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Peter Arrowsmith FCA highlights a selection of NIC matters, and provides a timely tip regarding childcare vouchers.

Urgent Action - For Some (Number 1)

Don't bother, say HM Revenue and Customs … which is probably every reason TO bother!

HMRC issued a brief note on 31 January confirming my earlier news that it is to appeal the Total People case concerning the use of the mileage allowance relief against lump sum payments (see NIC Update  - October 2010).

It stresses that each case must be considered on its merits and that for any refund claim to be successful there must be a clear link between the payment made and the actual use of the car. HMRC seems to be attempting to deflect refund claims. However, it seems to me that such a link HAD been shown to exist (in the same way as lump sums paid to essential car users by local authorities) and so in cases akin to Total People a claim may very well be appropriate. Claims for 2004/05 need to be lodged by 5 April 2011.

Urgent Action - For Some (Number 2)

In my NIC Update - May 2010 I reported on the Antique Buildings Ltd case (TC408). The company was successful in claiming a Class 1A refund (or, rather, avoiding payment of the arrears HMRC was demanding) having owned a helicopter which was provided for both business and personal use of the director. The company was successful due to a drafting defect in the consolidation that was ITEPA 2003 as normally where there is mixed use the entire amount is liable to Class 1A.

Many months after the time limit for HMRC to appeal will have expired, HMRC has just issued a note confirming that it is not doing so. Further, it is actually inviting claims for refunds for 2004/05, 2005/06 and 2006/07 (after which the law was changed to what was always intended) and clearly will not try to re-run the arguments it used against Antique Buildings Ltd. The claim will be in order where the deduction arises from ITEPA 2003 ss 363-365 (s 365 in particular, I would suggest) for those three years.

Only a cynic would suggest that this late announcement is connected with the fact that claims for 2004/05 need to be lodged by 5 April 2011 (a mere 36 calendar days away).

Another NIC Increase in 2012

From 6 April 2012 the contracted-out deduction for salary related schemes will be reduced from 1.6% to 1.4% (employee) and from 3.7% to 3.4% (employer). This will apply for a five year period. From the same date both contracted-out deductions for money purchase schemes and the payment of equivalent rebates into personal pensions plans will be abolished.

NIC Holiday Returns

HM Revenue and Customs will this month be sending out NIC Holiday returns (Forms E92) to those employers (a mere 1,000 or so, I understand) who have made successful applications under the scheme.

An unexpected feature is that it seems that affected employers are going to have to send in the E89 record form (or equivalent records) for each qualifying employee along with the E92.

Also unexpected is that the Returns will be on paper, it originally having been planned that these would be electronic only. As with the main P35, they must be filed by 19 May.

ITV and Entertainers

Until November 2006 ITV treated several actors as employed earners and accounted for NIC on the amounts it paid them. From December 2006 it ceased to account for Class 1 NICs, treating the actors as self-employed. HMRC issued determinations charging NICs on the payments (making use of the Categorisation Regulations 1978), and the company appealed. The First-tier Tribunal reviewed the evidence in detail and allowed the appeal in part, issuing a decision in principle that the company was required to account for NICs in respect of most of the types of contracts, but not where the actors were 'engaged to perform a specific role in a specific programme, engaged for a specific period of engagement, and received a single total inclusive fee'. (ITV Services Ltd v HMRC (TC836)). This is a potentially important case for those with clients who are entertainers. I imagine that HMRC will be appealing the decision.

The Old Chestnut - Loan Write-Offs

In Stewart Fraser Ltd v HMRC (TC923), the close company waived a loan to its controlling director. It was accepted that this gave rise to a charge to Income Tax under what is now CTA 2010 s 455, and that this took precedence over the employment income charge under ITEPA 2003 s 188. HMRC issued a decision that the waiver of loan gave rise to a liability to Class 1 National Insurance contributions and the company appealed. The First-tier Tribunal dismissed the appeal, Judge Radford observing that 'the shareholders had not been consulted on the waiving of the loans', which had been approved by S's directors. Accordingly it appeared that the waiver was in respect of the director's employment rather than in respect of his shareholding. Therefore it constituted remuneration which was subject to Class 1 contributions.

Restricted Shares Not so Restricted After All

In UBS AG v HMRC (TC648) an offshore company with restricted shares was formed. The employer, wishing to pay bonuses, purchased those shares, provided them to employees and the restrictions were subsequently lifted - adding to their value considerably.

HMRC contended that the value so obtained was subject to PAYE and Class 1 NIC.

