Cheshire Employer and Skills Development Ltd v HM Revenue and Customs

For national insurance purposes, the first question is whether an expense allowance is earnings on ordinary principles. Genuine reimbursement of employment expenses is not earnings merely because the payment is made under the employment or leaves the employee temporarily better off. The relevant inquiry is whether the payment contains a profit element. In a general travel-expense scheme, a broad-brush evaluation is appropriate. The scheme need not produce mathematical equivalence for each employee. It is sufficient that it was constructed in a genuine endeavour to match expenditure and to operate with approximately equal justice across its scope. A tribunal’s evaluative conclusion on that issue is not open to appellate interference absent an error of law.

The appellant operated a training business whose employees, particularly training advisers, travelled by car to trainees’ workplaces. It paid some employees fixed monthly lump sums, alongside mileage payments, under a travel policy. The appellant claimed reimbursement of Class 1 national insurance contributions paid on those sums for tax years 2002/03 to 2005/06.

The First-tier Tribunal found that the lump sums were not earnings on ordinary principles and allowed the appeal. The Upper Tribunal set that decision aside, holding that the First-tier Tribunal had asked the wrong question and that the payments were not relevant motoring expenditure under regulation 22A of the Social Security (Contributions) Regulations 2001. The central issue was whether the First-tier Tribunal had made an error of law in finding that the payments were not earnings.

1. Appeal allowed. The First-tier Tribunal had adopted the correct structured approach by first asking whether the lump sums were earnings on ordinary principles. If they were not, the alternative statutory questions did not need to be decided on the claim as framed.
2. The ordinary test is whether the payment is a profit arising from the employment, including whether it contains an element of personal profit or bounty. A payment does not become earnings merely because the employee would not have received it without being employed, or because it is made under the employment. Genuine reimbursement of expenditure incurred in performing employment duties is not an emolument.
3. In a general scheme for reimbursing travel expenditure, Donnelly v Williamson [1982] STC 88 supports a broad-brush approach. The question is whether the scheme was constructed in a genuine endeavour to achieve equivalence between the allowance and expenditure and to apply with approximately equal justice to those within its scope. Mathematical equivalence for each employee is unnecessary.
4. The First-tier Tribunal had evaluated the evidence as a whole. It found the scheme bona fide, its structure designed to avoid profit from maximising travel, and the lack of correlation between salary increases and allowance increases significant. Those findings provided a proper basis for concluding that the lump sums were not earnings. The Upper Tribunal therefore had no jurisdiction to substitute its own evaluation for that of the First-tier Tribunal.
5. The Court declined to hear argument on regulation 22A(3) and paragraph 7A of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001. Their meaning and effect, and the Upper Tribunal’s observations on them, remained obiter. The Court expressed no view on those issues. Lord Justice Etherton gave the judgment, with Lord Justice Mummery and Sir Stephen Sedley agreeing.

• Court of Appeal (Civil Division) [2012] EWCA Civ 1429: appeal allowed; the First-tier Tribunal’s decision was restored in substance.
• Upper Tribunal (Tax and Chancery Chamber): allowed HMRC’s appeal from the First-tier Tribunal and held that the payments were emoluments liable to national insurance contributions.
• First-tier Tribunal: allowed CESDL’s appeal from HMRC’s refusal to refund the contributions, finding that the payments were not earnings.