In a decision handed down on 31 January 2017, the First-tier Tribunal (‘FTT’) found against the taxpayer in the case of Macleod & Mitchell Contractors Limited v HMRC  UKFTT 139 (TC).
The case concerned the tax treatment of insurance policies taken out and funded by the company, which were mistakenly written in the name of the main director and shareholder, Mr Mitchell.
The FTT was provided with evidence to show that the intention of the Company and Mr Mitchell was that the insurance policies would be written in the name of the Company from the outset and to show that Mr Mitchell arranged for the benefit of the insurance policies to be assigned to the Company.
Mr Mitchell blamed the financial adviser who had arranged the insurance for the oversight: he had signed blank forms to arrange the insurance and had then relied on his adviser to complete the forms correctly.
Mr Mitchell and the directors of the Company claimed that the adviser had told them that he had learned that a mistake had been made by the insurance company when the policies had been entered into. There was an element of doubt on this point, as HMRC claimed that the adviser said to them during a telephone conversation that he had been under the impression that he was under the impression that Mr Mitchell was going to sign a declaration of trust over the insurance policies. Neither side called the adviser to give evidence and, in consequence, his apparent statements to HMRC and to the Company were not relied on by the FTT.
The case turned on ITEPA 2003, s 62 defines earnings to include ‘any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth’; and something will count as money’s worth if an employer makes a payment which is of direct monetary value to an employee, because the employee no longer has to pay that amount of money to a third party.
The FTT considered that it was ‘left with the position that although it was intended that the insurance policies should have been taken out in the name of the company they were in fact taken out in the name of Mr Mitchell and it was Mr Mitchell whom the insurance companies regarded as the beneficiary’.
On this basis, HMRC argued that the payment of the premiums by the Company constituted ‘money’s worth’ in Mr Mitchell’s hands, he was benefitting from the protection of the insurance policies and not bearing the economic costs of the premiums – it didn’t matter that he hadn’t actually made a claim under them before their benefit was assigned to the Company.
Counsel for Mr Mitchell argued in the alternative that:
- following The Edinburgh Life Assurance Company v Balderson  2 SLT 323, if the Company had paid insurance premiums incorrectly, believing them, wrongly, to have been its own liabilities, the Company would have the right to recover those premiums from Mr Mitchell;
- if the Company had paid the premiums wrongly, then Mr Mitchell still owed the insurance companies their premiums and the Company had the right to recover the incorrectly paid premiums from the insurance company.
The FTT was unpersuaded by these arguments, even if the Company had a right of recovery, it had not sought to pursue it.
Mr Mitchell’s final line of defence was that he would have held the benefit insurance policies on constructive trust for the Company if they had paid out. The FTT did not consider that a constructive trust could be said to have existed: no payment was made to Mr Mitchell under any of the policies and, throughout the period before the policies were assigned to the Company, neither Mr Mitchell nor the Company was aware that the policies had not been taken out for the Company’s benefit.
On this basis, the FTT found that the insurance premiums paid on these policies while they had been written in Mr Mitchell’s name, constituted taxable employment income in his hands, and that PAYE and NIC were properly due.
The case highlights the importance of ensuring that insurance products are properly entered into, as the tax implications of making errors of the sort described in this case can be costly and difficult to manage. The case also highlights the limits that exist on a taxpayer’s ability to escape a charge on the basis that his advisers were to blame for mistakes; ultimately the taxpayer is responsible for the tax impact of transactions that he or she undertakes and it is up to him or her to ensure that arrangements are implemented as they intend them to be.
For further information please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.