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Salt in the wound
My client was due to retire, aged 65, in April 2003, but by mutual agreement with his employer, he was granted short-term temporary extended rolling contracts of employment; the first of which was for six months to October 2003. This temporary employment remains ongoing.
Salt in the wound
My client was due to retire, aged 65, in April 2003, but by mutual agreement with his employer, he was granted short-term temporary extended rolling contracts of employment; the first of which was for six months to October 2003. This temporary employment remains ongoing.
One of the specified conditions of the new temporary contract — which HMRC have now seen and which was explained to my client and accepted by him — was that he would have no further entitlement to medical benefit. The April 2003 contract states that 'because of the nature of this contract, the company will be discontinuing your private health care cover, its portion of the pension contribution and the long term disability benefits'.
All this was two years ago, but in June 2004 the outsourced payroll agency prepared a 2003-04 P11D showing a medical benefit of almost £2,500. It transpired that the medical insurance had not been ceased in April 2003, but had continued until it was actually cancelled in February 2004. HMRC now seem quite determined to assess this benefit. However, not only did my client never receive any 'money's worth' benefit (ITEPA 2003, s 62), but perversely he was the victim of a very serious accident in the summer of 2003 when, as he then understood it, his medical insurance cover had already ceased.
We contend that there should be no taxable benefit in kind in this regard.
Do readers agree and do they have any further suggestions as to how we may persuade HMRC of this?
Query T16,632 — Hurt.
Hurt has a case where the client has been provided with a benefit in terms of private medical insurance, although the client had been told that he did not have that benefit. A taxable benefit in kind would only arise if the benefit was provided by reason of the person's employment. The contractual arrangements that have been agreed show that the client was not entitled to receive the benefit of private medical insurance for the period in question under either his original contract or the temporary contract.
However, ITEPA 2003, s 201(3) states that a benefit provided by an employer is to be regarded as provided by reason of the employment unless the employee is an individual and the provision is made in the normal course of the employer's domestic, family or personal relationships. We are not told that the client is related to the employer and so the benefit has been provided by reason of the client's employment according to the legislation. Actually, the benefit was provided by the employer by reason of the employer's mistake, but s 201(3) does not give a let out for such a circumstance!
Having said this, Inspectors can see unfairness and on occasion they will not always seek to impose the letter of the law if it gives rise to an obvious inequitable treatment, although often they will. Therefore, I would continue to argue the point on the basis of equity and that the understanding of all parties, as backed up by the contracts, was that there should be no medical insurance benefit, but the Inspector may just refer back to the legislation.
For the amounts involved, an appearance before the General Commissioners is not going to be cost effective and in any event the commissioners may also simply rely on the strict reading of the legislation.
Having said all of this, the key question that I would ask is why are H M Revenue and Customs chasing the employee and not the employer? The fault for this problem lies entirely with the employer and so if HMRC were going to continue to impose the benefit, and I was the client, I would want the employer to pay the tax on the private medical insurance. The mistake was made by the employer and so the financial consequences of that mistake should rest with the employer.
The payment should be grossed up for the fact that the employer is meeting the employee's liability. — Hodgy.
This is likely to depend upon whether there was a direct contractual relationship with the health insurer. If the position was that employees were given the opportunity to sign up with a particular provider and the company merely funded the premiums, then this will have amounted to earnings within ITEPA 2003, s 62(2)(b) and (3)(a) in just the same way as the payment of a bill would have done.
It seems, however, to be more likely that the contract was between the employer and the insurer. In these circumstances, the doctrine of privity of contract would have prevented the employee enforcing compliance by the insurer. He could only have done so through an action against the employer. As the terms of his employment were quite clear, any such litigation would have failed in limine.
The latter scenario could only be brought within the charge to tax under ITEPA 2003, s 201(2), as a 'benefit or facility of any kind'. Under the terms of the employment, no access to health cover was provided. The fact that the employer's bureaucracy 'renewed' it by mistake should not affect this where not only was the employee in ignorance of the mistake, but also the only right of the employee to enforce the cover against the insurer lay through the employer.
Indeed, under the terms of the policy, it might well turn out to have been the case that the insurer was not obliged to pay up on a claim made through the employer where the employer was under no contractual obligation to provide the cover. On no basis could that be represented as any sort of benefit or facility.
