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Peter Arrowsmith, FCA, with his monthly update of all things National Insurance - and a warning that HMRC advice on the IR35 Calculation is incorrect!

Tax and NIC Merger

Following my unusually optimistic report last month, I’m now less optimistic.

In a Commons Written Answer on 4 July, David Gauke describes what we are going to get in the autumn as ‘an update on this work’ – not the consultation document that we were promised at the end of May. Maybe the doom-mongers that I commented upon last time are correct.

DOTAS Regulations

The National Insurance Contributions (Application of Part 7 of the Finance Act 2004) Regulations 2012 (SI 2012/1868) consolidate the National Insurance Contributions (Application of Part 7 of the Finance Act 2004) Regulations 2007 and four subsequent amendments and also make some minor further amendments. The corresponding tax regulations (dating back to 2004) have also been consolidated.

Bereavement Benefits

Following the consultation mentioned in my January newsletter, the DWP has now confirmed that the change put forward will go ahead.

The new benefit is provisionally named Bereavement Support Payment and may be tax free.

Indicative amounts are a lump sum of £2,500 with monthly instalments of £150 for a year – or £5,000/£400 respectively if there is one or more dependent children. The deceased must have paid NIC on 25 times the Lower Earnings Limit in any one tax year. Credits and Class 3 contributions will not count (the latter do at present).

Personal Liability Notice Stands

Christine Roberts (TC1994) was unsuccessful in overturning a PLN issued where a company had not paid any Class 1 or Class 1A NIC in its nearly 12 months of trading before going into administration. The company had been formed to take over another business that itself was in administration and the other two directors in this case had been involved in that company and others connected with it.

The Tribunal was satisfied that the three directors had been neglectful and held that the apportionment by HMRC of one-third of the total unpaid NIC to this one appellant was entirely reasonable.

Revocation of Reduced Rate Election Not to be Backdated

Carol Anne Slater (TC1996) revoked her reduced rate election in 2007 on receipt of a pension forecast. Trying to improve her state pension position, in 2009 she was told by an HMRC officer that she could be treated as revoking the election in 1985. In 1984/85 and 1992/93 contributions had been paid at the full rate in error. The excess for the latter was refunded, and as regards 1985/86 the same employer as the prior year correctly deducted reduced rate contributions. For 1984/85, the potential refund was below a tolerance limit and no refund was offered.

Mrs Slater maintained that had the refund been offered for 1984/85 this would have prompted her to look into matters and revoke the election then. As the Tribunal noted, no revocation followed the offering of the later refund. The Tribunal had no power to overturn the change of mind on the part of HMRC. It also noted that the case has been considered by both the Adjudicator and the Parliamentary Ombudsman – both presumably without success.

Statutory Maternity Pay Shaken Up

Sanghita Aryal Dahal (TC1997) was successful in overcoming both her employer (McDonald’s Restaurants) and HMRC. Her SMP claim had failed on account of low earnings over the relevant eight week period – this had been calculated on the basis of the fortnightly payments made on alternate Thursdays. However, the payslips were dated the previous Saturday and a calculation using those as the four dates of payment over the necessary eight weeks produced average earnings above the Lower Earnings Limit so that SMP would be payable.

Appeal Produces Extra Pension

Frederick Wood (TC2030) was receiving only a 41% basic state pension despite having worked and paid contributions all his life. HMRC produced its usual records to justify the contributions history giving rise to this level of payment. W produced detailed schedules of his working life created from memory with the support of his wife. Though there were clearly lengthy contribution gaps in the HMRC records, those contributions that were recorded largely matched the record produced by W. For that reason and having formed the view that both W and his wife – who also gave evidence – were credible witnesses, the Tribunal decided that Reg 60 should apply to give credit for Class 1 contributions deducted by employers but never – according to the HMRC records – paid over. This was save for part of a period when W was running his own company with a friend and the Tribunal felt that W had been negligent so as to disqualify the relief that Reg 60 would otherwise have afforded.

Tip of the Month - IR35 Calculations

With the Olympics well under way, IR35 calculations will not be at the forefront of many minds. However, in due course it will be necessary to come back to any outstanding computations for 2011/12 (required by 31 January 2013 at the latest). And not too long after that, to the current year’s computations!

It is important to deduct in the calculation the correct employers' National Insurance contributions incurred. HM Revenue and Customs guidance, past and present, has been muddled (and remains so in the current CWG2 at page 59).

It is quite clear from ‘Step Six’ in Reg 7(1), Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000/727) that the amount to deduct is the liability FOR the year of calculation not the amount PAID IN the year.

CWG2 is simply wrong in saying that the Class 1 to deduct is that paid in the year (for many companies there may be no monthly payments of salary anyway, of course). The NIC on the deemed payment itself also needs to be taken into account for the year to which it relates, not when it is paid.

Having established that principle it applies equally to the rare cases where there are benefits in kind to also take into account – the Class 1A to deduct in a 2011/12 calculation is that due in July 2012 for 2011/12 – not the amount paid in 2011/12 (which relates to the previous year).

The above is taken from 'NIC Newsletter' (01/08/2012), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.