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DEPARTMENT OF SOCIAL SECURITY

Case No. C.1134/95

Delay in refunding national insurance contributions to a trainee probation officer

10.1 Mrs X complained that the Contributions Agency (CA), an executive agency of the Department of Social Security (DSS), had taken over four years, following a reinterpretation of the law, to refund the class 1 national insurance contributions (NICs) which she had paid while she was a Home Office (HO) sponsored trainee probation service student between 1979 and 1982; and that they had refused to pay interest on the refund.

10.2 My investigation into Mrs X's complaint began in December 1995 once the Parliamentary Commissioner's predecessor had obtained comments from the then Chief Executive of CA and the Permanent Under-Secretary of State for HO, after the referral of the complaint by the then constituency Member. I have not put into this report every detail investigated by the Commissioner's staff; but I am satisfied that no matter of significance has been overlooked. Annex A to the report sets out the main events surrounding Mrs X's complaint. Annex B lists the initials used and their meaning. The names of some parts of DSS have changed over the years. For ease of reference I have used the same descriptions throughout this report.

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Background

10.3 The level of NICs for which a person is liable is determined by his or her employment status. Liability for class 1 NICs arises when a person is employed, rather than self-employed. Class 1 NICs are percentage-based and relate to the level of employee earnings, and are paid by both the employee and the employer. Class 2 NICs are paid at a flat rate by self-employed persons. Class 3 NICs are flat-rate and may be paid by a man under the age of 65 or a woman under 60 whose contribution is otherwise insufficient for a particular benefit. (For example the payment of such NICs can entitle the person to a retirement pension.) Determinations on the classification of contributions requirements are made within CA by NI inspectors acting on behalf of the Secretary of State for Social Security (SofS). The classification of employment status may also be determined by HM Inspectors of Taxes in order to assess an individual's tax liability. As part of the former Government's commitment to reduce the burden on business, a ‘common approach' policy on employment status matters has existed for some years between the Inland Revenue (IR) and DSS. Accordingly, decisions or rulings by one department are normally adopted by the other provided all the relevant facts have been taken into account and the circumstances have not changed.

10.4 In 1979 a departmental report entitled ‘Legal Entitlements and Administrative Practices' (LEAP) was published outlining the principles to be observed where a legal entitlement to benefit arose, or was affected by, a change in statutory provisions or in their interpretation. The report concluded that a judgment had to be made as to the lengths DSS had to go to identify individuals who might have been deprived of entitlement in the past or who might have a potential entitlement to benefit. DSS were advised to seek legal advice and to consult Ministers where a general legal entitlement was not met fully.

10.5 Regulation 32 of the Social Security (Contributions) Regulations 1979 provides that where NICs have been paid in error by a person (or a secondary contributor such as an employer), they shall be refunded to that person (or the secondary contributor) if application is made in writing to the SofS within a specified time. Regulation 32(5) stipulates that an application for a refund must be made within the period of six years from the end of the year in which the NIC was paid; but there is discretion to extend the period provided that the SofS is satisfied that the person making the application had ‘good cause' for not making it within the normal period. There were similar provisions in the 1973 and 1975 versions of the Regulations. Schedule 3 to the Social Security (Consequential Provisions) Act 1992 provides that questions relating to NICs are to be determined in accordance with the provisions in force at the time.

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10.6 DSS have a non-statutory compensation scheme, the scope of which has been accepted by the Commissioner and his predecessors, to compensate those who have suffered an unacceptable delay in the payment of benefit or in the refund of overpaid NICs as a result of clear and unambiguous departmental error. At the time relevant to the complaint compensation could be considered only where the delay in payment was at least 12 months. No compensation was payable in respect of the first 12 months of delay, known as the ‘fallow period'. DSS do not consider that a change in the interpretation of the law, or the overturning of a decision by a higher tier of the adjudicating authorities, constitutes such an error. The guidance on the scheme specifically cites such cases as being outside the compensation arrangements. Compensation in respect of delay in such cases is considered only where the implementation of a decision is delayed as a result of maladministration.

