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People may not normally be overly keen to pay tax, even if it is for schools and hospitals (assuming of course that the war we were dubious about was financed by others), but how would you feel if for donkey’s years you had been paying tax needlessly? I suppose it would be like having teeth pulled and then hearing: ‘Actually, now I’ve got this tooth out, it looks OK to me’.
You can easily change your dentist, but changing national systems takes slightly longer. More truthfully, it takes years and years. Such is the extraordinary tale of the war pensioners whose Ministry of Defence pensions were tax exempt, although pay-as-you-earn tax had in fact been deducted. This story still rumbles on to this very day, even though one might have thought it was apparently all sorted out in 1998 when it first became public news.
The tax side of it has never, so far as I am aware, been retold in any detail, but in fact it contains quite a few interesting facets. It is a tale of blunder upon blunder in official departments, compounded by frightened staff wondering whether to run and hide or confront the issues with silly arguments and misinformation all mixed in and still continuing to this very day.
Forward march!
It was section 16, Finance Act 1919 (and the significance of that date in a war context will be abundantly obvious) which first applied an exemption from income tax to ‘income from wounds and disability pensions’ as listed in the section. There were various categories, but as a flavour of them, one of them was:
‘Disablement or disability pensions granted to members, other than commissioned officers, of the naval, military or air forces of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air force service.’
There was also an apportionment provision where the amount of any pension was not solely attributable to disablement or disability, so that in those cases there would only be partial exemption.
It appears that this tax exemption fell out of favour with the powers that be after the Second World War. The National Audit Office published a report on the ‘taxation of armed forces invaliding pensions’ in November 2002 and this notes that in the 1950s the Admiralty deliberately concealed the existence of the exemption from ratings, because efforts were being made to abolish it, even though those efforts ultimately came to nothing. The idea that a measure laid down in an Act of Parliament could be quietly and deliberately overlooked because it was not liked is certainly a novel one to me.
Listen, you ’orrible lot!
Major John Perry, who has been an ardent campaigner in relation to the tax treatment of war disability pensions, was medically discharged from the Army in October 1971. He duly began to collect his army pension. Quite by accident in 1997, he stumbled upon the fact that some disability pensions were being treated as tax free and, although not knowing the reasons for this tax-free status, he claimed similar treatment for his own pension. This claim was turned down and so he took his case through an internal appeal procedure which was applicable to army pensions.
At the first stage, his claim was rejected on the grounds that only Service Attributable Pensions, which were introduced in 1973, were within any tax exemption and as Major Perry’s pension was awarded in 1971, it was taxable. There was a second stage to the appeal procedure which could be invoked, and Major Perry pressed his appeal on to this stage. By this time, the Finance Act 1919 exemption had been mentioned, albeit in its consolidated form in section 315, Taxes Act 1988.
The appeal was rejected again at the second stage on the basis that Major Perry’s pension was based on length of service, and not degree of disability, and so was outside the exemption. It was further held that only improvements to the armed forces pension scheme introduced in 1973 brought about entitlement to tax exemption under section 315 in appropriate cases. It seems amazing that both the Ministry of Defence, and its two internal appeal panels, got matters so drastically wrong. How on earth could section 16, Finance Act 1919 possibly provide any financial assistance for the poor, shattered soldiers from the First World War, if it was not until 1973 that pensions awarded thereafter were within its terms?
Following these unsuccessful appeals, Major Perry embarked upon a campaign for a change in the law, having accepted by now that his disability pension was apparently taxable. It was not of course, and because of his tenacious efforts, the scales eventually fell from someone’s eyes at the Ministry of Defence and suddenly they saw the light. It was discovered that the Royal Air Force had routinely made invaliding pensions tax free, even though the amounts paid were unaffected by the existence of disability, and so I believe a mild form of panic set in.
Either the Royal Air Force was right and the Army was wrong, in which event the ramifications for hundreds of pensions which had been paid for many years would be pretty phenomenal, or alternatively the Royal Air Force was wrong, in which the ramifications for their pensions in payment would be equally horrifying. In the event, it was discovered and accepted that the Army was wrong and about a thousand pensioners had been wrongly taxed, some for a very long period of time.
About turn!
Wheels then began to turn to correct matters. The Revenue got involved as it had unwittingly been receiving tax under pay-as-you-earn which should not in fact have been collected. Of course, it is not as simple as saying everyone should just get his or her money back. Ordinary tax repayment claims are subject to time limits and conditions laid down by the Taxes Management Act 1970 and, basically, if the taxpayer is going to get anything back, then he will have to whistle for it insofar as the claim goes back more than six years. There are also repayment supplement provisions in section 824, Taxes Act 1988, but these are cast in terms of making sure that no one gets rich at the expense of the Revenue.
In fact, the six-year time limit was waived, primarily because the error was made by another Government department. So all tax wrongly deducted, however far back the claim stretched, was allowed for repayment, and I believe in nearly all cases the money has been paid over already. This was done under the Revenue’s ‘care and management’ provision in section 1, Taxes Management Act 1970, but when it was pointed out that the applicable repayment supplement provision offered only a meagre rate of interest and not stretching for the whole period of time that the Exchequer had enjoyed the use of the money, the response was that care and management did not extend that far. The Revenue was bound by section 824, Taxes Act 1988 and no alternative could be offered. It is noteworthy that, even in cases such as these, the Revenue considered that the interest on tax provisions must be strictly applied and no concession is permissible. Readers will recognise this approach as it permeates every aspect of interest, both receivable and payable on tax.
