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Peter Arrowsmith FCA with an update on NIC matters and a timely reminder about calculating Directors' NICs properly.

Reality Sets in for NIC Holiday Scheme

David Cameron has admitted that the NIC Holiday Scheme has not been as successful as had been planned. However, he seems to take solace that it hasn't therefore cost the Government very much.
Take up was still 'around' 12,000 employers (i.e., could be 11,001) as at 19 January - against a planned 400,000 over the scheme's three-year life.

New Tax Year Reality Not Yet Set in for HMRC!

Many people will have been too busy with Self Assessment returns to have started looking at the new Employer Helpbooks for 2012/13. 'Helpbook' is perhaps a generous phrase.

Readers may already be aware that contracted-out money purchase rebates are being abolished at the end of the current tax year.So why does the new E12 (PAYE and National Insurance Rates and Limits 2012/13) set out rates for Tables F, G and S?

I can think of no reason - and can reassure you that the news that there will be no COMP rebates after 5 April 2012 IS correct.

This negligence would be funny if it were not so serious.

NIC on Mileage Allowances

The Upper Tribunal has granted permission for the case popularly known as Total People Ltd to be further appealed by the employer. The company was successful at the First-Tier Tribunal, but the decision was, for rather perverse reasons, overturned by the Upper Tribunal. Now the Court of Appeal will have a go.

Bereavement Benefit Consultation

The DWP has issued a consultation document  Bereavement Benefit for the 21st Century
In essence, the Government is proposing to severely reduce (both in amount and duration for which payable) the weekly benefits but increase the lump sum payable on death.

Pensions Reduced

The Social Security Pensions (Flat Rate Introduction Year) Order 2011 (SI 2011/2953) sets 2012/13 as the 'flat rate introduction year'. This marks the start of the period to around the early 2030s whereby the additional pension earned by higher earners is replaced by a flat rate accrual of state pension, so that by soon after 2030 there will be no earnings related state pension accrued - only a flat rate addition (or no flat rate addition where earnings are insufficient).

This would also have been the time at which the 'Upper Accrual Point' would have been introduced had Gordon Brown not accelerated its introduction which had the quite accidental (I'm sure!!) effect of increasing NIC revenue over the past few years. The UAP is £770 per week forever until it is abolished at the above-mentioned early-2030s date.

All that I say above is based on currently enacted legislation, but the current Government is now planning to have a completely flat rate additional state pension by the middle of this decade.

Work longer, pay more contributions, get less pension - now where have I heard that phrase before?

Easier Unemployment Claims for Armed Forces Partners

The Welfare Reform Act 2009 (Commencement No. 6) Order 2011 (SI 2011/2857) and the Social Security (Contribution Conditions for Jobseeker's Allowance and Employment and Support Allowance) Regulations 2011 (SI 2011/2862) make changes to the contribution conditions for the contribution-based elements of the benefits mentioned above.

The change affects wives and civil partners who have left the UK since 1 April 2010 to accompany their partner on a tour of duty abroad in the armed forces. The first contribution condition for such people may now be met in ANY one year rather than one of two very recent years pertinent to the claim for benefit (that still applies to the rest of us). This will help partners upon their eventual return to the UK.

HMRC v PA Holdings

PA Holdings was an avoidance case involving the payment of dividends out of a special purpose vehicle. The First-Tier Tribunal decided that for tax purposes the income was both general earnings from employment and dividend income for tax purposes and 'earnings' (as defined) for NIC purposes. The double tax charge is then alleviated by what was ICTA 1988 s 20(2).

HMRC appealed the tax finding and PA Holdings appealed the NIC finding.

The Court of Appeal ([2011] EWCA Civ 1414) decided that the income was earnings for tax but, rather perversely in my opinion, also then decided that was the end of the matter - you didn't need to look at other means of taxing the payment. Yet if the status of earnings trumps everything else, why was s 20 ever needed (and it is of course carried forward into ITEPA 2003)?

I guess as the finding is that NIC is due anyway, I shouldn't be too concerned. But I can't help but think the decision is very strange and let's hope the case is further appealed. In my opinion the FTT was right all along.

Subsistence and Salary Sacrifice

Reed (that is the group of recruitment firms, rather than the owners of LexisNexis, or indeed any other similarly named firms) has lost at the First-Tier Tribunal in a case involving salary sacrifice in relation to travel and subsistence - Reed Employment Plc (and 11 other associated Reed companies) v HMRC (TC1727).

As well as the technicalities of the effectiveness of the salary sacrifice and the eligibility of relief for mobile workers under the travel and subsistence rules, there is the issue that HMRC had granted a dispensation in respect of the expenses in question. Reed is, I understand, currently minded to seek a judicial review of its treatment by HMRC. (So much for allegations that big business gets cosy deals from HMRC, then, as the general media would like Joe Public to believe).

The case report is so massive, at over 90 pages, that it comes with an index and dramatis personae.

Weight Watchers (UK) Limited & Others v HMRC

I have reported previously the HMRC victory at the First-Tier Tribunal which held that 'leaders' were employees of the company.

The Upper Tribunal has dismissed the company's further appeal saying that the FTT's decision was correct and could not be faulted. ([2011] UKUT 433 (TCC))

Personal Liability

In Charles Michael O'Rourke v HMRC (TC1675), unpaid National Insurance of L Wear & Co was transferred to O under a personal liability notice.