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Investigation

10.7 For the sake of clarity I give the following summary of the events in the case. On 2 October 1991 HO wrote to CA asking for guidance on whether HO sponsored trainee probation service students were liable for the payment of class 1 NICs, as a Special Tax Commissioner had held that payments made to such students were not liable to income tax. On 31 October CA told HO that the Tax Commissioner's decision would apply to liability for NICs. An officer in DSS policy section C1 considered the implications of the decision and sought legal advice; on 24 March 1992 she sought guidance from her line manager. In July C1 advised CA to process any applications which they had received for refunds of NICs and asked HO for details of the sponsored students involved. In September HO supplied details of 2,600 students who had been sponsored since 1986 but C1 later established that the HO student sponsorship scheme had started in 1970. On 20 October C1 asked DSS solicitors branch (SOL) for advice on the periods for which NICs could be refunded. On 17 November SOL provided advice. On 1 December 1992 the officer in C1 made her recommendations for action to her line manager, but he did not reply. On 26 February 1993 C1 told CA technical services (CATS) that refunds could be made on application for NICs paid on or after April 1975. On 29 September, after further debate and legal advice about the date from which refunds could be made, C1 authorised CA to refund any NICs wrongly paid since 1970. In October 1993 C1 asked CA to consider how best to identify all students who might be entitled to a refund of NICs. In June 1994, after discussions with CA, and with DSS finance and information divisions, C1 obtained Ministerial approval for a publicity campaign to identify those students not already identified as entitled to refunds. In October Mrs X's case was identified. In March 1995 CA refunded £418.82 NICs which Mrs X had paid between 1979 and 1981, but refused to compensate her for the loss in value of that payment.

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The CA reply to the complaint

10.8 In her comments on the complaint, the then Chief Executive of CA explained that liability to pay a particular class of NIC is determined by law and that it is the responsibility of CA to ensure that the correct class of NIC is paid. Class 1 NICs are payable where an employee is employed under a contract of service; the term ‘contract of service' has no legal definition but over the years the courts have provided a considerable amount of guidance. CA apply that guidance in considering a person's employment status but the area is complex and frequently a fine balance of judgment has to be exercised. DSS had regarded the HO sponsored students as being engaged under a contract of service; and that view had not been challenged until the Tax Commissioner's decision that the contractual arrangements between HO and the student did not amount to gainful employment. In the Tax Commissioner's judgment the payments received during such a period of studentship were not earnings but income from a scholarship. Strictly, that decision had not been legally binding for NICs purposes but DSS had agreed to regard it as coming within the common approach policy (paragraph 10.3) and thereby had committed themselves to making refunds of class 1 NICs in appropriate cases. CA had confirmed that position with HO in general terms on 30 October 1991 but had then had to consider a number of important factors: the extent to which the ruling should be retrospective; the possible effects of refunds on benefit entitlements; the problem of identifying all the sponsored students who might have been affected; and the implications for both the NI Fund (of which the Treasury had general oversight) and CA's own resources. The Chief Executive said that CA had needed to seek advice from DSS headquarters and SOL, and also to liaise with Treasury. In June 1994 Ministers had approved the proposed campaign designed to reach as many HO sponsored students as practicable. Administrative arrangements had then been put in place to identify applicants for refunds and to process claims. The Chief Executive accepted that the whole process had been time-consuming but she considered that CA's decision not to pay Mrs X extra-statutory compensation (by way of interest on the refund) was correct in that there had been no departmental error.

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HO reply to the complaint

10.9 In his comments on the complaint, the Permanent Under-Secretary of State for HO said that IR had notified HO on 9 September 1991 that HO sponsored students were exempt from taxation liability on their sponsorship income. IR had asked HO to stop making income tax deductions in respect of then current and future students. He explained that some (contactable) students had been advised that they could claim refunds, but that other enquiries had been referred to CA. The Permanent Secretary said that CA's letter of 12 October 1993 had advised that all former HO sponsored students from 1970 to 1992 would be entitled to a refund of NICs. On 28 November 1994 HO had circulated the text of CA's national press advertisements to all chief probation officers as part of the effort to help trace former sponsored students who might benefit.

Interviews with DSS staff

10.10 As part of the investigation into Mrs X's complaint (and another similar complaint: reference C.93/96) two of the Commissioner's staff interviewed the officer within C1 (whom I call officer A) who had been involved throughout in examining the policy issues and co-ordinating actions, together with two other officers (officers B and C) from CA's refunds group and CATS. Officer A explained that she had been relatively new to a very busy policy post in 1991. (C1 were heavily involved in work concerned with legislative changes to accommodate new payment arrangements for self-employed contributors, with the introduction of three statutory instruments, with a European Commissioner's interpretation of a challenge to retirement pension legislation, and with the development of a deregulation initiative which became the income tax/NICs review.) Examination of departmental papers could trace no formal response to the memoranda officer A had put to her line manager (officer D) on 24 March and 1 December 1992 (see annex A entries). Officer A's recollection was that he had not responded in either instance. She felt that officer D had generally given her insufficient support before leaving for new work around September 1993. She explained that she had retrieved the papers from officer D's desk in July 1992; and again in 1993 during her exchanges with refunds group. After receiving the further advice from SOL in September 1993, she had asked other colleagues for certain advice and information. In retrospect, officer A considered that C1 could have approached finance division around October 1992, about a year earlier than she actually did.

10.11 Officer B explained that each HO student claim had taken in all about 45 minutes to process but that some of the individual actions could be spread over a number of months depending on the timeliness of correspondence. As at the end of April 1997 6,596 claims had been identified and the total cost of refunds had been £5.6 million. For his part officer C explained that CATS had been heavily preoccupied in 1993 with the ramifications of other difficult policy issues which CA had considered to be of greater priority than that of the HO sponsored students, in terms of Parliamentary and other outside interest. Furthermore there had at that time been no published instructions in place, a situation since remedied, setting out the occasions when Treasury needed to be consulted (see annex A entry for 3 March 1994).

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10.12 Officer D was unavailable to be interviewed at the time. The Commissioner's staff wrote to him in June 1997, explaining the background to the HO sponsored student policy issues and supplying copies of relevant documents, and asking for his version of events. He subsequently explained that he had left C1 at the end of September 1993 and that his main duties had been liaison with CA over their high level objectives and the replacement of the NI recording system. He said ‘I have only recently ended a long spell of sickness the nature of which makes it difficult for me to remember any details of any involvement in the particular policy file in question. I am sorry I cannot be more helpful'.

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Findings

10.13 The crux of Mrs X's complaint was that CA had acted unreasonably in refusing to pay interest on her refund of NICs. My consideration of this case has centred upon three questions: whether CA were at fault over their original categorisation of HO sponsored students for NICs purposes; whether, having accepted the decision of the Tax Commissioner, DSS were maladmin-istrative in the way in which they set about identifying those entitled to refunds of NICs; and, having identified Mrs X as potentially entitled to a refund, whether CA took reasonable steps to make her payment without delay. The Parliamentary Commissioner's staff have carefully considered the relevant files and have interviewed the officers who dealt with the implications arising from the Tax Commissioner's decision.

10.14 I accept that the categorisation of a person's employment status for the purpose of NICs liability can be a complex matter which requires the exercise of a fine balance of judgment. Although DSS's long-time acceptance of class 1 status for HO sponsored students was reversed, I recognise that, as here, a subsequent contrary ruling need not necessarily mean that an earlier decision was maladministrative. I have found no evidence that DSS's original acceptance that there was a class 1 liability was maladministrative. The main issue is therefore whether there was unreasonable delay after October 1991 when CA were first made aware of the Tax Commissioner's ruling. CA quickly accepted that ruling as binding for the purposes of establishing liability for NICs in line with the common approach policy which they have with IR (paragraph 10.3). The scale of the task which then fell to DSS in rectifying the situation should not be underestimated. It was a much more complex issue than simply refunding overpaid NICs. Among the factors which needed to be considered included:

1. the extent to which the backdating of claims for refunds should be allowed (paragraph 10.5);
   
   
2. the effects of such refunds on benefit entitlements (both benefit already paid and any future potential entitlement); and
   
   
3. how best to identify all those entitled to a refund, given that HO were unable to provide all the relevant detail.

Those factors required CA to seek advice from DSS headquarters and Ministers, SOL and the Treasury.

10.15 DSS did not learn of the full extent of the problem until October 1992, when HO told them how long the student sponsorship scheme had been running. That was later than it should have been: enquiries of HO could have been commissioned much earlier than July 1992, although that would not necessarily have resulted in HO being able to supply the information sought any earlier, given the problems with the police computer (see Annex A entry for 8 September 1992). Furthermore, the few steps accomplished during much of 1993 were reactive, rather than proactive, in nature. The main periods of inactivity coincided with the apparent lack of response by officer D to officer A's written requests to him for guidance. Officer D had asked in February 1992 to be kept informed of developments once legal advice had been obtained. The only tangible evidence of his views, however, was the very brief remarks on the second (1 December 1992) of two subsequent lengthy memoranda by officer A, that suggested that officer D had not come to a formal view. Although I have not been able to obtain from officer D his account of the events (paragraph 10.12), I conclude that he did not give the level of support to officer A which she could reasonably have expected.

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10.16 There were also other, if lesser, delays. CATS were unable to meet the tight deadlines suggested by C1 in October 1992 (which were not actioned until January 1993); but I accept that CATS were under particular pressure at that time over a number of important issues, including those being considered by C1 (paragraph 10.10) which CA considered to be of greater priority than the NICs liability of HO sponsored students. The delays in consulting the Treasury, first mooted by finance division in February 1994, could have been reduced if finance division had reacted to C1's earlier note of 6 October 1993. By the same token, officer A has accepted (paragraph 10.10) that C1 could have alerted finance division very much earlier. I agree. As the relevant case papers have been routinely destroyed, I cannot now establish why it took some six months to implement the publicity campaign which had been approved by Ministers in June 1994.

10.17 The consideration of all the policy issues arising was bound to be time-consuming. Nevertheless, the lack of effective management meant that officer A's well-meaning efforts were on occasion lacking in focus and planning. Even after making allowances for the demands and pressures on all participating DSS staff, and suitable time for adequate reflection, I consider that Ministers could have been consulted at least 12 months earlier than they were. I criticise DSS's performance accordingly.

10.18 Bearing in mind the large number of claims (paragraph 10.11) I do not consider that the time taken by CA to process Mrs X's individual claim, once identified, was unreasonable; but over three years in total was an inordinately long time to take to resolve the matter of refunds. In my view, if DSS had acted more effectively, Mrs X could have expected to receive her refund around a year earlier. The approach which the Commissioner, like his predecessor, considers correct is that a person who has suffered injustice due to maladministration should be put in the position he or she would have been in had the maladministration not occurred. In the light of my findings I invited the Permanent Secretary of DSS to consider making an ex gratia payment to Mrs X equivalent to one year's interest on the amount of the refund and to consider the implications of my findings for other similar cases. In reply the Permanent Secretary said that the Chief Executive of CA had agreed to make Mrs X such a payment. In addition CA agreed to examine an estimated 6,500 other cases with a view to extending the same treatment to those similarly disadvantaged.

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Conclusion

10.19 Although they faced a difficult task, DSS took too long to secure Ministerial approval to make refunds to HO sponsored students. I regard the decision to pay Mrs X twelve months' interest on her refund, and CA's undertaking to examine an estimated 6,500 other cases with a view to similar treatment, to be a suitable outcome to a justified complaint.

27 February 1998

Summary

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Last updated: 26 April 2006