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TaxationWeb by Peter Arrowsmith, FCA

Having received Royal Assent as long ago as 13 May, the first provisions of this legislation only come into effect on 1 September 2004. This article covers an outline of the provisions of this obscure Act.Having received Royal Assent as long ago as 13 May, the first provisions of this legislation only come into effect on 1 September 2004. An outline of the provisions of this obscure Act follows –

Sections 1, 3, 5, 7 and 9 of the Act relate to Great Britain; sections 2, 4, 6, 8 and 10 relate to Northern Ireland.

Sections 1 and 2 (together with supplementing Regulations) extend the opportunities for employers to recover primary contributions on securities based earnings. It allows the employer (with the employee’s agreement) to withhold an amount of securities equal to the value of the employee’s NIC. The employer is now able to recover in the year in which the gain arises, and in the year of cessation and the year following where an employee has left the employment.

Sections 3 and 4 extend the circumstances in which employers and employees can make agreements and joint elections to transfer the employer’s NIC liability to the employee on share based earnings, to include restricted and convertible securities. Agreements not previously within the legislation can now be made in respect of securities already awarded but only if a gain has not already arisen. The opportunity to make an agreement or election does not extend to those situations where the tax charge arises under the anti-avoidance provisions in Chapter 3A, Income Tax (Earnings and Pensions) Act 2003. These provisions also do not relate to any NIC that may arise on the original award of the securities – this is because the employer’s liability at that time is not unpredictable through future market movements. Finance Act 2004 ensures that the employer’s NICs borne by the employee will continue to be tax deductible in his hands on the extended range of securities (the tax relief previously applied only in the case of share options).

Section 5 and 6 align the procedures and periods of notice required for distraint or summary action to recover tax and NIC debts – fourteen days in Scotland and seven days elsewhere. There is no actual time limit specified in tax law, but Inland Revenue guidance requires debtors to be given seven days notice of action. In addition, s 5(4) allows for the future application of existing tax law to the recovery of NIC and allows such changes to be made by Statutory Instrument.

Sections 7 and 8 align the tax and NIC powers of Inland Revenue officers to inspect records and obtain information relating to Class 1, Class 1A, Class 1B and Class 2 contributions. It applies ss 20, 20B and 20BB, Taxes Management Act 1970, to NIC – with appropriate modifications – as a replacement to the current draconian provisions in s110ZA, Social Security Contributions and Benefits Act 1992. No provision is required for Class 3 contributions as they are entirely voluntary, and Class 4 contributions are already within that regime.

Sections 9 and 10 align Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) compliance with that for Statutory Paternity Pay (SPP) and Statutory Adoption Pay (SAP). Specifically, it replaces the present regime of criminal offences for SSP and SMP with the civil regime already applicable to SPP and SAP. The penalties will be a maximum of £300 for failing to produce records or information (and £60 per day for continued failure) and a maximum of £3,000 for failing to maintain records or repeatedly failing to make payments of SSP/SMP to employees.

Sections 1-6 come into force on 1 September 2004, sections 9 and 10 on 1 January 2005 and sections 7 and 8 on 6 April 2005 (The National Insurance Contributions and Statutory Payments Act 2004 (Commencement) Order 2004 (SI 2004/1943)). In connection with the opportunity for employers and employees to elect (as opposed to merely agreeing) to transfer the secondary liability to the employee on securities options generally (previously only share options), the Inland Revenue has updated its model elections and these are available at www.inlandrevenue.gov.uk/shareschemes/guidance_jointnics.htm
Nonetheless, I feel that professional advice will be needed in many cases.

It is interesting to note that nothing was inserted into the Act during its passage through the Parliamentary process about the disclosure of avoidance schemes (ie, in line with the Budget announcement about tax schemes). As such schemes usually also avoid PAYE – if not income tax altogether – it is presumably thought that the tax disclosure requirements (now, of course, very much in force) will automatically pick up NIC schemes at the same time.