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Taxpayer wins on purposive interpretation

09 November 2012

In recent years, it is usually HMRC pressing the courts to identify the purpose of the legislation and to reject a narrow interpretation of the legislation.

However, the shoe was on the other foot in Marcia Willett Limited v HMRC [2012] UKFTT 625 (TC).

Marcia Willett Limited (‘the Taxpayer’) appealed to the First-tier Tribunal (Tax Chamber) (‘the Tribunal’) against a decision of HMRC under section 8 Social Security Contributions (Transfer of Functions, etc) Act 1999, relating to the payment of Class 1A national insurance contributions (‘NICs’).

The relevant legislation is set out at section 10 of the Social Security Contributions and Benefits Act 1992 (‘SSCBA’). Section 10 provides that:

“10(1) Where- (a) for any tax year an earner is chargeable to income tax under ITEPA 2003 on an amount of general earnings received by him from any employments (“the relevant employment”),

(b) the relevant employment is both –

(i) employed earner’s employment, and

(ii) an employment, other than an excluded employment within the meaning of the benefits code (see Chapter 2 of Part 3 of ITEPA 2003),

(c) the whole or part of the general earnings falls, for the purposes of Class 1 contributions to be left out of account in the computation of the earnings paid to or for the benefit of the earner, a Class 1A contribution shall be payable for that tax year, in accordance with this section, in respect of that earner and so much of general earnings as so falls to be left out of account.”

The specific charging provision of the Income Tax Earnings and Pensions Act 2003 (‘ITEPA’), referred to in section 10, is section 203 of ITEPA and this determines the amount of a cash benefit received by an employee and that is imported into section 10. (The cash equivalent of the amount treated as earnings). In particular, section 203(2) provides that:

“the cash equivalent of an employment related benefit is the cost of the benefit less any part of that cost made good by the employee to the persons providing the benefit.”

The facts

The Taxpayer is a family owned close company whose business is exploiting the writing skills of its two directors. The Taxpayer owned a property, occupied by the two directors. The directors paid the bills relating to the property, but the Taxpayer paid for structural repairs to the property. It was common ground that it was not the intention of the Taxpayer to provide benefits in kind to the directors.

In order to remove the income tax charges, the Taxpayer “made good” the benefits in kind under section 203(2) ITEPA on 6 May 2008 by an adjustment to the directors’ company loan accounts. This had the effect of removing the income tax charge under section 203 ITEPA for each of the relevant periods.

However, the Taxpayer was charged Class 1A NICs as well as income tax in respect of the benefits in kind arising in relation to the property in accordance with section 10 SSCBA. The making good payment was not made until sometime after the due date for each of the Class 1A contributions had passed.

The Tribunal had to decide whether the fact that any income tax liability under section 203 had been removed as a result of the Taxpayer “making good” the benefits in kind, also meant that the section 10 SSCBA requirement to account for Class 1A NICs is removed.

HMRC’s arguments

HMRC’s argued that the obligations under section 10 SSCBA remained in force despite the fact the any related income tax charge had been removed. The section 10 obligation is determined as at the time of the due payment date under paragraph 71 of the Social Security (Contributions) Regulations 2001 (“the Regulations”). Anything which happens subsequently cannot alter that original charge and there is no provision in the NIC legislation confirming that “making good” removes a Class 1A obligation.

HMRC argued section 10 SSCBA must be read as subject to an “implied limitation that the earner must make the payment before the tax liability for the year becomes due” and therefore the obligation to pay the Class 1A NICs cannot be changed by events subsequent to the payment due date.

HMRC contended that the timing rules at paragraph 71 of the Regulations are effectively a charging provision, crystallising the Class 1A obligation on that date.

Taxpayer’s arguments

The Taxpayer argued that section 10 SSCBA is dependent on the existence of a charge under section 203. If a making good payment had removed the section 203 income tax charge, it must also remove the section 10 Class 1A payment obligation. The making good provisions in s 203 are an integral part of the calculations of the benefits which are chargeable to tax. The ITEPA is a comprehensive charging code and the SSCBA is totally dependent on a charge arising under ITEPA.

The Tribunal’s decision

The Tribunal agreed with the Taxpayer that there can be no charge to Class 1A NICs in circumstances where there is no income tax charge and that the time for payment rules in the Regulations cannot override the provisions of the primary legislation.

The Tribunal considered the primary legislation was clear. Section 10 SSCBA and section 203 ITEPA are inter-dependent and a Class 1A NIC charge can only arise when there is an income tax charge. Whilst the Tribunal did agree with HMRC that there is no express wording in section 203 that a “making good” payment has retrospective effect for the purposes of section 10, the Tribunal was satisfied that on a plain reading of section 203(2) a “making good” payment extinguishes an income tax charge from the beginning and that therefore there are no general earnings, or income tax charge to which section 10 can apply.

This interpretation is consistent with both the purpose of the NIC legislation, which is to charge benefits to tax only to the extent that they are actually received and in line with the general approach of UK tax legislation, which allows for the taxpayer’s chargeability to be altered by subsequent changes of fact or law. The general structure of UK tax legislation is that a tax liability can be impacted by future events; losses can be carried back to earlier periods, tax returns can be kept open for 12 months or longer in some cases, HMRC can amend tax returns on the basis of facts “discovered” after the event. The Tribunal highlighted two significant objections to HMRC’s approach to statutory interpretation. Firstly, is that the Regulations are made pursuant to the primary legislation, section 175 SSCBA. It is a principle of UK law that subordinate legislation cannot go beyond the scope of the primary legislation to which it is subordinate. Secondly, in cases of doubt, subordinate legislation should be construed in the light of the enabling act – in this case the SSCBA.


HMRC frequently argue for a purposive approach to legislative interpretation when it suits their case, and in many instances they are successful when such an approach is adopted by the courts and tax tribunals. The narrow approach they adopted in this case is therefore somewhat surprising, and demonstrates an inconsistency in their approach to statutory interpretation. It would appear that they are not averse to adopting a narrow and more literal approach when the circumstances of the case suits them to do so. The Tribunal’s emphatic rejection of such an approach in this case is to be welcomed.

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