The First Tier Tribunal (FTT) has found in favour of a former ‘psychedelic soul’ rock musician of state pension age who was seeking to overturn an HMRC ruling preventing him from making over 30 years of late payments of backdated Class 2 National Insurance contributions (NICs), on the grounds that this was not due to a failure to exercise due care and diligence
The case concerned Richard Thomas, who in the 1960s was the drummer with the Birmingham group Breakthru, before joining prog-rock band Jonesy and then forming the group Gold who were originally a pop act but later became one of the most successful bands to record advertising jingles. [Richard Thomas and the Commissioners for Her Majesty’s Revenue and Customs, [2016] UKFTT 735 TC05463].
The tribunal heard that Thomas left school in 1966, was employed for two years and then became a self-employed musician and paid 18 Class 2 NICs in 1968–69. He went on to have periods where his income was so low that he was not required to pay NICs, a period of employment, and in 1975 he had no work at all and although his NIC record was not sufficient to claim unemployment benefit he was entitled to social security payments.
In 1975 the NICs scheme was reconstructed and while the flat rate of Class 2 NICs continued as the basis of entitlement to benefits for self-employed workers, Class 4 NICs were introduced as a profits based change for the self-employed.
In 1976 Thomas resumed work as a self-employed musician and between 1976 and 1978 his income rose due to the success of TV jingles and other work. In 1978 Thomas appointed an accountant to prepare his tax returns. Thomas asked his accountant about the Class 4 NICs on his return and was told that they were his self-employed NICs.
In 1982 his accountant advised him that his earnings had exceeded the VAT threshold, and he accordingly registered for VAT as a self-employed trader.
Between 1978 and 2014 Thomas did not receive any correspondence about his failure to pay Class 2 NICs and although the NIC agencies ran publicity campaigns Thomas did not see or hear them; while his tax returns would have included information about paying Class 2 NICs these were with his accountant.
Shortly before his 65th birthday Thomas contacted the Pension Office and was advised that there was no record of his self-employment and that he was last recorded as unemployed in 1976.
He then entered into correspondence with HMRC about paying Class 2 NICs for the period 1 January 1976 to his retirement date to restore his NIC record. This was allowed for a period of six years from 6 April 2008 to 5 April 2014, but HMRC told Thomas that he would not be given any credits for the period prior to 6 April 2008. HMRC also decided that in these circumstances it would not require him to pay the Class 2 NICs due for the period prior to 6 April 2008.
Thomas appealed against this decision, requesting to make payments late under the Social Security (Crediting and Treatment of Contributions, and National Insurance Numbers) Regulations 2001 (SI 2001/769), reg. 6 (and previous legislation). This was on the basis that his failure to pay the NICs on time was attributable to his ignorance or error, but that the ignorance or error was not the result of a failure to exercise due care and diligence.
In their deliberations, the FTT considered Thomas’s enquiries and knowledge of the NIC scheme and his behaviours in relation to other taxation issues. The FTT found the musician was not familiar with the Class 2 NICs system, as he had only paid 18 Class 2 NICs in 1968–69 and his remaining pre 1976 NIC payments were Class 1 NICs.
After Thomas had resumed his self-employment in 1976 he appointed an accountant to ensure that his affairs were in order. He had asked his accountant about Class 4 NICs and had accepted the response that it was his NICs contribution as a registered self-employed person.
Thomas’s behaviour with regard to his other tax affairs supported his claim that he would have paid Class 2 NICs if he had known that they were payable.
The tribunal held that the fact that Thomas resumed self-employment at the same time as the reconstruction of the NICs scheme and the introduction of Class 4 NICs (collected under a separate method from Class 2 NICs) could well have contributed to both his misunderstanding that payment of the new Class 4 NICs was his pension contributions payment and his contribution record falling between the two collection agencies, and these factors reinforced the assumption that he made based on his accountant’s response to his enquiry.
In conclusion that FTT found that Thomas had discharged the onus of proof that his ignorance or error was not due to a failure on his part to exercise due care and diligence. Accordingly the appeal was allowed and Thomas was entitled to make late payments of Class 2 NICs that could be carried back and treated as paid in the Class 2 NICs liability period.
Meg Wilson, CCH tax writer, said: ‘It is surprising that in a period of almost four decades the self-employed individual in this case had no awareness of Class 2 NICs, especially as he had an accountant.
‘However it does highlight that having two classes of NICs for the self-employed is confusing. This is part of the reason why the Office of Tax Simplification recommended that Class 2 NICs be integrated into Class 4 NICs, which is expected to take effect from April 2018.’
Richard Thomas and the Commissioners for Her Majesty’s Revenue and Customs, [2016] UKFTT 735 TC05463 is here.
