The exchange of letters between the CIOT and the Inland Revenue appears below. In November 2003 the Chartered Institute of Taxation (CIOT) wrote to the Revenue about the article in Tax Bulletin 65 concerning the decision in the Tullett and Tokyo case. The text of our letter is reproduced below:
We write with regard to the article in Tax Bulletin 65 concerning National Insurance Contributions (NICs) on Funded Unapproved Retirement Benefit Schemes (FURBS), which was published in June this year.
In that article the Inland Revenue reaffirmed their view that contributions to FURBS are subject to Class 1 NICs. This is further to the review undertaken by the Inland Revenue in the light of the case of Tullett & Tokyo Forex International Ltd and Others v Secretary of State (“Tullett”). It also followed discussions between a number of taxpayers, and their advisers, and the Inland Revenue on this matter and, indeed, refunds of NIC that had previously been made by local offices.
The position of the Chartered Institute of Taxation has been, and remains, that we do not consider that Class 1 NIC is in fact due on contributions to a FURBS. However, we accept, of course, that you are entitled to a different view.
In the context of Tullett, we thus assume that you consider that the position of the gilts paid into the insurance policies in Tullett can be differentiated from contributions into a FURBS.
However, we were concerned that the article does not actually say this. Instead, it appears to reject the decision of the courts in Tullett. Whilst it is clearly open to the Revenue (and indeed taxpayers) to distinguish a case on the facts, the Tax Bulletin article seems to go much further. For example, the Bulletin says that Mr Justice Collins in the High Court:
“put too much emphasis on Schedule E tax case law when the three appeals [in Tullett] concerned the interpretation of NICs legislation.”
The Bulletin then implies that inadequate consideration was given in the judgement to the difference between “earnings” and “emoluments” and to the meaning of “earnings” within Social Security legislation.
These comments make it appear as if the Revenue do not accept the judgement of the courts, and that by putting too much emphasis on Schedule E tax case law in considering a NICs case Mr Justice Collins effectively wrongly decided Tullett. We are sure that this is not what is meant, but it would be helpful if you could explain why the payment of short-dated gilts into life insurance policies cannot be regarded in the same way as payments into a FURBS, so that we can better understand your technical position.”
The Revenue replied in December 2003 by saying:
“It is not correct to say that the Inland Revenue rejects the Tullett judgment. The Revenue applied that decision to all other cases involving payments made to single life insurance policies where the facts were identical to those in Tullett. But we do not accept that the judgment can or should be applied to other cases where the facts can be distinguished. We believe that is the case with payments into FURBS – a view supported by legal advice.”
The Institute wrote again in January saying:
Thank you for your letter of 18 December 2003 but, with respect, we do not think it “fully” answers our letter of 18 November.
We appreciate that you have now made it absolutely clear that you do not reject the Tullett decision, and this is welcome. But we did specifically ask if you could explain why the payment of short-dated gilts into life insurance policies could not be regarded in the same way as payments into FURBS, so that we could better understand your apparent rejection of the application of the case in other circumstances.
Your letter does not, however, provide this explanation, but rather asserts that the two situations can be distinguished on the facts. We recognise that your view is based on legal advice, but it would be more “helpful” to give an indication as to what that legal advice is, and which material facts are different.
Perhaps it would assist if we set out why we think the two situations are the same.
In Tullett & Tokyo it was decided that, where a payment (in that case, a gilt) is made to a third party (in that case, a life assurance company) for the benefit of an employee, any "earnings paid to or for the benefit of" the employee for the purposes of s6 SSCBA 1992 is what the employee receives, not the payment itself.
(i) where the payment discharges a debt of the employee, there is no real difference between what the employee receives (ie the discharge of the debt) and the payment made by the employer (which is the equivalent of money paid to the employee) but
(ii) where the payment procures a benefit in kind for the employee (in that case, an enhancement in the value of the life assurance policy), the earnings are the benefit itself (not the payment made by the employer) and, accordingly, the amount of the earnings is, in principle, the second-hand value of the benefit.
In Tullett & Tokyo, the enhancement in the value of the life assurance policy fell within sub-para (ii) above and, at the relevant time, a benefit in kind consisting of an enhancement in the value of an asset belonging to the employee was disregarded as earnings by virtue of reg 19(5)(b) SS(C)R 1979.
As far as we can see, a contribution to a FURBS falls clearly within sub-para (ii) above, and therefore should only be subject to NICs on its second-hand value and disregarded as earnings by the current day equivalent of reg 19(5)(b).
The distinguishable facts seem to be as follows:
(a) contributions to a FURBS tend to be made in cash, whereas the contribution in the Tullett & Tokyo case was made in gilts. This distinction is irrelevant for section 6 purposes. In the Tullett & Tokyo case, Collins J discussed the cash payments in the Overdrive case without drawing any distinction between the two methods of making the contribution;
(b) contributions to a FURBS are generally contributions to a fund backing a pension policy belonging to an employee or a class of employees, whereas the contribution in the Tullett & Tokyo case was to a single life assurance policy held by an individual employee. It is difficult to see that this makes any relevant difference.
We would be glad if you would explain why you, and your lawyers, think contributions to FURBS remain within the charge to Class 1 NICs. I am sure you will understand that it is easier for taxpayers to accept the authority of the Revenue’s views expressed in the Tax Bulletin if they can see and understand the rationale on which they are based.”
The Revenue’s reply to this letter has just been received, with an apology for the long delay. It says:
“I agree with what you say about what was decided in the Tullett & Tokyo judgement. Mr Justice Collins decided that “…the payment of the gilts to the insurers was not “earnings paid…for the benefit of the earner” within the meaning of s.6(1) of the 1992 Act…” He concluded that the earnings was what the employee receives.
On that basis what the employees received was the enhancement in the value of a life assurance policy. As that is a payment in kind, it was disregarded in the calculation of the employees’ gross earnings for the purposes of assessing the amount of Class 1 NICs payable by virtue of regulation 19(1)(d) of the Social Security (Contributions) Regulations 1979.
Where I part company with you is in your assertion that, in the case of a payment into a FURBS, the earnings paid to or for the benefit of an employee is not that payment, but what the employee receives as a result of that payment. In other words, applying the reasoning in Tullett.
But, as explained in Tax Bulletin 65, the Revenue does not accept, for the reasons given, that the reasoning in Tullett applies to payments into a FURBS. Those reasons are, in effect, a précis of our legal advice. I’m not sure what more I can usefully add to those.
Finally a comment on your last paragraph. I’m not sure that, whatever explanations the Revenue gives, employers, their agents etc, will be more willing to accept our view of the position. Indeed, it is evident that whatever we say, some will simply not accept our view. That, of course, is their right. Ultimately, an employer can ask for its case to be determined by the tax appeal Commissioners.”
The Institute has decided not to pursue the correspondence but is publishing this information, with the Revenue’s agreement, for the benefit of CIOT members.
This information has been brought to you by the Technical Department (tel 020 7235 9381).