FROST SKIP HIRE (NEWCASTLE) LTD Appellant

038150FROST SKIP HIRE (NEWCASTLE) LTDMr M S Johnson Manchester7 MayMr & Mrs G Frost, directors of the Appellant, for the AppellantMr J Cormack, of the Regional Appeals Unit of the Inland Revenue, for the RespondentM S JOHNSON

NATIONAL INSURANCE CONTRIBUTIONS — school fees paid by company to school for the education of son of the director of the company — whether payments in kind — no — whether the company discharged the parents’ debt — yes — whether the liability was that of the company — no — appeal dismissed

THE SPECIAL COMMISSIONERS

FROST SKIP HIRE (NEWCASTLE) LTD Appellant

- and -

PAULINE WOODRespondents

(HM INSPECTOR OF TAXES)

SPECIAL COMMISSIONER:Mr M S Johnson (Chairman)

Sitting in public in Manchester on 7 May 2004

Mr & Mrs G Frost, directors of the Appellant, for the Appellant

Mr J Cormack, of the Regional Appeals Unit of the Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

Nature of the appeal

1.The decision under appeal concerns the liability of the appellant to pay additional Class 1 National Insurance Contributions for the period 6 April 1997 to 5 April 2000 (“the relevant period”) in respect of the earnings of its director Mr G Frost. The Notice of Decision is dated 5 December 2002. The appellant is said to have been liable to pay contributions totalling £7,418.72 over the relevant period. The amount in fact paid by the appellant totalled £4,413.69. The difference between these figures constitutes the amount in dispute (“the disputed contributions”).

2.The issue between the parties relates to the school fees paid on behalf of Mr Frost’s son Adam for his attendance at Ascham House School, Gosforth, Newcastle upon Tyne (“the school”), which is a well-known private day school for boys aged 3 to 13. Adam’s father was an “old boy” of the school and Adam followed his father there. Some of Adam’s school fees were paid by the appellant, which has given rise to the difficulty with which this tribunal is concerned. The dispute has revolved round the question whether, in paying those fees, the appellant was meeting a pecuniary liability of its director, Adam’s father. The appellant is a limited company which was during the relevant period owned and run by Mr & Mrs Frost.

3.It is common ground between the parties that if the appellant was meeting a pecuniary liability of Mr Frost, the appellant is liable to pay the disputed contributions. Their amount is not in dispute. If, on the other hand, the appellant was discharging its own liability, the parties are in agreement that the disputed contributions are not due, so that the Notice of Decision is misconceived.

Evidence before the tribunal

4.I have had the assistance of the contents of a bundle of documents prepared in advance and helpfully presented by Mr Cormack, representing the respondent. This has been assembled in collaboration with Mr & Mrs Frost, representing the appellant, and additions to the bundle have been agreed with them. The bundle includes an agreed statement of facts. For the hearing, Mr Cormack prepared and handed in a supplemental bundle. Both parties also submitted skeleton arguments.

5.The oral evidence received by the tribunal has consisted of that from Mr & Mrs Frost themselves, who were cross-examined by Mr Cormack, and that of Mr Michael Wilson, a Compliance Team Manager at the Newcastle Tax Office responsible for the Northumbria area, who was called by Mr Cormack and cross-examined by Mr & Mrs Frost. No other witness was called by either party.

6.In the main, the facts are not in dispute. However their interpretation is highly contentious. As mentioned below, the tribunal has unfortunately not been helped by the somewhat ambiguous position of the school

The facts

7.The background is that not long after Adam’s birth – he was born on 8 February 1993 – Mr Frost filled in and signed a form of application for his son’s admission to the school in September 1997. The form was dated 23 April 1993. Just above the date and signature there appears the following:

“I the undersigned being the Parent of Adam F. Frost hereby apply for his admission to Ascham House School. I have received a copy of the School Prospectus and notice of the terms and conditions upon which he will be accepted as a pupil of the School and hereby confirm my acceptance of them”.

8.The 1993 prospectus for the school, a copy of which is included in the main bundle, contains detailed terms and conditions. There are provisions dealing with the following matters relating to pupils: admission and registration, scholarships, fees and withdrawal of pupils, insurance for inability to pay fees, health, clothing and liaison with parents. It is, in particular, made plain that fees are payable on or before the first day of the term for which they are due and cannot be remitted.

9.The prospectus also contains a paragraph reading as follows:

“CONDITIONS OF ACCEPTANCE

The terms and conditions set out in the prospectus may be amended from time to time and its provisions, subject to any such amendments, will apply during the whole period of a boy’s attendance at the School. Admission to the School is conditional upon acceptance of them”.

10.I find that the application form was duly lodged with the school and that, on the basis of that application, Mr & Mrs Frost thereafter hoped and expected that their son would be offered a place at the school in 1997 when he was old enough.

