Macleod – insurance premiums paid not earnings from taxpayer's employment

In Macleod and Mitchell Contractors Limited and William Mitchell v HMRC [2019] UKUT 0046 (TCC), the Upper Tribunal (UT) has held that insurance premiums paid by the company on policies taken out in the sole director's name were not earnings from his employment.

Background

Mr Mitchell was the sole director and shareholder of Macleod and Mitchell Contractors Ltd (MMCL). Several insurance policies were taken out and the premiums paid by MMCL. 

In each case, Mr Mitchell was the insured but MMCL and Mr Mitchell had understood that the policyholder in each case was MMCL. In 2013, it was discovered that the policies ought to have been in the name of, or for the benefit of, MMCL. 

Following this discovery, Mr Mitchell assigned the policies to MMCL in 2014. None of the policies had paid out benefits prior to the assignment.

HMRC assessed Mr Mitchell to income tax and national insurance contributions in respect of the premiums paid by MMCL up to the date of the assignment. MMCL was assessed to pay primary and secondary class 1 national insurance contributions in respect of the payments. 

The assessments were appealed to the First-tier Tribunal (FTT). 

FTT decision

The appeals were dismissed. 

The FTT held that the premium payments were subject to income tax and national insurance contributions as they constituted earnings from Mr Mitchell's employment. 

In the view of the FTT, the tax treatment must follow the transactions that actually took place, regardless of the parties' intentions. It rejected the proposition that the policies were held on constructive trust for MMCL. The payments of the premiums had relieved Mr Mitchell of pecuniary liabilities to the insurance company and therefore the payments were earnings from his employment (section 62, Income Tax (Earnings and Pensions) Act 2003).

Mr Mitchell and MMCL appealed to the UT. 

UT decision

The appeals were allowed. 

The central issue for the UT to determine was whether the premium payments conferred a profit or benefit on Mr Mitchell and whether such a benefit derived from Mr Mitchell's employment. 

In the view of the UT, the premium payments made were not earnings from Mr Mitchell's office or employment. The payments were not intended to be a reward, return or remuneration for his services. They were intended to provide the benefit of insurance cover to MMCL and that is why the premiums were paid. The UT said at [22]:

"In our opinion the premium payments here were very clearly not earnings from Mr Mitchell’s office or employment. On the contrary, echoing the language of Lord Diplock [in Tyrer v Smart [1979] STC 34], they “were bestowed upon him for some other reason”. They were not intended to be a reward, return or remuneration for his services. They were intended to benefit MMCL, not him. They were made on the erroneous understanding that MMCL was the policyholder and that it would be the beneficiary of any policy proceeds."

The UT stated that Mr Mitchell owed a fiduciary duty to MMCL as a director not to make a personal profit and to avoid any possible conflict between his interests and those of the company. Mr Mitchell did not enjoy any personal benefit from being the policy holder and had an obligation to assign the policies on demand, which he did once the error was discovered.

MMCL had no right to recover the premiums from Mr Mitchell as he was only the policyholder due to MMCL's mistake and the premiums could only be recovered if MMCL accepted that Mr Mitchell was the rightful owner of the policies, which it did not. As such, MMCL was not relieving Mr Mitchell of any pecuniary liability and payment of the premiums was not a reward, return or remuneration for his services. The same analysis applied to national insurance contributions under section 3, Social Security Contributions and Benefits Act 1992.

Comment 

The FTT erred in law by failing to focus correctly on the critical question of whether there was any benefit to Mr Mitchell from the payment of the premiums and, if so, whether this arose 'from' his employment. 

The FTT also treated the company's intention when granting a benefit to an employee as irrelevant, when in fact the purpose of an employer in granting a benefit to an employee is a crucial factor when determining whether the benefit is to be regarded as a reward, or return, for the employee's services. 

A copy of the decision can be viewed here.