He appealed on the basis that the word 'neglect' is to be construed in this penal circumstance subjectively and not, as is the widespread habit of HMRC, to construe it objectively. The Tribunal agreed reaching its decision after noting that the provisions at SSAA 1992 ss 121C and 121D are criminal for the purpose of the European Convention of Human Rights and then considering the same issue under domestic law and taking on board the 'Hansard' principle.

An earlier Tribunal had directed that O's addiction which affected his behaviour could not be taken into account as neglect had an objective meaning. Accordingly, this direction was set aside and the case will be heard afresh with that evidence to be admitted and fully considered.

HMRC Records Still Reign Supreme...

Pamela Ann Tarr v HMRC (TC1485) is yet another case where the NIRS2 records were favoured over a contributor's recollection.

T claimed that extra years of Home Responsibilities Protection were due (which would have the effect of increasing her state pension), but the computer records showed 50p of reduced rate contributions paid in 1978/79. This had the effect of maintaining the election for longer and Home Responsibilities Protection is not due for years when the election was in force.

The case was not helped by the story having changed several times (would that not be the case though as older documents, etc., were uncovered and memories stirred?).

...And Again

… though in this case, the decision doesn't leave me having doubts about the system.

In TC1474, Dilip Kumar Dass challenged at retirement his contributions record as he had entitlement to only an 89% state pension. This was, though, partly due to the fact that he came to this country after the age of 16.

Nonetheless, he challenged various elements on what are to me spurious grounds such as that unconnected employers (one of which included the BBC) should have aggregated earnings and that no Class 1 was paid on examiners' income. Regulars will not need me to remind them that such income is statutorily deemed to be from self-employment under Categorisation of Earners Regulations 1978.

The appeal failed.

Employer Failed to Pay Class 3 NIC?!

In David Ashworth v HMRC (TC1632), A had worked in Hong Kong from 1973 to 1979 and failure to pay Class 3 voluntary contributions for that period left a shortfall in his state pension. HMRC had agreed in 2008 that these could be paid late and A's employment contract was such that the employer would pay the contributions if A wanted them paid. A complained that the former employer went into administration during a lengthy period when HMRC failed to provide the necessary documents.

Not surprisingly, the Tribunal found that the matter in question did not fall within its jurisdiction, and noted that A has taken the matter up with the Adjudicator's Office. Perhaps we will see a case report on this in an Annual Report this year or next - recent Reports from the Adjudicator's Office have not mentioned any NIC cases at all.

Half a Victory re Lost NIC Paid

In Bogdan Maciej Hudziec v HMRC (TC1700) missing contributions were considered, not for the first time, by the First-Tier Tribunal.

This case is unusual, however, in that H was born on 3 June 1957 and so the challenge was not prompted by the usual circumstance of a less than 100% state pension entitlement. H is Polish and has had some short periods of work in the UK, some outwith his visa terms, with only a 'temporary NINO' and some of those under a false name.

The issue arose because H requested a certificate E205 from the UK to assist with a Polish benefit claim. The certificate provided showed nothing paid in the UK.

There was some work as a student fruit-picking, etc., in the Wisbech area supposedly under the SAWS (Seasonal Agricultural Workers Scheme) which affords NIC exemption for foreign students. However, the Tribunal found that H did not meet the exemption conditions and, coloured by his producing a seemingly forged letter from a later employer, deduced that he must have given false information to the Wisbech employer. Thus, he could not have notional contributions deemed to his credit under Reg 60 as he had connived with the employer in the non-payment of contributions. There were tiny amounts of NIC paid in some subsequent visits to this country but HMRC could find none in their huge suspense account of unmatched items. However, as regards two of the small, subsequent employments the FTT decided that HMRC should apply Reg 60 to the benefit of H. Whether the tiny amounts in question will actually assist his Polish state benefits claim we shall, of course, never know.

The Tribunal criticised HMRC for setting out the 2001 version of what is now Reg 145(3) in relation to the 1980s and asserting that the previous wording was the same (Reg 119(3)). In fact it was not. The Tribunal said that as NIC accrues over a person's entire working life with the potential to go back over up to 49 years, it is incumbent on HMRC to present to the Tribunal the version of the law current at the time in point in any dispute. I can't argue with that.

Tip of the Month - Where did the Time Go?

This marks the tenth anniversary of my 'Tip of the Month', which ought (as we numerate tax people know) to make the one that follows this month the 121st and not the 120th. In fact, it is neither as in some years the Tip has taken a summer holiday. I hope someone else is counting, because I'm not!

Tip of the Month - Directors' National Insurance Calculations

As we near the end of the tax year, accountants to smaller firms and payrollers in bigger ones need to remember that after the final payment to directors in the year, the National Insurance paid by both director and employer needs to be checked and calculated on the annual earnings period basis (or a pro-rata basis in the year of appointment, but not in the year of resignation). Other methods are often used in making calculations during the year and some of these methods even have the approval of HMRC and the force of law. Whatever methodology has been used, an annual check will mop up any easily made errors due to resignation, death, a change in the employee's applicable Table Letter (e.g., moving into or out of contracted-out employment, revoking a married woman's reduced rate election or reaching state pension age) or simply variations in the level of pay. The widely held view that just because HMRC permits other methods of calculation during the year that is the end of the matter is a pure myth. The annual (or pro rata annual, if applicable) basis is the only basis that applies in every case, so check your calculations before submission of the year end returns.

The above is taken from 'NIC Newsletter' (01/02/2012), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.