An Isle of Man employer has to pay not only class 1 employee National Insurance contributions ("NIC's") but also class 1 employer NIC's even though its employees may work wholly in Great Britain. This was the finding of the Isle of Man Staff of Government (Appeal Division) Court on an appeal from the Social Security Commissioner.[1] Leave to appeal further to the Privy Council was then declined by the appeal court.

The appellant was a Manx registered limited liability company conducting business from the Isle of Man and licensed in the Isle of Man as an employment business. It employed some 1,500 individuals under contracts of employment however the individuals live in Great Britain and do not work in the Isle of Man. The appellant made the services of those individuals available to businesses situated in Great Britain. The company received payment from the businesses to whom the services were provided and then it paid salaries to the relevant individuals.

The appellant deducted from such salary primary class 1 employee NIC's and paid such sums to Her Majesty's Revenue and Customs in Great Britain. However the company made no payment in respect of secondary class 1 employer NIC's. The question of law raised by the appeal from the Social Security Commissioner was summarised by the appeal court as:-

"The simply expressed but difficult and important question of law raised by this appeal is whether the reciprocity in social security matters between the Isle of Man and GB provided by the operation of statutes and Orders in Council lawfully creates a liability for an employer in the Isle of Man to pay secondary class 1 (employer) NIC's for employees working in Great Britain."

In resolving the question of law, the Court was faced with "well reasoned but contrasting decisions of the Courts below". The Social Security Appeal Tribunal had determined there was no liability to pay secondary class 1 employer NIC's for the appellant's employees employed in Great Britain but on appeal the Social Security Commissioner had decided there was such a liability. In determining the issue the appeal court felt compelled to review the legislative history which began with the Social Insurance and Allied Services Report by Sir William Beveridge in November 1942 which itself was the foundation of the modern social security system in both Great Britain and the Isle of Man. The Court cited that the report stressed the importance of contributions to the scheme of insurance, accepted that there was an "inextricable link" between benefits and contributions and recognised that reciprocity of National Insurance between nations was envisaged. The appeal court commented "We agree with the [Social Security] Commissioner that such inextricable link continues to this day".

The appeal court then turned to the National Insurance Act 1946 of Parliament and the National Insurance (Isle of Man) Act 1948 of Tynwald. The 1946 Act provided for reciprocal arrangements with corresponding systems by its sections 63 and 64. The first reciprocal agreement between Great Britain and the Isle of Man was signed on 1 July 1948.

The court then looked at later legislation including the Social Security Act 1973 of Parliament as applied in the Isle of Man by virtue of the Social Security Legislation (Application) Act 1974 of Tynwald. In January 1978 the 1948 reciprocal agreement was replaced by a new agreement between Great Britain and the Isle of Man.

The appeal involved a detailed scrutiny of some key aspects of the legislation and in particular whether certain of the provisions applied to the Isle of Man confer the enabling power to regulate for reciprocal agreements that levied contributions and whether the Social Security Commissioner had erred in holding that the 1978 reciprocal arrangements imposed a liability on the appellant to pay secondary contributions for its employees who are employed in Great Britain. The appeal court noted that the burden lay on the appellant to show that the Social Security Commissioner's decision was wrong in law.

The appeal court reviewed the authorities and the decision of the Social Security Commissioner. It concluded that the Social Security Commissioner had been correct to adjudge that there was a power in the making of the reciprocal arrangements with other countries to include the ability to levy NIC's as opposed to simply reciprocity as to the payment of benefits. The court was therefore satisfied that the employment of an individual in Great Britain, where the employer is in the Isle of Man, triggers the operation of the reciprocal arrangements which relate both to the paying of contributions and the payment of benefits. The employee is to be treated as being employed in the Isle of Man and the natural consequence is that the employer, being resident in the Isle of Man, is liable for secondary class 1 employer NIC's in the normal way, as would be the case for an employee resident in the Isle of Man. The appeal court repeated the Social Security Commissioner's statement that "liability to pay contributions is the other side of the social security coin to the paying of benefits."

On 24 August 2012 the Manx company applied for special leave to appeal further to the Privy Council (the Isle of Man's highest appellate authority). The test it had to satisfy was to show that it was a case of gravity involving a matter of public interest, or some other question of law, or affecting property of considerable amount, or where the case is otherwise of some public importance of a very substantial character[2].

The company cited as a ground of seeking such leave that this was the first example of a charge to tax being imposed by an international agreement between states which can be distinguished from double taxation agreements between states which relieve the payment of double taxation by allocating the power to tax between the partaking states.

The Staff of Government (Appeal Division) considered the application for leave and declined it. The appeal Deemsters commented that they were satisfied as to the correctness of their conclusions and satisfied that none of the matters relied on by the appellant bringing the proposed appeal would justify the granting of special leave by the court.

[1] Penfolds Limited v The Treasury Judgment of Staff of Government Division (Appeal Division) 13 July 2012

[2] Approving Daily Telegraph Newspaper Company Limited v McLaughlin [1904] AC 776

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