Major Perry, indefatigable as ever, wrote back to say that this was plainly not good enough. The pensioners affected needed to be properly restored to the financial position which they would have been in, had they not incorrectly suffered tax deductions over many years. Thus the use of simple interest under section 824 was less than satisfactory and interest should be compounded. Worse still, the repayment claims in many cases stretched back through periods of high inflation when the interest rate on offer was plainly inadequate. It should also be recognised that there was a wider consequence to the error; a pension paid net of tax supported a lower mortgage for a property purchase upon leaving the armed forces and thus there will have been much consequential loss in the investment potential in the property market.
Polish those boots up!
One astute pensioner, Captain Lewis, raised the contention that as the pensions were tax exempt, what was paid over could not have been tax at all and so the provisions of the Taxes Acts were not applicable. Instead there was a general principle of restitution by which the pensioners should be restored to the position in which they would have been had the errors not been made. Although Captain Lewis had no professional representation, he had in fact made a very good point. In Woolwich Equitable Building Society v Commissioners of Inland Revenue [1992] STC 657 it was held that money paid to a public authority in the form of taxes pursuant to an ultra vires demand by the authority was prima facie recoverable by the subject as of right at common law, without any need to invoke a mistake of law. The interest provisions in the Taxes Acts were not applicable to such a claim.
The Revenue’s response to Captain Lewis was, in my view, very unsatisfactory. Public departments (London) wrote on 31 July 2002:
‘Of course it might be possible to argue that the deductions were not income tax at all. That being so, clearly all of the repayments made by my colleagues will have been unnecessary and will have to be recovered. The same would go for any repayment supplement on them.’
That, in my opinion, was a very unsatisfactory letter indeed, and all the more so because it must surely have been written with at least some oversight by top Revenue officials. Its unsatisfactory nature is aggravated by the fact that the writer of it had clear knowledge that he was dealing with an unrepresented and uninformed taxpayer and the writer thought it was fair game to intimidate the victim into submission. If the Woolwich principle was applicable, it would not diminish the claim but enhance it. If the Revenue wants taxpayers to co-operate with it, then it had better start co-operating with them and write more helpful letters than it did on 31 July 2002.
In fact, whether the Woolwich principle applies is a matter for debate. It appears that in some cases the errors were primarily one of fact in that there was no identification of which pensions were attributable to disability. A mistake of law was certainly made when it was thought that only post 1973 pensions were tax free. There was no ultra vires demand, but simply the incorrect application of pay-as-you-earn. However, the law has developed further since the Woolwich case. In Deutsche Morgan Grenfell v Commissioners of Inland Revenue and the Attorney General [2003] STC 1017 the High Court held that a person who pays tax under a mistake of law is entitled to make a general restitutionary claim in relation to which a limitation period does not run until the mistake is discovered.
The likelihood is that there would be a mix of claims by the war pensioners, some under mistake of law, and some under mistake of fact, the latter presumably governed by section 33, Taxes Management Act 1970.
Come on, at the double!
Fortunately the pensioners were not to be intimidated and are still pursuing their claim to this day. The Revenue says it is not its problem. The Ministry of Defence says that it is still thinking about it, but (even after years of procrastination) it has been pre-occupied with more important matters. There are vague promises of some sort of offer being made at some stage without any indication of what it might be.
Meanwhile the silliness continues. Pensioner, Major R Perkins, has a pension which dates back to 1959 when he retired on medical grounds from army service. Nevertheless, it has been taxed ever since. His claim for exemption was finally accepted in October 2001, but effective only from 25 August 1999. Where does that date come from, I wonder; have we all missed it in the Finance Act 1919 somewhere? Someone in the Veterans Agency then telephoned Major Perkins in order to be put in touch with his doctor and as a result of that call concluded that Major Perkins’ disability had disappeared over the years. So the tax exemption was revoked. Perhaps there is some other provision in the Finance Act 1919 which no one has yet noticed which says that if a disability disappears, like a ten pound note in a Paul Daniels’ stunt, then the pension ceases to be a disability pension. In fact this entire issue is completely irrelevant to the exemption, and so this octogenarian is now in the fifth year of his fight for justice and is ending his days assisted by charity, whilst tens of thousands of pounds of his pension has been illegally withheld by the Ministry that declares its care and concern for its pensioners.
Get a move on!
Taking on the full might of the United Kingdom Government is a daunting task and one can only admire these redoubtable pensioners for their dogged efforts to get a proper remedy for an extraordinary official mistake. Major Perry won the award for ‘Best contribution in the field of tax’ in the Butterworths Tolley Tax Awards 2002. It is scarcely believable that he and over one thousand others are still waiting for the Ministry of Defence to take the matter off the back burner. It is a huge public relations disaster which any sensible organisation would want to minimise and clear up quickly. Unfortunately silly ones maximise everyone’s problems, including their own, by letting it all run on for endless years.
