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TaxationWeb by Peter Arrowsmith, FCA

New regulations introduced with effect from 6 April 2003 prevent a double NIC charge for postmasters. Peter Arrowsmith FCA explains this change. The Social Security (Contributions) (Amendment No. 7) Regulations 2003 (SI 2003/2958) purport to change the 2001 Contributions Regs by eliminating from 6 April 2003 the double NIC charge for sub-postmasters.

The difficulty for sub-postmasters has been that their Post Office salary is paid after deduction of Class 1 contributions, but then gets subjected to Class 4 liability as well. For many sub-postmasters the salary is above the Class 1 Upper Earnings Limit (UEL) and so Class 4 contributions can be deferred with just a small adjustment at the end of the year. However, where the amount of Post Office salary that is subjected to Class 1 is below the UEL, some or all of the Class 4 liability sticks - with a resultant double charge on at least some of the income.

Without this new development the position would have become worse for the current and future years as there would have been both Class 1 and Class 4 on the same income without limit on either.

The Revenue's website is unequivocal as to the effect of the new legislation. Having set the scene as to the fact that the PO salary is assessable to tax under (sic) Schedule E and that there is a long standing tax concession, it states 'From April 2003, where a sub-postmaster includes his salary in the profits from the retail business, he or she will no longer pay Class 4 NICs on his (sic) earnings received from the Post Office'. All of this is done under the heading - 'the double charge incurred by sub-postmasters'. In the past the Contributions Agency spent years denying that the phenomenon affecting sub-postmasters was a double charge at all so this alone is clearly a great leap forward.

There is possibly bad news in the form of words used in the new Regulations.

Bear in mind the existing words in the 2001 Regs which state at Regulation 94 - 'If, for any year of assessment, (a) an earner has earnings from employment which is employed earner's employment; and (b) those earnings are chargeable to income tax under Schedule D; the earner shall be excepted from liability to pay contributions under section 15 of the Act on those earnings.' The difficulty here has always been that highlighted word 'chargeable', as the former Contributions Agency and subsequently the Inland Revenue have always said that the PO salary is not 'chargeable' under Schedule D but merely charged as such for convenience. Their view has been that the salary remains 'chargeable' (even though not in fact charged as such) under what was Schedule E. So if the law is now changed that can surely be only a good thing?

The difficulty is the form of words of the new law (new Regulation 94A) as follows - 'Where - (a) an earner has earnings from employment which is employed earner's employment; and (b) an amount representing those earnings is included in the calculation of profits chargeable to income tax under Schedule D; the earner shall be excepted from liability to pay contributions under section 15 of the Act (Class 4 contributions) on that amount.'

The clue is once again that highlighted word 'chargeable'. It seems arguable that the new sub-paragraph (b) does no more than acknowledge what has been happening pre- and post- this change of law (if that is indeed what it is). But it still fairly and squarely restricts the relief to cases where those earnings that have been subjected to Class 1 are 'chargeable' to Schedule D. So has there in fact been any change at all?

Clearly the Revenue thinks there has - their website note could not be clearer. But if that's the effect of new Reg 94A then cannot affected sub-postmasters equally argue that the same benefit should accrue to them from the old wording, and that the old arguments about the PO receipts losing their identity when paid into the business are of no more effect in the past as the Revenue clearly thinks now?

This change, if it is indeed legally effective, is good news and long overdue. The new legislation, of course, is not confined to sub-postmasters. Those in other businesses will also benefit, eg general medical practitioners with hospital appointment income (although in many such cases this is not actually paid into the partnership, but the total merely used as an adjustment in the profit shares between the doctors).