HM Revenue and Customs v Fenton

MR JUSTICE RICHARDS: This is an appeal by way of case stated under Regulation 22 of The General Commissioners (Jurisdiction and Procedure) Regulations 1994. Whilst those regulations have been revoked, under transitional arrangements they continue to apply to the decision under appeal.

By their decision dated 24 March 2009 the General Commissioners upheld the claim of Michael Fenton to the repayment of class 3 voluntary national insurance contributions paid during three years, from 6 April 2003 to 5 April 2006, totalling £1,150.40. The Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) appeal against this decision.

Mr Fenton has not appeared at this hearing, but he has asked the court to take into consideration comments which he has sent in writing. The points which he makes arise in any event on the consideration of this appeal and are, I hope, addressed by this judgment without needing further specific reference to them.

The national insurance system at the relevant time was so far as relevant governed by the Social Security Contributions and Benefits Act 1992 (“the 1992 Act”) and the Social Security Contributions Regulations 2001 (“the 2001 Regulations”). The premise underlying the national insurance system is that contributions will secure particular benefits. The relevant benefits in this case included the basic state pension and bereavement allowance. The maximum amount of benefits would be secured only by contributions made over a specified number of years, called qualifying years.

Class 3 contributions entitled a male contributor to a full basic state pension if contributions were made for 44 qualifying years. The rules for the entitlement to a full bereavement allowance are more complex, but broadly speaking the more qualifying years’ contributions paid, the higher the percentage of the allowance which became payable. A person may in certain circumstances make voluntary contributions with a view to securing benefits, but subject to certain restrictions contained in Section 14 of the 1992 Act and Regulation 49 of the 2001 Regulations (referred to as precluded class 3 contributions).

On application by the contributor precluded class 3 contributions must be refunded (see Regulation 56 of the 2001 Regulations). Contributions must also be refunded if they have been paid “in error”, and application for their repayment is made by the contributor (see Regulation 52 of the 2001 Regulations). Regulation 52(9) defines error as follows:

“In this regulation “error” means, and means only, an error which:

(a)

is made at the time of the payment; and

(b)

relates to some past or present matter.”

Mr Fenton was made redundant in October 2002. He was informed that he did not have enough qualifying years to qualify for a full basic state pension, but in literature sent with his pension forms he was informed that he could pay voluntary class 3 contributions to improve his future pension and bereavement allowance. He decided to pay voluntary class 3 contributions in order to improve his entitlement to the basic state pension. His own understanding was that he had paid sufficient to be entitled to a full bereavement allowance. He therefore paid the contributions to which this appeal relates.

In May 2006 the government announced a number of proposals to reform the national insurance system, including the equalisation between men and women of the number of qualifying years required to secure the maximum basic state pension for those retiring after 6 April 2010. The maximum number of years for men would be reduced to 30. These changes were effected by the Pensions Act 2007.

In September 2006 Mr Fenton received a letter from HMRC explaining these changes, from which it was clear that he would not need to make any further voluntary contributions in order to become entitled to the full state basic pension. He cancelled his direct debit by which his contributions were paid. He requested repayment of the contributions he had made since the beginning of that tax year, that is to say 6 April 2006, and as found by the General Commissioners he was refunded £166.10 in respect of the period from 6 April 2006 to 9 September 2006 because, having cancelled his direct debit, he would not derive any benefit from his payment of national insurance contributions for that year. His entitlement to a refund of the contributions made in that year stemmed from a combination of Regulation 49(1)(b) and Regulation 56 of the 2001 Regulations.

Mr Fenton had achieved 30 qualifying years before April 2003. He claimed a refund of all his voluntary contributions during the three years ended 5 April 2006 on the grounds that they were paid in error.

HMRC rejected his claim for a refund made on that basis and he appealed that decision to the General Commissioners. The General Commissioners rejected his appeal so far as it related to a claim based on his contributions having been made in error. In my judgment, they were right to do so. The definition of error in Regulation 52(9) is expressly limited to an error (a) made at the time of payment and (b) relating to some past or present matter. During the three years in question Mr Fenton made no error. Under the relevant legislation then in force he needed 44 qualifying years to secure his full entitlement of the basic state pension and his contributions were made for that purpose. This changed only with the publication of the reform proposals and subsequent enactment of the proposal to reduce the number of qualifying years to 30.

Nonetheless the General Commissioners upheld Mr Fenton’s claim for repayments on the grounds, as it appears from their case stated, that HMRC could not show that in the event the contributions in question had increased Mr Fenton’s entitlement to bereavement allowance. They appear to have based this on the terms of a letter dated 13 December 2007 from HMRC to Mr Fenton. The letter so far as material reads as follows:

“As you know, the Pensions Act 2007 made changes to the qualifying conditions which are needed to obtain a basic State Pension. However it did not change the qualifying conditions which are needed to obtain bereavement benefits such as Widowed Parent’s Allowance and Bereavement Allowance. Such benefits can only be derived from the record of the deceased husband.

I appreciate the point you make about wishing to have a refund of the Class 3 contributions you paid during the above years because they do not count for basic State Retirement Pension. However those contributions still count, and would be needed, to help you satisfy the qualifying conditions for bereavement benefits should your wife ever be in need of them.

Class 3 contributions can only be refunded if it can be shown that they were paid in error at the time the payment was made. I understand that the letter of 7 August 2007 from Mrs Bone set out the provisions of regulation 52 of the Social Security (Contributions) Regulations 2001 which describes what error means within the meaning of the legislation. They can also be refunded if no benefits can be derived from it.

Careful consideration has been given to the circumstances of your case and it has been decided that the contributions in question do not fall to be refundable because:

(a)

they were not made in error at the time payment was made within the meaning of regulation 52 of the Social Security (Contributions) Regulations 2001 and

(b)

they can still be taken into account for certain benefits.”

The only circumstances set out in the legislation in which refunds of class 3 contributions can be made are where either the contributions have been made in error, as defined in Regulation 52, or where precluded class 3 contributions have been made, as defined by Section 14 of the 1992 Act and Regulation 49 of the 2001 Regulations.

The contributions in question on this appeal were not made in error for the reasons given and they do not fall within Section 14 or Regulation 49. The legislation provides a comprehensive scheme for dealing with contributions and benefits. There is no power for HMRC to introduce a new basis on which refunds may be made. I do not myself read HMRC’s letter of 13 December 2007 as purporting to doing so. The reference to refunds if “no benefits can be derived from them” must I think refer to Section 14 and Regulation 49. Nonetheless I can understand how the last part of the letter quoted above stating that Mr Fenton’s contributions did not fall to be refunded because “(b) they can still be taken into account for certain benefits” led Mr Fenton and the General Commissioners to believe that if the contributions would no longer be taken into account they were refundable.

HMRC say that they did in fact secure an enhancement to Mr Fenton’s entitlement to bereavement allowance, but even if that were not the case there would be no statutory basis for a refund of the contributions in question. Accordingly, I consider that the General Commissioners were wrong in law to decide that Mr Fenton was entitled to a refund of those contributions.

The question of law stated in paragraph 12 of the case stated by the General Commissioners is whether the contributions in question were paid in error within the meaning of Regulation 52(9). Since there is no challenge to their decision that they were not paid in error it appears that the wrong question of law has been stated. The correct question is whether there existed any other basis on which Mr Fenton was entitled to a refund of the contributions in question. I will amend the case stated to reflect that question of law under CPR 52 PD 18.50 and answer that there is no other basis of entitlement to a refund.