The special commissioners decided that, although the assignment of book debts constituted a payment of earnings, it did not involve a payment in kind for National Insurance purposes and did not constitute trading arrangements for PAYE.

Facts

These appeals concerned the efficacy of a scheme to pay directors by way of the assignment of book debts in order to avoid National Insurance contributions (NICs) and PAYE. The taxpayers were introduced to the scheme by tax advisers who informed them that the main risk in the scheme was that the debtor would default after the assignment to an employee of the debt. In such a case, the employee to whom the debt was assigned would be taxable on the value of the debt when it was assigned, with no income tax or capital gains tax relief for later bad debts. In each case, the taxpayers were private limited companies and HMRC issued notices of decision under s. 8 of the Social Security Contributions (Transfer of Functions, etc) Act 1999 (‘SSCTFA 1999’) and notices of determination under reg. 49 of the Income Tax (Employments) Regulations 1993. The taxpayers appealed against those notices.

Issues

Whether the assignments of trade debts constituted payments of ‘earnings’ within s. 3 and 6 of the Social Security Contributions and Benefits Act 1992 (‘SSCBA 1992’); whether the assignments involved a ‘payment in kind’ within reg. 19(1)(d) of the Social Security (Contributions)Regulations 1979 such that they fell to be excluded from the computation of earnings for NIC purposes; if the assignment was a payment in kind, whether reg. 19(5) of the Regulations required the assignment to be treated as otherwise than a payment in kind; whether ‘trading arrangements’ existed for the trade debts within Sch. 1A, para. 9C of the Regulations; whether the principles of statutory construction stated by the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (HMIT) [2004] BTC 414 (‘BMBF’) and IR Commrs v Scottish Provident Institution [2004] BTC 426 required or allowed the tribunal to come to any different conclusion.

Decision

The special commissioners (Dr John Avery Jones and Adrian Shipwright) (dismissing the appeal) said that previous appeals relating to schemes for avoiding NICs and PAYE had all followed the same pattern: (1) the employer started with cash that it intended to give the employee, (2) the employer bought an asset, usually of an outlandish variety, such as platinum sponge, but sometimes an asset that could be held for investment, such as gold Napoleons, making an arrangement that the seller would buy it back again from the employee, (3) the asset was transferred to the employee, (4) the asset was sold back to the original seller by the employee. Universally they had failed to achieve the purpose of avoiding NICs and PAYE. The scheme in this appeal was different in that the employer did not start with cash. It did not buy an asset; the book debts arose from its normal trading. No arrangements were put in place with a third party for realising the book debt in the hands of the employee; the nature of book debts was that they turned into cash. The employee took the bad debt risk; in the other cases he took a risk of price changes in the asset. On the other hand, and in common with the other cases, the scheme was a mechanism to deliver cash and a book debt was not something that could be held for any enjoyment because it did not produce any benefits other than cash; it could be turned into cash earlier by dealing with it, although that was not the intention here, but there was no possibility of holding it for longer than it took to produce cash. The issue in this appeal was whether these differences led to a different result.

Payment in kind

The correct approach following BMBF was first, to decide, on a purposive construction, exactly what transactions would answer to the statutory description and secondly, to decide whether the transaction in question did so. The purposive construction of benefit in kind in the context of reg. 19(1)(d) was to exclude from NICs those benefits that could realistically be used and enjoyed in kind by the recipient, on the basis that if they were included there would be difficulties of valuation and timing (MacNiven v Westmoreland Investments Ltd [2001] BTC 44; [2003] 1 AC 311 considered).

While a book debt's nature was that it was expected to turn into cash in a short time, it was difficult to see why an employer would want to provide book debts in order for them to be held by the employee as they were incapable of being enjoyed as such as they did not produce any benefits. Although they could be dealt with earlier than waiting for them to turn into cash, for example by assignment or borrowing against them, that was not the intention of the taxpayers. Book debts were unlike the other disregarded debt-type assets, which were all of a type normally held as investments because they produced income or gain. Where a debt was payable on demand, as was the case with a cheque, it was traditionally treated as cash even though conceptually it was a debt due from the bank, and in that respect not unlike the book debts in the present appeal. On the facts of the present case, the regulation was both capable of applying and should be applied to exclude the book debts from the expression payment in kind.

The bad debt aspect did not make any difference to the analysis. It was a risk to which attention had been drawn by the taxpayers’ advisers. The scheme was still a mechanism to deliver cash if the amount of cash was capable of variation, even though the expected variation was minimal in the short time that it was expected to be held by the employee. As regards the time of payment, hindsight could not be used since the question was whether the facts were such that NICs were payable on the date of the assignment. Although applying a Ramsay approach to analyse payment expected to be over a period of up to three months as a cash payment at the time of the assignment was an extreme case, it was appropriate in this case because the intention was never that the directors should enjoy the book debts as such, and a book debt was incapable of being enjoyed in any way by merely holding it. It was better described as a mechanism to boost the balance on the directors’ loan accounts, than as a mechanism to deliver cash, but it was still not a payment in kind because the intention was never that the book debts should be enjoyed in kind.

PAYE

The PAYE issue was similar. The word ‘payment’ in this context was capable of including facts under which an interest under a settlement which was ostensibly contingent although there was no risk of the contingency not occurring was acquired by the employer, assigned to the employee and fell into possession within a matter of days. The word ‘payment’ in ICTA 1988, s. 203 had to be applied to include the assignment of the book debts.

Trading arrangements

The issue which was applicable both to NICs and PAYE with regard to trading arrangements was whether the book debts were an asset for which trading arrangements existed (the only difference was that for PAYE the payment was deemed to be the amount obtained by the trading arrangements, and the date was the date of the assignment (s. 203F(1)). The taxpayers’ arrangements for collecting the trade debts were not arrangements for the assigned trade debt; nor were they for the purpose of enabling the director to obtain an amount similar to the expense incurred in the provision of the asset. Since the arrangements for collecting the debts already existed they were not arrangements for the purpose of enabling the director to obtain that amount. The purpose of arrangements was what the arrangements set out to achieve and the reason for their existence. Here the arrangements for collecting debts existed to collect the debts on behalf of each of the taxpayers; they had merely been used on this occasion to obtain that amount for the director.

(2006) Sp C 559. Decision released 22 August 2006.