Appeal Numbers : SC/3225/2008

[2010] UKFTT 205 (TC)

TC00507

Appeal numbers : SC/3225/2008

TC/2009/10162

National Insurance contributions – liability of secondary contributor for Class 1 contributions – jurisdiction – whether the appellant was liable for secondary contributions as host employer of the employees – whether a third party was liable for those contributions as resident, present or having a place of business in the jurisdiction

FIRST-TIER TRIBUNAL

TAX CHAMBER

GOLDMAN SACHS INTERNATIONALAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (National Insurance Contributions) Respondents

TRIBUNAL: JUDGE DAVID WILLIAMS

Sitting in public in London on 17 and 18 December 2009

David Goldberg QC, instructed by Freshfields Bruckhaus Deringer, for the Appellants

Malcolm Gammie QC, instructed by the counsel General to HMRC, for the Respondents

DECISION

1This decision was directed by the Upper Tribunal on a preliminary issue. It arises in an appeal by Goldman Sachs International (“GSI”) against a notice of decision issued by the predecessor to the National Insurance Contributions Office (“NICO”) of the Respondents, Her Majesty’s Revenue and Customs (“HMRC”, which includes predecessors in title). It arises out of litigation involving appeals by GSI and an associated company, Goldman Sachs Services Ltd (“GSSL”), against decisions and determinations made by HMRC and other litigation commenced by HMRC. Following the direction of the Upper Tribunal, the appeal by GSSL is no longer linked with this appeal. I do not discuss its appeal further. It is no longer a party to this appeal. It was not represented before me nor gave evidence to me.

2I heard the preliminary issue over two days during which I heard the evidence of one witness for GSI and was given limited documentary evidence. It was agreed that counsel and the tribunal would not identify the names in these proceedings of individuals who were not parties to the hearing in court, and that the tribunal would redact any identifying details of individuals from the decision. In part for this reason, the tribunal indicated that it would issue a draft to both parties before issuing its full decision. A draft was issued, and the parties were invited to make any submissions they wished on three points: any requested redactions, any corrections, and any submissions on points of law that were not fully argued at the hearing (for example about statutory payments, the history of the regulations, and the Scottish aspect). Both parties suggested corrections, and I am grateful for those. Neither party requested any further redactions, although GSI made a linked application that I will deal with separately. GSI declined to make any further comment on issues of law. HMRC did so, but mainly by way of correction and clarification.

3The direction of the Upper Tribunal is:

“A preliminary hearing (the “Preliminary Hearing”) shall be held before the First-tier Tribunal (Tax Chamber) to determine whether Goldman Sachs International is the secondary contributor in respect of employees of Goldman Sachs Services Ltd for the purposes of sections 6(3) and 7 of the SSCBA by virtue of the application of regulation 5 and paragraph 9 of Schedule 3 to the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689).

The Upper Tribunal gave full directions for the Preliminary Hearing. I heard it in accordance with those directions which, I understand, were largely agreed in draft by the parties.

4The direction directed the parties to endeavour to agree a statement of agreed facts. The parties were unable to do so. Indeed, I have to record that they agreed very little. I am therefore able to rely on little common ground between the parties as to the relevant facts save in so far as an issue was identified and not challenged in the hearing before me. However, I exercise caution on this. I am not hearing the full appeal. Issues that might have been agreed or challenged expressly on the basis of evidence presented in the full appeal are not so readily identified or supported in this preliminary hearing. I therefore did not take the view that the fact that a party had not produced evidence on something excluded the party from raising an objection about a point. The tribunal has broad rules about both its proceedings and about evidence and it must exercise them efficiently and effectively when dealing with a preliminary issue.

5The evidence before me came from two sources. The first consisted of two witness statements and oral evidence of an individual witness who was not working in the relevant area of the GS group at the times relevant to these appeals but became responsible for some of them after that time, together with an assemblage of documents. The second was correspondence between the parties to the main appeals.

The appeals giving rise to the preliminary issue

6The appeal of which this is a preliminary hearing is against two decisions made by HMRC under section 8 of the Social Security Contributions (Transfer of Functions) Act 1999 (“TFA”). They were issued on 12 December 2002. All section 8 decisions about Class 1 National Insurance contributions (“N I contributions”) must name both the individual that NICO contends to be an employee in the relevant period and the person whom NICO contends to be the employer, unless it is contended that the employer is responsible for both primary and secondary Class 1 contributions. That was not contended here. Formally, this involves HMRC issuing a decision against every employee of an employer where NICO is of the view that there is a failure to pay Class 1 contributions on behalf of all or a significant part of the payroll of a major employer. Additionally, both the putative employee and the putative employer have separate rights of appeal against such a decision. So a challenge by NICO to the NI contribution returns for a major employer potentially involves issuing many individual decisions with two potential appellants against every notice.

