NIM25032 - Class 3 NICs: time limits for paying Class 3 NICs: due care and diligence - caselaw

Regulation 50(2)(b) Social Security (Contributions) Regulations 2001 (SI 2001 No. 1004)

NIM25030 explains that the time limits for the payment of Class 3 NICs may be extended when the two tests set out in regulation 50 are satisfied. The second test is that the ignorance or error was not caused by the contributor failing to exercise due care and diligence.

There have been a number of Special Commissioners’ and court cases in which the meaning of exercising due care and diligence has been considered. For instance:

• Mrs Adedolapo F Adojutelegan v Clark (Officer of the Board) [2004] UKSC SPC00430
• Dr Philip L Rose v HMRC [2006] UKSPC SPC00574
• Norman T Clements v HMRC [2008] UKSPC SPC00677
• John R Goldsack v HMRC [2010] UKFTT 530 (TC)

The most relevant decision, though, is the Court of Appeal’s decision in Kearney v HMRC [2010] EWCA Civ 288, given in March 2010. The main issue for the Court of Appeal was whether the General Commissioners’ finding that Mr Kearney’s ignorance of his ability to pay Class 3 NICs for the years 1948 to 1965 was not due to his lack of due care and diligence was so perverse that no reasonable Commissioners, acting judicially and properly instructed, could have made that finding. In considering that issue, the Court of Appeal laid down some general guidance as to the approach to be followed in such cases.

Giving the judgement of the court, Lady Justice Arden stated, at paragraph 34, that the correct approach:

“…is to treat all relevant circumstances as factors which have to be balanced together to reach an assessment or evaluation on a case-by-case basis as to whether due care and diligence was exercised and, if not, whether the failure was the cause of the contributor’s ignorance of his obligation to pay contributions when he was bound or entitled to pay them.”

She then went on to explain what she considered to be relevant factors as follows:

“[35] Like the Judge [in the High Court], I do not think it is possible to produce a definitive list of relevant factors. However, they would include the contributor’s age and any relevant physical disability or incapacitation. Thus Mr Nawbatt accepted that a 19-year-old student might be in a stronger position to show that he had exercised due care and diligence when he took no action to pay contributions than an older person already in employment. Moreover, a person may have known about the NIC scheme and gone abroad, leaving, like the Good Samaritan with the innkeeper, a sum of money with another person, whom he thought reliable. He may have instructed that person to make payments of NICs. If that person fails to pay NICs on time, the contributor may be able to show that his ignorance of the failure to pay was not due to lack of due care or diligence. In some circumstances, therefore, doing nothing in terms of contacting the NICO may (as the Judge accepted) not be fatal. However, as I see it, a person need not be induced to take no action by a positive misrepresentation. To take an obvious example, a person may be incapacitated by illness during the relevant period. A person may also have language difficulties which may require to be taken into account.

[36] Knowledge of the NIC scheme is also likely to be a very important factor, but it may have to be established what the source of his knowledge was and generally the degree of knowledge. Moreover, there cannot logically be an absolute rule that, if the contributor has knowledge of the existence of some aspect of the NIC scheme, he can never show that he exercised due care and diligence unless he made further enquiries about his rights or obligations. It must, as the Judge recognised, all depend on the circumstances. Nonetheless, it will be an unusual case in which a person is able to show that, while he made no contributions even after learning the basic features of the NIC scheme, he nonetheless exercised due care and diligence.

[37] The decision-maker also has to look at the circumstances as they stood at the time. People can now be expected in many parts of the world to have access to the internet or to mobile phones, but that would not have been the position in the 1960s.”

In Goldsack, the First-tier Tribunal said this at paragraph 36:

“To the above list [ie, the factors in paragraphs 35 - 37 in Kearney], we would add “the extent and nature of the action or inaction of the Appellant (particularly in relation to the making of enquiries) at the relevant time or over the relevant period, bearing in mind the extent of his knowledge of the NIC scheme”.

This is because when Lady Justice Arden said (at [36] of Kearney):

“… there cannot logically be an absolute rule that, if the contributor has knowledge of the existence of some aspect of the NIC scheme, he can never show that he exercised due care and diligence unless he made further enquiries about his rights or obligations”

she was clearly contemplating that in some circumstances, knowledge of “some aspect of the NIC scheme”, combined with a failure to make “further enquiries about his rights or obligations” could amount to a failure to exercise due care and diligence. It must also be borne in mind that she went on to say:

“Nonetheless, it will be an unusual case in which a person is able to show that, while he made no contributions even after learning the basic features of the NIC scheme, he nonetheless exercised due care and diligence”

and this passage emphasises that the degree of knowledge of the NIC scheme held by the contributor is important, not just in its own right but also (and perhaps more importantly) in determining the extent of any further enquiries which he should have made.”

For guidance on what the above means in practice, see NIM25033.