11.The next material piece of evidence is that the Headmaster of the school, Mr Reid, wrote to Mr & Mrs Frost on 23 May 1996 to inform them that Adam could start at the school in January or April 1997, rather than September 1997, if desired. It is inferred in that letter that Adam had already been offered a place for September 1997.

12.Adam was duly entered as an infant in early 1997, on a part time footing, having previously had a nursery place in order to see, as his mother told me, “how he settled down”. The bundle contains an invoice from the school for the Summer Term of 1997, directed to Mr & Mrs Frost by name, and I find that they personally paid the fees for that term in advance on 3 April 1997.

13.Adam’s fees for the Christmas Term 1997, when he became full time, were invoiced by the school to the appellant in July 1997. This came about in consequence of discussions that the Frosts had had with their accountant as to the most tax efficient means of discharging the school fees. The advice given to them was that it would be advantageous for the appellant to pay the fees, as the most cost-effective method of payment following Inland Revenue guidelines.

14.Encouraged by the accountant, Mrs Frost went down to the school to seek the agreement of the school to “transfer” bills for school fees to the appellant. She spoke to the Assistant Bursar, Mrs Bullock. I have not heard from Mrs Bullock, or indeed from anyone else at the school, having had only the benefit of indirect evidence from that source, as described below. However I am satisfied that Mrs Frost persuaded the Assistant Bursar to have the school send bills for school fees to the appellant in future, and that this was done, the first such bill being that for the Christmas Term 1997.

15.I moreover find that Mrs Bullock told Mrs Frost that she (Mrs Bullock) would ask the Bursar to alter the name and address of the person to whom bills for fees would be sent from those of the Frosts to those of the appellant, and that she (Mrs Frost) could assume that this would be in order unless the school contacted the Frosts to the contrary. I find that the school acted on Mrs Frost’s request, at the instance of Mrs Bullock, without further communication with the Frosts.

16.Throughout the rest of the relevant period the appellant paid Adam’s school fees by company cheque. I do not however find that the school had any dealings with the appellant, apart from the school rendering bills for its fees and receiving payment of the fees from the appellant.

17.The school is run as a company limited by guarantee, under the name “Ascham House School Trust Limited”. Its bills for school fees are prepared and rendered in the name of that company. I have studied the Memorandum and Articles of Association of that company, copies of which are contained in the supplemental bundle produced by Mr Cormack. It was set up as a charitable trust for the advancement of education, having members and a “Governing Body” of not less than 7 nor more than 30, elected and retiring by rotation. The Governing Body has control over the admission of members of the trust.

18.Regulation 35 of the Articles of Association provides that the business of the trust is to be managed by the Governing Body. It is clear from that regulation that the power to make contracts relevant to the affairs of the school resides in the Governing Body.

19.I have also seen a copy of the Report of the Governors for the year ended 31 July 2000. That contains the statement:

“The governors determine the general policy of the school. The day to day management of the school is delegated to the Head and the Bursar”.

20.I conclude from the above that the Head and the Bursar probably had the authority of the Governing Body to enter into contracts with regard to the education of pupils during the relevant period.

The position of the school

21.No-one from the school has given evidence. Instead all I have from that source is a note of a conversation[1] between Mr Wilson and Mr Mankin, Chairman of Governors, copies of three letters from Mrs Lightley, who is the school Bursar, and copies of two letters from Mr Mankin to Mr & Mrs Frost. I consider that unfortunately none of these sheds any light on the change in billing that took place in 1997.

22.In a letter to Mr Wilson dated 15 November 2002, Mrs Lightley wrote that the school issues invoices for fees to limited companies if asked by parents, and that the school would “if appropriate” pursue the company for the fees in case of non-payment. The expression “if appropriate” is a vague one that is of no assistance to me, especially since Mrs Lightley adds that the school has never had an instance of a company that has defaulted in payment of fees billed to it.

23.In a letter dated 15 May 2003 expressed to be “To whom it may concern” Mrs Lightley said: “I am writing to confirm that there was an informal verbal agreement by usage that Frost Skip Hire Ltd were to be billed for the school fees of Adam Frost”. I am not sure how this was meant to be helpful, but I suspect that all that Mrs Lightley is saying is that the school and the Frosts were in agreement that the school would bill the appellant for the fees instead of the Frosts.

24.Enclosed with a letter to Mr Cormack dated 22 April 2004, Mrs Lightley has provided copies of the Memorandum and Articles of the school and copies of the abbreviated accounts and Governors’ report mentioned above. I have found these to be useful as background.

25.I have seen copies of two letters from Mr Mankin, both written to the Frosts, respectively dated 29 April 2004 and 4 May 2004.