7To avoid this, HMRC followed the practice, approved and adopted by this tribunal in past appeals, of naming a few individuals as “specimen” employees, and notices are issued to those employees and to their employer. Two individuals were identified in the early stages of this litigation, and decisions were issued concerning both of them.

8One of the decisions reads:

“That Goldman Sachs International is liable to pay primary and secondary Class 1 contributions in respect of the earnings of [a named individual]. The amount that Goldman Sachs is liable to pay in respect of those earnings is £85,015.60. The amount that Goldman Sachs has paid in respect of those earnings is £4,313.60. The difference is due to Class 1 contributions on income in respect of the exercise of Unapproved Share Options:

1997/1998 £ 131,000 at 10%

1998/1999 £ 143,000 at 10%

1999/2000 £ 191,000 at 12.2%”

The other decision names another individual (with a name further down the alphabetical order of the payroll) and gives other figures but is otherwise in exactly the same form as this decision.

9Had this been a full hearing of the appeal, those individuals would have been entitled to appeal against the decision in their own right and they would have been entitled to express their views and to have given evidence to the tribunal. They would have been on record as appellants whether or not they chose to take an active part. No mention of the individuals was made in the directions for this hearing, and they have neither appeared before me nor given any evidence. I have, for example, not been shown that the decisions in question were served on the individuals so that they were aware of their rights of appeal. Nor am I aware of any indication by them, if they did receive notice, that they appealed against the decisions or acquiesced in them. I assume that they were given proper notice, and that these appeals are proceeding in good order. But that is an assumption, not a finding, and may need to be tested at a later stage. Nor do I take any point on the issue raised by Mr Gammie QC when he informed me that GSI had nominated the two individuals and not GSSL. If GSI was not the employer of either individual, on what basis did it nominate them for this appeal? That I also leave to the main hearing. I take another related point from Mr Goldberg QC, again without the point being tested. He submitted that on the unchallenged basis of the evidence of the witness “all people working in the UK for GS were employees of GSSL” and that the two individuals were working in the UK.

I accept that, save for specific individuals identified in the papers.

10Any response by an employee to a section 8 decision is directly relevant to this preliminary hearing. An indication that an employee she does not intend to appeal against the decision is clearly evidence in support of the decision, while an indication that the individual has appealed or intends to appeal against the decision is clearly evidence in support of an appeal by an employer or a person contended to be an employer. I do not have that evidence. It cannot be assumed that an employee will agree with the views of the employer about contribution issues and I do not assume that. However, I was given no more than minimal evidence about either of the individuals. I do not, for example, know whether they still work for GSI, GSSL or any associated company or whether they are now within the jurisdiction of this tribunal. And it may be that the secondary contributions on the specific earnings of these employees arise when there is no equivalent primary contribution, so that the employees would have no practical direct interest in the appeals. Nor do I know that the two individuals have been informed of this hearing. I therefore make this decision without making any finding of fact which may prejudice a decision for or against either of the individuals as appellants in any further hearing of the appeals. Nor do I name them in this decision for that reason.

11As I know little about, and make no further findings about, those individuals, I must make further assumptions. I assume, but do not find, that the status of the individuals does not raise any specific question about their own liability to primary Class 1 contributions. Such questions may affect the outcome of any appeal on the primary contribution issue and whether as a result there is any secondary contribution liability. For example, if the individual is personally not within the jurisdiction of the British NI contribution scheme, then there will be no secondary contribution liability. I therefore assume, but do not find, that the named individuals were at all relevant times within the jurisdiction of the NI scheme for Great Britain and that there were no reasons of age, gender, or otherwise that gave rise to specific personal considerations relevant to this decision. I also assume, as indicated at the hearing, that there is no relevant European Union point of relevance, nor any issue arising from any double social security agreement.

