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Peter Arrowsmith FCA highlights a selection of NIC matters, and provides a tip for employers who have taken advantage of the NIC holiday for new businesses.

NIC Bill

The Bill had its third reading and was passed by the House of Lords on 22 March. It subsequently received Royal Assent on the same day, bringing into effect next week's 1% rate increase across the board and at last giving legality to the 'NIC Holiday' scheme for new businesses.

Limits Changing Too

Supplementing the rate increase in the National Insurance Contributions Act 2011, (see above), the Social Security (Contributions) (Amendment No. 2) Regulations 2011 (SI 2011/940) provide the new Lower Earnings Limit, Upper Earnings Limit and Thresholds in line with the Government's December announcement. They also increase the Married Woman's Reduced Rate by 1% to 5.85% as expected. The Social Security (Contributions) (Re-rating) Order 2011 (SI 2011/938) sets the new Class 2 and Class 3 rates, the Class 2 Small Earnings Exception limit and the Class 4 Lower and Upper Profits Limits.

Other Changes to Regulations

The Social Security (Contributions) (Amendment No. 3) Regulations 2011 (SI 2011/797) make three changes which came into force on 6 April 2011:

• power is made to refund Class 1A contributions paid on the provision of holiday homes through companies where tax relief was granted on a retrospective basis in Finance Act 2009. Claims must be made on or before 6 April 2015, though HMRC will contact all those who applied for tax refunds;
• vary the time at which, and periods for which, Class 2 and Class 3 contributions are payable (to half yearly, except where direct debit payments are made). The change does extend to Class 3 contributions as well, as had been expected but never explicitly stated; and
• exempts from Class 1 liability the payment of subsistence expenses to persons seconded to either the European Medicines Agency, the European Police College or the European Banking Authority.

FURBS Again - After All This Time

Forde and McHugh Ltd v HMRC [2011] UKUT78 (TCC) was a lead case heard by the Upper Tribunal. The company had invited a director (M) by letter on 9 April 2002 to join a Funded Unapproved Retirement Benefit Scheme (FURBS) of which he was the only member. In the period of relevance to this appeal contributions were made by way of Treasury Stock and a nominal cash amount of £1,000.

The Scheme Rules provided for benefits to be paid in the case of retirement from service, death benefits, benefits on change in nature of services, and benefits on leaving service before retirement age.

The company, citing Tullet & Tokyo International and Others v Secretary of State for Social Security, contended that the payments of contributions into a fund which required the operation of a contingency before onward payments out could be made, were not "earnings" within the social security legislation. It was also submitted that Telent plc v HMRC had been wrongly decided.

HMRC contended hat M had received a contingent interest in a fund on which it was possible to place a value and also sought to distinguish the Tullet decision.

The Tribunal held that whilst there was no doubt that the contributions into the FURBS was a payment to or for the benefit of M they were not "earnings".

Further, merely because it was possible to ascribe a value to the Fund that did not turn the payment into "earnings" either.

Another IR35 victory

In MBF Design Services Ltd v HMRC (TC 912), the employer supplied the services of the sole director to Airbus.

Looking at the evidence the Tribunal felt that the contract was a contract for services; remuneration was renegotiated frequently, errors had to be corrected at the expense of MBF, the director could be laid off without notice, the working pattern and hours were not typical of an employee, no holiday or sick pay was due and employee benefits were largely unavailable. The Tribunal therefore held that the fortunes of MBF depended on the work available. It was also clear from the contracts that the parties did not intend to create what would be an employment relationship, absent the existence of MBF.

Tax Leakage - Plumbers

HM Revenue and Customs has set up the Plumbers' Tax Safe Plan (PTSP) enabling plumbers to declare undeclared income if they notify an intention to disclose by 31 May and pay the related Income Tax, Class 4 NIC, interest and much-reduced penalties by 31 August 2011.

Further details can be found at Introduction to the Plumbers' Tax Safe Plan together with a link to a pdf guide.

Non-plumbers are also being encouraged to use the scheme, even though it was designed for plumbers.

Fancy that!

In a recent impact assessment concerning the change of Class 2 quarterly billing to six-monthly (see above), HM Revenue and Customs has stated that nearly 1 million people make a total of 3.7 million Class 2 payments per year. Over 90% of these involve writing a cheque - either for posting or paying over a bank or Post Office counter. Only the other 10% are paid online.

The former costs HMRC £2.35 per item to account for; the latter £1.

Tip of the Month - April 20011

This month's tip won't apply to too many people as it concerns the new NIC Holiday. The government had expected 400,000 applications over the three-year life of the scheme. The last time any figures were given only just over 1,000 employers had applied (in six months). So at least it won't be costing the Treasury too much, eh?

Be that as it may, we are at another tax year end, and such employers will need to complete their P35 and P14s in the usual way - and, of course, that means online in virtually all cases too. However, those getting the NIC Holiday MUST also complete the paper E92 return that HM Revenue and Customs has recently sent to successful applicants. These must be returned by post so as to be received by 19 May 2011. The record sheets E89 (one for each employee), or equivalent records, must also be attached to the E92 (note: this latter requirement was not made clear at the outset of the scheme).

The idea is that the P35 and the E92 will be processed together or at least both processed before penalty notices and underpayment notices are sent out.

None of us can be sure that HM Revenue and Customs will do this part correctly and timeously (though if it doesn't I'm sure at least one of the 1,000 affected employers will contact a National daily), but one thing we can be sure of is that if the supplementary Holiday return is late or not submitted at all it will appear to HM Revenue and Customs, looking at its records, that the employer has underpaid NIC for 2010/11.

Underpayment notices and enforcement action will then all swing into place.

So - save yourself unnecessary phone calls sorting it out later. Just send the E92 in - correct and on time. It really WILL be worth your while.

The above is taken from 'NIC Newsletter' (01/04/2011), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.