26.In the first of these letters, Mr Mankin wrote that the school Bursar has no recollection of her Assistant talking to Mrs Frost. Mr Mankin wrote that he has no reason to doubt, however, that the conversation took place, and he set out what might have been thought and said in the conversation. That is not evidence but speculation and so I can have no regard to it.

27.Mr Mankin then added: “It has always been the case that the school receives payment of fees from a range of sources (including grandparents, companies and embassies) other than parents. It is also true, however, that the then Bursar’s Assistant would not have had authority to alter the nature of the relationship with the parents that underlies the education of your son”. I can see why this was intended to be helpful. However it is, unfortunately, off the point, because the question is not the authority or lack of authority of the Bursar’s Assistant, but rather what one reads into the circumstance that the school changed the billing arrangements in this case.

28.In his second letter, Mr Mankin commented upon Mr Wilson’s note of a conversation he had with Mr Mankin on 6 November 2002. Mr Wilson has told the tribunal about this note. Although Mr Wilson had written to Mr Mankin for information about a hypothetical case of a company that might pay a child’s school fees, Mr Wilson told me that he was sure that Mr Mankin knew that they were discussing the appellant and the Frosts, and that Mr Mankin indicated this obliquely in conversation, without either of them naming names.

29.I find that the thrust of Mr Mankin’s comments in his conversation with Mr Wilson was that the school regarded the parents as responsible for their child, irrespective of the fee-paying arrangements, and cast doubt on the responsibility of the fee-paying company in question. However, writing to the Frosts on 4 May 2004, that is to say just before the hearing, Mr Mankin stated:

“ … I cannot recall the detail of my conversation although I believe that I commented that in light of the assurance given by Mr Wilson[2] the school found itself in a difficult position between one of its parents and the Inland Revenue and that all we could do would be to answer questions posed by both sides as fully as possible and not take sides in the dispute. That was and remains the school’s position”.

30.It is a matter for regret that the school has not sent a representative to tribunal to provide the full answers promised by Mr Mankin. In these circumstances the tribunal must do the best it can with the evidence before it.

Analysis of the facts

31.I find that, on lodging the signed application form on behalf of Adam in 1993, Mr Frost indicated that, if his son should be accepted as a pupil, he would be responsible for his son’s fees. It is in my view clear that Mr Frost was offering to make himself liable for payment of Adam’s school fees, term by term, for so long as Adam might remain at the school.

32.Accordingly I see no reason to question that, when the school accepted Adam as a pupil, it did so on the basis that Mr Frost would be liable for Adam’s fees as indicated in the application form. This is, moreover, fortified by the letter to Mr & Mrs Frost from the Headmaster dated 23 May 1996. So far as the school was concerned, its day to day management was, it appears, delegated inter alia to the Head. Mr & Mrs Frost accepted the Head’s offer to have their son start in school before September 1997. The place that Adam had already accepted, in apparent reliance upon the terms and conditions of the prospectus, was now re-offered to him by the Head for an earlier start. The fees for that early start were duly billed to the Frosts and paid by them. It cannot be doubted, in my view, that the school expected them to continue to be responsible for Adam’s fees following that early start, should he thereafter continue in school.

33.I understand that the school is now considering a form of written contract for parents of pupils to sign, providing for the payment of school fees. There was no such written contract in the present case. Mr & Mrs Frost told the tribunal that they were not asked to sign any such contract, and had not done so. However they accepted that they would have had to pay Adam’s fees in respect of the relevant period, had the appellant not done so. Adam’s fees needed to be paid, at the beginning of each successive term, if he was to remain in the school.

34.There is no evidence before me of a renegotiation of contractual arrangements between the school and the appellant. The most that Mr & Mrs Frost are able to say is that the school accepted that it would bill the appellant instead of them. There are two possible analyses of this. The first is that the school treated the appellant as satisfying the Frosts’ debt. In other words, if the appellant did not pay, and neither did the Frosts, then it would be the Frosts who might be taken to court by the school, not the appellant, because the contractual liability was that of the Frosts. The second possible analysis is that the school was prepared to treat the appellant as contractually responsible instead of the Frosts. Accordingly, if bills for fees were not paid, the school should sue the appellant. The Frosts would have the defence that they were no longer contractually responsible for the fees.

35.Of these two possible analyses, it is the first that is more likely. I have noted that the school took care, in its application form used in this case, to secure the undertaking of the parent to pay fees throughout the child’s school career. I do not think that the school would be likely to accept an arrangement with a limited company which failed to substitute for such an existing undertaking a similar undertaking from the company. Yet there is no evidence that the school approached the appellant for this. Nor was such an undertaking offered by Mrs Frost when she spoke to Mrs Bullock. The fact that the school had no such dealings with the appellant strongly suggests that it must have considered this to be unnecessary, because of the existing arrangement with the Frosts.