Pecuniary liability principle
Under the pecuniary liability principle, where an employer settles a personal bill on behalf of an employee, whether Class 1 or Class 1A NIC are payable, depends on the way the bill is settled.
If the contract is with the employer and the employer pays directly to the supplier, PAYE cannot be operated and therefore it is reported on form P11D as a taxable benefit.
Where the employee signs the contract with the supplier and the employer either settles the bill for the employee or reimburses the employee, the payment is subject to PAYE and Class 1 NIC. It is therefore vital that close attention is paid to any relevant contract, e.g home telephone, so that the most beneficial tax treatment is secured. Unfortunately, Macleod & Mitchell Contractors Ltd (MMCL) neglected to do this and paid a heavy price when they lost their recent appeal at the First Tier Tax Tribunal.
Macleod & Mitchell Contractors Ltd (MMCL)
Both William Mitchell, the sole director and shareholder of MMCL, and his company made a joint appeal against an NIC decision served on the company and income tax assessments raised on Mr Mitchell. NIC totalled nearly £50,000 covering the tax years 2009/10 – 2013/14 and income tax approximately £28,000 for the three years ended 5th April 2014.
MMCL had paid premiums under a mixture of life insurance, critical illness and income protection policies, all of which were in the name of Mr Mitchell. The key issue, therefore, for both appeals, was whether or not the premiums should be treated as earnings from Mr Mitchell’s employment income and therefore subject to employers and employees NIC and income tax.
A key point was when the decision had been made to take out the insurance contracts it had been the intention of Mr Mitchell, and therefore of MMCL, that the policies should be in the name of the company.
Mr Mitchell approached an independent financial advisor, Mr Coll, to take out the policies. Mitchell had signed incomplete proposal forms for the insurance policies and had trusted Mr Coll to complete them correctly and finalise the arrangements. Mitchell said that he did not recall receiving copies of the completed proposal forms but did receive copies of the policies, and although he had read them he had not fully understood them.
What was very clear to the tribunal was that the first few pages of the policy schedules were in the name of Mr Mitchell and not MMCL.
In the course of preparing the company’s annual accounts, the reporting accountant found that MMCL’s bookkeeper had charged the insurance premiums to the Director’s Loan account. The accountant had taken great care to ensure that the premiums were correctly treated and had asked Mr Mitchell to confirm that the policies were in the name of the company and that they should be treated as a company expense. Mitchell stated he had checked this with Mr Coll who had confirmed that the policies were in the name of MMCL. The accountant had asked this question of Mr Mitchell at most if not all year-ends during the period in question.
According to Mitchell and his accountant, when the error had been discovered Mr Coll had stated that he was always aware that the policies should have been in the name of MMCL and initially blamed insurance companies for the error. However, in a telephone conversation with HMRC in 2014, he stated that for such policies it was the normal practice to take out the policies in the name of Mr Mitchell, with the intention that a declaration of trust should subsequently be made by Mitchell in favour of the company. Coll stated that he expected this to be arranged by the accountant and reaffirmed this in a letter to HMRC in 2015.
MMCL never sought to recover the premiums from either Mr Mitchell or the insurance companies. Thus, the benefits which Mr Mitchell enjoyed from those insurance policies, until they were assigned to MMCL, were the benefits which might have been paid out to him upon an insured event taking place.
The tribunal concluded that even if they accepted the proposition that the company had the right to recover the premiums from either Mitchell or the insurance companies, the fact was it did not do so. Once MMCL became aware of the issue in 2013, the company must have made the decision not to seek such a recovery. The appeals were therefore dismissed and the tax and NIC assessments upheld.
Apparently, Mitchell had commenced civil proceedings against Mr Coll but had not progressed these pending the outcome of the tribunal appeal.
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