It was held that where contractual bonuses were due there was prima facie liability to tax and NIC and as regards all of the bonuses as a matter of fact in this particular case the shares did not meet the definition of 'restricted shares' in ITEPA 2003 s 423. The test in s 423(2)(c) that an employee would not be entitled, on forfeiture, to receive an amount of at least their market value at the time of forfeiture was not met.

In a case heard at the same time as the one above and where the facts and issues were broadly similar (Deutsche Bank Group Services (UK) Ltd v HMRC (TC944)), the First-tier Tribunal dismissed appeals against determinations under PAYE Regulations Reg 80 on the basis that the sums in question were 'earnings received by employees'. Judge Williams observed that 'although the scheme was undertaken through the medium of independent entities, the tribunal finds as fact that in reality the whole was a co-ordinated scheme in which all those involved in providing bonus payments to the employees played assigned roles undertaken either to achieve the desired reduction in taxation or to receive a fee for facilitating that aim'. He held that ITEPA 2003 ss 422-432 had to be construed in the light of the intention of Parliament in creating a set of rules 'for dealing with one form of provision of securities to employees, which otherwise would fall to be taxed as earnings in the hands of the relevant employees'. On the evidence, Parliament could not have 'intended to provide the double exemption from Income Tax' which the bank was claiming.

Be More Careful!

In Anthony Marshall v HMRC (TC849), M found at retirement that he was due only a 94% basic state pension as he had not paid Class 2 contributions for a number of years whilst self-employed. He had been sent a bill for only six years' arrears around the time of retirement, but this left the 6% deficit. He asked to pay the extra years, but HMRC refused as he had not exercised due care and diligence.

M contended that he should have been chased for payment by virtue of having declared self-employment of his tax return, claimed that he had not received the 'Notes' with the tax return which included a mention of the need to register separately for Class 2, and said that he had not received deficiency notices claimed to have been sent (having changed address). In addition, he had stated to an HMRC Inspector on 7 April 2005 that he had not signed on whilst unemployed because he did not have enough contributions - thus indicating that he knew he should be paying.

The Tribunal agreed with HMRC that further Class 2 arrears could not be paid. M could, however, pay up to six years' additional Class 3 contributions at today's much higher rates!

The circumstances of this case are unusual in that, at the time of M's retirement, it was the general practice of HMRC (it is said not to be so now, but may still happen occasionally) that all years' arrears were requested for payment and, if paid, those in excess of six years would simply not count for benefit purposes. True, in this case M would then have had two fights rather than one.

Pension Compensation Liable to Tax and NIC

Kuehne + Nagel Drinks Logistics Ltd and others v CRC (Upper Tribunal (Tax and Chancery Chamber), 21 December 2010) was an appeal from the decision for HMRC at the First-tier Tribunal that I have referred to in NIC Update - May 2010.

Compensation for giving up pension rights was linked to the need to keep workers onside and steer clear of the threat of strike action. The Upper Tribunal reinforced the earlier decision that the linkage to employment and the words in ITEPA 2003 s 62(2) meant that the payments of £5,000 per worker were taxable and, similarly, liable to NIC.

New Toolkit

HM Revenue and Customs has issued a new toolkit - 'National Insurance Contributions and Statutory Payments Toolkit'. It can be downloaded from Toolkits to Reduce Errors

Class 2 Payments for non-Direct Debit Payers

From April 2011, the old quarterly bills are being replaced with two bills a year. Those for 2011/12 will cover the following periods:

10 April 2011 - 8 October 2011 (due 31 January 2012)
9 October 2011 - 7 April 2012 (due 31 July 2012).

These bills are targeted to be issued in October 2011 and April 2012 respectively.

Tip of the Month - March 2011

From 6 April 2011 the main childcare relief of up to £55 per week for vouchers or employer payments to childcare providers will be restricted for 40% and 50%-rate taxpayers but only for NEW participants.

Therefore, new parents (or indeed more experienced parents) not already in a scheme but who have both at least one child and also the opportunity to join should (unless they are and expect to remain only basic rate taxpayers) join on or before 5 April 2011 - it does not matter that the employer may not have had time to provide the first weeks' entitlement before 6 April 2011.

For scheme members who ARE affected by the new restrictions, the reduced amounts apply to NIC (Class 1 for vouchers; Class 1A for actual childcare payments if an employer contract) as much as to Income Tax and are £28 per week for 40% taxpayers and £22 per week for 50% taxpayers.

[ For further information on the impending changes to Childcare Vouchers, see Childishly Simple - Changes to Tax-Free Childcare Vouchers from April 2011 - