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Parliamentary Commissioner for Administration

First Report Session 1998-99

Volume 3 - 1st Report - Session 1998-99

DEPARTMENT OF SOCIAL SECURITY

Case No. C.607/96

Delay in refunding employers' national insurance contributions

8.1. A company complained that the Contributions Agency (CA), an executive agency of the Department of Social Security (DSS), had paid insufficient compensation for their delay in refunding employers' national insurance contributions (NICs) which the company had paid.

8.2. My investigation began in March 1997 once the Parliamentary Commissioner had obtained comments from the then Deputy Chief Executive of CA. 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. An annex to the report gives the meaning of the abbreviations used in it.

Background

8.3. The level of NICs for which a person is liable is determined by his employment status. Liability for Class 1 contributions arises when a person is employed, rather than self-employed. Class 1 contributions relate to the level of employee earnings and are paid by both the employee and the employer. Class 2 contributions are paid at a flat rate by self-employed people. Determinations on the classification of NICs requirements within CA are made by inspectors acting on behalf of the Secretary of State for Social Security. Classification of employment status may also be determined by HM Inspectors of Taxes in order to assess an individual's tax liability. Since 1987 the Inland Revenue (IR) and DSS have co-ordinated procedures to provide that decisions on employment status made by one department are accepted by the other, provided that they have been based on all the relevant facts and that the circumstances have not changed. Those procedures establish responsibility for liaison between nominated contact points in IR and DSS to determine a common approach and agreement on which department should take the lead.

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8.4. In 1989, after a special review, IR classed those who carried out certain specialist activities in various High Street chains as employed persons for the purposes of tax and NICs. The company accepted the ruling—as did CA—and Class 1 NICs were paid from the tax year 1989/90 in respect of those working in their outlets. In April 1991 a Special Commissioner upheld an appeal by another company and the self-employed status was restored.

8.5 DSS operate a non-statutory special payments scheme—the scope of which has been accepted by the Commissioner and his predecessors and which was modelled on the statutory scheme operated by IR—under which financial redress may be given for the effects of maladministration. Among other things, compensation in the form of interest can be paid where, because of a clear and unambiguous error by CA, there has been a delay of more than 12 months in refunding NICs to a contributor. The period over which compensation is calculated does not include the first 12 months of delay—known as the 'fallow period'—in recognition of the fact that all claims for refunds take time to process. The fallow period starts from the date of the claim for a refund or the date the refund became due whichever is the later. The scheme also provides for compensation to be paid where departmental maladministration has directly caused a person to incur additional expenditure. The special payments scheme sits alongside, but is separate from, CA's statutory provisions for paying interest on NIC refunds which were introduced in respect of refunds of Class 1 NICs for 1992/93 onwards. Those provisions closely follow the IR scheme under which a repayment supplement may be paid on refunds of overpaid income tax. Interest is calculated from the last day of the year after the year in respect of which the NICs were paid ('the relevant date') until the repayment order is issued (unless the NICs were paid more than 12 months after the end of the year in respect of which they were made).

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Investigation

1992

8.6. On 15 January 1992 the company wrote to IR saying that the recent successful appeal by another company (paragraph 8.4) confirmed the view which the company had always held that the specialists which they engaged were self-employed. They gave notice of their intention accordingly to stop making payments of tax and Class 1 NICs. Payments stopped with effect from October 1991. On 29 June, after an exchange of correspondence, IR told the company that they would not contest the company's decision. On 17 July the company's legal advisor wrote to CA claiming a refund of employers' Class 1 NICs paid by the company in the tax years 1989/90, 1990/91 and 1991/92. On 21 July CA's refunds section wrote asking the legal advisor for details of the specialists involved and the NICs paid. The legal advisor supplied some of that information on 4 September. On 14 September refunds section sought advice from CA's technical services section as to whether the specialists should be regarded as self-employed. On 27 October, after examining IR's papers and discussing the matter with them, technical services section advised acceptance of IR's ruling that the specialists engaged by the company between the years 1989/90 and 1991/92 had properly been self-employed; and that refunds should be made. On 3 November the legal advisor wrote to refunds section asking for confirmation that the matter was receiving attention.

1993

8.7. On 25 February 1993 the legal advisor wrote asking refunds section how the company's claim was proceeding and when they might expect repayment. He wrote again on 22 April. CA did not reply. On 11 July refunds section asked technical services section for further advice in particular whether individual specialists could challenge the Class 2 ruling. Technical services section replied on 14 July. On 17 August refunds section asked technical services section—among other things—whether they could refund the Class 1 NICs paid by the company before the individual specialists had accepted the self-employed categorisation. On 27 September the legal advisor wrote to refunds section expressing concern at the time taken to resolve the matter. Refunds section replied on 26 October saying that the case was with their technical services section who expected to complete their action within the next four to five weeks at which point the legal advisor would be told how the refund would be made. On 30 November, after seeking legal advice, technical services section advised that the overpaid NICs should be refunded to the company without the agreement of the individual specialists concerned but on the condition that, in the event that an individual specialist disputed the Class 2 ruling and CA's subsequent investigation proved that Class 1 employment classification was appropriate, the company agreed to repay the employers' Class 1 contributions due. On 10 December the legal advisor wrote to refunds section pointing out that it was more than 15 months since the company's claim for a refund had been made. He asked refunds section to confirm that the matter would be finalised without delay; and said that he expected interest to be paid on the refund.

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1994

8.8. On 5 January 1994 refunds section wrote to the legal advisor seeking the company's written agreement to the condition proposed by technical services section. They said that work had started on assessing the amount of the refund due but that further details might be needed from the company to enable them to trace all the NICs paid. On 19 January the legal advisor wrote to refunds section asking them, as an interim measure, to pay 80 per cent of the amount due; and to confirm that interest would be paid. On 28 January the company sent refunds section their agreement to the proposed condition. On 17 February CA sent the company a part refund of NICs totalling £313,748.65. On 18 March the legal advisor wrote to refunds section asking when the balance would be paid and for CA's assurance that interest would be paid. On 21 April he asked refunds section for a reply to his enquiry. On 27 April refunds section telephoned the legal advisor to tell him that the matter of the balance of the refund was in hand. They said that interest could not be paid. On 5 July the legal advisor wrote to refunds section saying that the company had supplied all the information they had (about the specialists engaged by them) and asking for the balance of the refund due. He asked again about interest on the refund. On 17 August refunds section telephoned the company to explain that they were having difficulty in tracing the records of some specialists (the company had been unable to supply full details of all the specialists); but said that they could pay a further £8,184.99. CA sent that amount to the company on 17 August. On 12 September the legal advisor telephoned again about progress. Refunds section told him that meetings about the matter were due to take place on 21 September. On 13 October the legal advisor sent another reminder. On 21 November CA sent the company a third and final refund of £79,498.75 (making £401,432.39 in all). On 13 December the legal advisor wrote to refunds section reminding them of his request for interest on the refunds.

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1995

8.9. On 10 February 1995 refunds section telephoned the legal advisor and told him that no interest would be paid. On 15 February the legal advisor wrote to refunds section pressing the company's case for interest. He pointed out that CA had taken since July 1992 to resolve the claim for refund of NICs; and that the company had incurred legal expenses of £33,000 in obtaining repayment. On 18 February refunds section referred the papers to technical services section for consideration of compensation. On 14 July the legal advisor wrote to refunds section asking about progress on the claim for interest. On 21 July technical services section decided that the company had waited longer than they should have done for the refund of NICs and that accordingly compensation for the delay should be paid to them. On 31 August, after obtaining further information from refunds section, technical services section awarded compensation of £3,925.50. Their calculation was based on the view that the three refunds should have been made on 9 December 1992, 8 June and 12 September 1993 (instead of 17 February, 17 August and 21 November 1994); and that a separate fallow period (paragraph 8.5) should be applied to each instalment. On 11 September CA sent the payment to the company.

8.10 On 14 September the legal advisor wrote to refunds section asking how the payment had been calculated. On 28 September technical services section replied. They explained the DSS compensation scheme which they said had been based on the scheme operated by IR to the extent that it applied only where delays in making a refund lasted more than one year; and that interest—at the rates applicable to the IR scheme—was calculated from one year after the date payment should have been made. On 2 October 1995 the legal advisor wrote to technical services section saying that, as CA had said that they were seeking to mirror the scheme operated by IR, he had calculated that the compensation should total £72,571.82. On 11 October technical services section wrote to the legal advisor setting out the compensation calculation and explaining the fallow periods used. The legal advisor replied on 19 October saying—among other things—that CA's compensation calculation did not recognise their earlier incorrect categorisation of specialists. On 4 December technical services section replied saying that their decision (on 27 October 1992) to follow IR's line that the specialists should be categorised as self-employed had been in keeping with the principles of the common approach between themselves and IR and had not constituted an admission that their employment status had been incorrectly ruled in the past. The company remained dissatisfied and asked the Member to refer their complaint to the Commissioner's predecessor.

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8.11 In his comments on the case (made on 24 February 1997) the then Deputy Chief Executive of CA said that there was a significant difference in the way the fallow period was determined between the non-statutory special payments scheme operated by DSS and the statutory scheme operated by IR; and that the compensation due to the company had to be calculated under the provisions of the DSS scheme. He said that he was, however, not completely satisfied that the fallow period had been correctly applied in their case and he had asked for the calculations to be fully reviewed. He acknowledged that there had been considerable delays both in making the refund to the company and in paying compensation, for which he apologised.

8.12. On 2 October 1997 CA decided that their calculation of the compensation due to the company (paragraph 8.9) had been incorrect in that the fallow period should have started on 27 October 1992, the date when CA had changed the employment status of the specialists (paragraph 8.6) and the date when the refund had therefore become due. They amended the compensation award to £16,888.54 and on 21 October they sent the company the balance of £12,963.04. On 4 November CA sent the company a further payment of £2,120.33 being compensation for the delay in paying that sum.

8.13. The Commissioner's staff found a serious mistake in the latest calculation in that the fallow period (from 27 October 1992 to 26 October 1993) had been applied only to the first instalment of the refund made on 17 February 1994 and not—as it should have been—to the second and third instalments. They pointed out the error to CA who corrected the calculations. CA found that the compensation properly due to the company for the delay in making the refund of £401,432.39 was £11,092.16; and that the compensation for the delay in paying the correct compensation due (from 11 September 1995 to 21 October 1997) should have been £598.74. They told the Commissioner's staff that the consequent overpayments of £5,796.38 made on 21 October 1997 and £1,521.59 made on 4 November 1997 (paragraph 8.12) would not be recovered from the company. I return to that issue in paragraph 8.22 of the report.

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Findings

8.14. The company's complaint about the level of compensation paid to them rested on two issues. They claimed first that the compensation did not acknowledge the wrong categorisation of the specialists, and secondly that the calculation should have followed the rules of IR's special payments scheme on which the DSS scheme had been based (paragraph 8.10). Refunds of overpaid NICs may attract interest in two ways (paragraph 8.5). The statutory scheme applies only to refunds in respect of the years since 1992/93 and therefore not to the refunds made to the company. The non-statutory scheme, unlike the statutory scheme, applies only where there has been maladministration and is the one under which CA paid compensation to the company.

8.15. I look first at the categorisation issue. CA, in line with their policy on such matters (paragraph 8.3), accepted IR's classification of the specialists both in 1989 (paragraph 8.4) and then again in 1992 (paragraph 8.6) when IR changed the classification. The categorisation of a person's employment status for the purposes of NICs and tax liability can be a complex matter which requires the exercise of fine judgment. Opinions can differ so that a subsequent contrary opinion, as here, need not necessarily mean that an earlier decision was wrong in a maladministrative sense. I have found no evidence that CA's acceptance in 1989 of IR's classification of Class 1 status was wrongly reached. That being so, I find no grounds for seeking compensation for the company in respect of any period before CA were alerted to IR's reclassification of the specialists; and my investigation has focused on the period after 17 July 1992 when the company sought a refund of NICs after the reclassification.

8.16. CA accepted that they took too long after their decision on 27 October 1992 to accept the reclassification (paragraph 8.6) to make the resulting NICs refunds to the company (paragraph 8.9). Under the rules of the special payments scheme (paragraph 8.5) the fallow period for the calculation of the interest payable to the company as a result of CA's delay in this case should have started from the date the refund became due. That date was 27 October 1992 when CA agreed to accept the reclassification (paragraph 8.6). CA failed to apply the rules correctly and chose three different dates to apply to each of the three refunds which were made (paragraph 8.9)—in effect allowing additional time to process the case over and above the fallow period—thereby substantially underpaying interest. I criticise CA for their mistake which, despite representations of dissatisfaction by the company, they failed to notice until the Commissioner's intervention (paragraphs 8.11 and 8.12). Regrettably, in correcting their mistake they made a further error (paragraph 8.13) which transformed the underpayment into an overpayment of £5,796.38. I criticise CA for their carelessness.

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8.17. I am satisfied that, after the correction of CA's mistakes, the rules of the non-statutory special payments scheme have been properly applied to the company's case. Nevertheless, if I had found evidence of maladministration by CA in the period between 17 July 1992 when the company requested the NICs refund and 27 October 1992 when CA made the decision which enabled the refund to be made, I might have considered seeking an earlier start date for the fallow period. However, I have found no such evidence. In my view, the period of three months which CA took to decide the question of reclassification was reasonable given the enquiries which they had to make.

8.18. I turn next to CA's handling of the company's request for compensation. The legal advisor first mentioned the matter of interest on the NICs refund in his letter of 10 December 1993 (paragraph 8.7). CA's reply did not address the point (paragraph 8.8) nor did they respond to two further enquiries made on 19 January and 18 March 1994. They finally telephoned the legal advisor at the end of April after he had sent another reminder; but they told him—wrongly—that interest could not be paid. They repeated that advice on 10 February 1995 (paragraph 8.9) after the legal advisor had raised the matter in two further letters during 1994 (paragraph 8.8). CA's information was correct to the extent that the company could not benefit from the statutory scheme for paying interest on refunds of NICs but they appeared to have overlooked the non-statutory scheme. The case was eventually referred for consideration of compensation on 18 February 1995 (paragraph 8.9) after another approach from the legal advisor—a year after the first refund had been made. I criticise CA for their poor handling of the legal advisor's requests for interest. Regrettably, things did not improve because it took CA five months to make a decision to pay compensation and almost another two months to pay it. I criticise them for that delay.

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8.19. After the payment of compensation there followed an exchange of correspondence between the legal advisor and CA about the basis for the amount of the award (paragraph 8.10). I note that the original letter sent with the payment gave little information about the special payment scheme and none about the calculation itself. That was not helpful; and was bound in my view to prompt further enquiry. Moreover, the letter which CA sent in reply to that enquiry, while explaining the scheme, gave no details of its application to the company's case. Disappointingly, after the Commissioner's intervention and the Chief Executive's request that the compensation award be reconsidered (paragraph 8.11), there was a substantial delay of seven months before CA revised the award. That was not good enough.

8.20. CA have compensated the company for the delay in paying the correct amount of compensation between 11 September 1995 when they sent the first, incorrect award and 21 October 1997 when they sent an additional (albeit again incorrect) payment (paragraph 8.12); but they have made no payment to compensate for the delay in making the first award (paragraph 8.18). By my calculation such a payment would amount to substantially less than the amount by which the company has been overpaid as a result of CA's mistakes (paragraph 8.13). Accordingly, I do not propose to press CA further on that matter.

8.21. I was concerned at CA's poor performance in dealing with the compensation aspects of this case and sought the Chief Executive's assurance that staff were fully conversant with the procedures. CA's Director of Operations replied on the Chief Executive's behalf saying that, on the evidence before him, the officers who had dealt with the case had not been as conversant with the procedures as they should have been; but in recent months he (the Director) had taken steps to improve understanding of the procedures in CA. He said that CA had produced a special payments guide and set up a team dedicated to all aspects of special payments work. The team were working closely with the Departmental Special Payments Unit and would also undertake a monitoring and advisory role across CA designed to raise standards and increase awareness of the special payments scheme. In addition, the team would handle high level complaints such as those channelled through this Office; and in that way CA could ensure that those cases would be dealt with by the most experienced officers in CA. I welcomed that news. The Director apologised for the shortcomings revealed by the investigation.

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8.22. That brings me to the matter of the company's legal costs. The legal advisor mentioned a sum in his letter of 15 February 1995 (paragraph 8.9) which, in view of the amount, seemed to represent not only the cost of obtaining the refund of NICs from CA but also the cost of pursuing the company's application for reclassification both with IR and with CA. Be that as it may, CA did not follow that matter up. The Commissioner accepts that those dealing with CA must expect to incur some expenditure and he does not normally seek reimbursement of the costs of establishing a claim. However, as I saw it, the legal advisor had taken action both to enquire about progress on the case and to press the company's claims for refunds and compensation, action which he would not have had to take if CA had acted promptly and correctly at all times; and to that extent the company had incurred legal costs over and above what should have been necessary. I therefore asked the Chief Executive to consider reimbursing the company—on the production of acceptable evidence—for those legal costs which had resulted directly from CA's maladministration; but taking account of the earlier overpayment of compensation (paragraph 8.13) and my comments in paragraph 8.20. CA's Director of Operations replied agreeing to my request. If the company wish to pursue this matter they should therefore provide CA with a detailed breakdown of the costs which they incurred as a direct result of CA's maladministration.

Conclusion

8.23. CA dealt poorly with the company's claim for compensation for the delay in refunding NICs. They took too long to reach a decision on the claim and when they did so they incorrectly applied the rules of their special payments scheme. After the Commissioner's intervention CA sent the company additional compensation of £12,963.04 plus £2,120.33 compensation for the loss in value of that sum; but CA wrongly calculated those payments thereby overpaying the company by £7,317.97. In view of the overpayment I decided not to press CA to compensate the company for the delay in making the first award of compensation. CA's Director of Operations agreed to consider reimbursing those legal costs which the company had incurred solely as a result of CA's maladministration to the extent that the costs exceeded the amount overpaid to them. I regard the additional payments made together with the undertaking regarding the company's legal costs; the steps taken to improve understanding and awareness of the special payments scheme; and the apologies for CA's shortcomings—which I pass on to the company through this report—as a satisfactory response to a justified complaint.

24 June 1998

Appendix A

Abbreviations used and their meaning

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Last updated: 26 April 2006