12I was told little about the “exercise of Unapproved Share Options” referred to in the decisions. As that is the main issue in the appeal, I make no findings about it. But I must make further working assumptions. I assume that the sums concerned are earnings of employed earners for current purposes. That is in dispute in the main appeal. I was not given evidence that any sums arising as earnings under these options were paid (if they were paid at all) to the named employees through the employer’s standard payroll. That is also important. I assume that the two individuals were the beneficiaries of the sums identified in the decisions by HMRC. I assume that the two individuals were paid monthly and that any payments for which they and their employer should have accounted, at least in the view of HMRC, were payable to them through the employer’s payroll as part of their monthly pay arrangements. However, I adopt that assumption with considerable caution. I do not know, for example, when or how the sums were paid, and in particular if they were paid direct to the employees or through one or more third parties. Were they paid in or after the year in which it is contended that they were earnings? Were they in the relevant periods or after those periods? When did any liability, if there was a liability, to pay the sums actually arise? I was given no evidence on those points. I therefore assume that the liability of the primary and secondary contributors arose by reference to monthly pay periods. I do so because there was clearly evidence of monthly pay cycles applying at any rate to most employees.

The main arguments of the parties

13HMRC contends that there is a liability to pay both primary and secondary Class 1 contributions in respect of the sums identified by description in the disputed decisions. HMRC issued decisions treating GSI as the secondary contributor in respect of the named employees, who are contended to be the primary contributors. In its initial decisions HMRC appears to have assumed without further analysis that GSI was the secondary contributor. GSI initially took no point on that. At a later stage GSI contended that GSSL was the secondary contributor. HMRC contested this on the ground that GSSL was not within the jurisdiction as a secondary contributor and that GSI, which was in the jurisdiction, was liable for the secondary contributions as host employer. GSI contended that GSSL was in the jurisdiction and so it, GSI, could not be host employer.

14At this point I must make a further reservation about the evidence before me. I do not know the precise relationship between GSI and GSSL. They are clearly both linked within the Goldman Sachs group or groups of companies in some way, but I have not been given evidence of the nature of that link. I assume that neither of these two bodies controls the other, but the evidence is that they are clearly closely linked in some other way. In the absence of any agreed facts or specific evidence, I assume that for the purpose of this decision that GSSL is a third party and that GSI and GSSL cannot be regarded as the alter ego or alternate personality of each other.

15I also accept as a basis for this decision, without making any finding, the understanding by HMRC of the employment arrangements involving the two nominated employees and similar employees. I quote from the skeleton argument of Mr Gammie QC (with inserted abbreviations and omissions):

“The Revenue’s current understanding of the GS employment arrangements is as follows: -

(a) Throughout the relevant period GSSL formally employed (ie it was the group contractual employing company of) a number of individuals whom it seconded to work for other GS entities.

(b) In the 26-month period between 6 April 1997 and sometime around June or July 1999 (“the first period”) all the employees in respect of whom NI liabilities are said to arise in this case (including [the two named employees]) were contractually employed by GSSL.

(c) Throughout the first period GSSL seconded all those employees to work for other GS entities and most of them (including [the two named employees]) were seconded for GSI in the UK.

(d) In the 10 month period from sometime around June or July to 5 April 2000 (“the second period”) a number of the employees concerned (including[the two named employees]) were employed by and continued to work for GSI and were not employed by GSSL.”

16The dispute as it is put to me for this preliminary decision is about whether GSI is the secondary contributor for current purposes. I assume that GSI is not “the employer” of the relevant employees for the first period in question. It was accepted by HMRC that GSSL is not registered either in England and Wales or in Scotland and is registered in the British Virgin Islands. It was not disputed by HMRC that GSSL was not resident in any part of the United Kingdom at any time relevant to these appeals. It was not disputed by GSI that it, GSI, was in the jurisdiction for those purposes.

17The dispute is about whether GSSL, as secondary contributor, was in the jurisdiction for current purposes while not being incorporated or resident here. If it was not, then the question is about whether GSI is, or is to be treated as, secondary contributor as it was in the jurisdiction. The parties put this to me as a matter of first impression on which there is no previous direct authority. It is therefore necessary to examine the legislative context of the test around which the argument revolves.

This decision

18It is perhaps surprising that so important a provision as the jurisdictional rule for secondary contributors of NI contributions has not previously been considered by any court or tribunal. And it is interesting that there has been no perceived need by the legislature to define the jurisdictional limits in regulation 119 and its predecessors further either in the original legislation in 1974 or at any time since 1974 to clarify or amend them. One might assume that the reason is that the rule is entirely clear and unambiguous. Unfortunately that is not so, as the arguments of the parties to this case show well. There is no “bright line” here.