of Class 4 contributions, the Tribunal accepts that the Appellant’s failure to pay the Class 2 contributions in this Appeal was due to an error on his part, in the sense that he held a mistaken belief that he had notified HMRC of his self employed status through completing self employment tax returns and paying contributions, albeit Class 4 ones.
32.	The issue, therefore, was whether the Appellant’s error was due to his failure to exercise due care and diligence. 
33.	On the question of due diligence Patten J in Revenue and Customs Commissioners v Thompson  [2007] STC 240 at paragraph 24:
“But for the taxpayer to succeed on the appeal, he would, in my judgment, have needed to establish not simply that he failed to receive reminders from the Revenue to pay the National Insurance due, but that, through no fault of his own, he was simply in ignorance that he had the liability, or was under some misapprehension (again through no fault of his own) that no payments were required to be made”.
34.	Special Commissioner  J F Avery Jones held  in Mrs Adedolapo Fehinola Adojutelegan v Derek Clark (Officer of the Board)  SpC430 held on due diligence that
“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 a contributor personally contacts them. The Appellant had failed to make any enquiries and therefore not exercise due care and diligence”.
35.	Special Commissioner Dr D Williams in Philip Langley Rose v HMRC  20 September 2006 at paragraph 48 stated that 
“Was the ignorance or error the result of his failure to exercise due care and diligence? Mr Nawbatt cited a number of authorities about the test to me in the argument. But I do not consider that the phrase presents any difficulty in this case. 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 not to enquire or not to pay.  In the context of the current question of protecting his NI record, he chose not to exercise due care and diligence in protecting his contribution record”.
36.	The Tribunal considers that the above authorities and Special Commissioners’ decisions make it clear that the exercise of due care and diligence required positive steps on the part of the Appellant at the requisite time to clarify the position regarding his National Insurance contributions. It is not sufficient for the Appellant to plead that it was HMRC’s fault in not sending him the appropriate information and reminders.
37.	The Tribunal finds the following facts in respect of the issue of due care and diligence:
(1)	The appropriate authorities took extensive steps to advise self employed persons of their obligations to register separately as self employed and pay Class 2 contributions. This was evidenced by the printed guidance brochures and the 2001 media campaign. 
(2)	The appropriate authority notified the Appellant on eight occasions since 1988/89 that he had not paid sufficient National Insurance contributions. The Appellant denied that he received the correspondence because they were sent to his former address. The Appellant, however, was under an obligation to notify the appropriate authorities of his change of address.
(3)	The Appellant accepted that he completed tax returns for self employment during the relevant period. The accompanying notes to those returns explicitly reminded self employed persons of their obligations to register as such and make Class 2 contributions. The Appellant denied that he received the notes. The Tribunal does not accept the Appellant’s denial. In the Tribunal’s view, the more probable explanation was that he received the notes but did not read their contents.  
(4)	The Appellant knew that he did not have sufficient contributions to make a benefit claim well before 2008 (see the evidence of the contact with the Tax Inspector in 2005 recorded in HMRC’s self assessment notes).
(5)	The Appellant made no enquiries of HMRC and or the appropriate contributions authority of his obligations as a self employed person until 2008 when he received his state pension forecast.
38.	The Tribunal is satisfied on the facts found that the Appellant took no steps at all to enquire about his responsibilities as a self employed person during the relevant time. Further the Appellant closed his eyes to the wide range of public information available to self employed persons about their responsibilities under the National Insurance scheme. Finally the Appellant ignored the specific information about his self employed status and contribution record supplied by the relevant bodies. The Tribunal, therefore, decides that the Appellant’s error regarding the non-payment of Class 2 National Insurance contributions was his fault in that he failed to exercise due care and diligence.
Decision
39.	The Tribunal holds that
(1)	The Appellant was not ignorant of his obligations under the National Insurance Scheme.
(2)	The Appellant  was in error in holding a mistaken belief that he had notified HMRC of his self employed status through completing self employment tax returns and  paying contributions, albeit Class 4 contributions.
(3)	The Appellant’s error was due to his failure to exercise due care and diligence.
40.	The Tribunal dismisses the Appeal and upholds HMRC’s decision that any Class 2 contributions now paid in respect of the period 1 July 1984 to 5 April 2002 will be treated as not having been paid for the purposes of any contributory benefit.
41.	The Tribunal notes that a recent change in the law from 6 April 2009 permits certain people to pay additional Class 3 (voluntary) contributions in a wider range of  circumstances than hitherto. The Appellant may wish to make enquiries of The Pension Service to see whether he can benefit from the changes. 
42.	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.

MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 25 November 2010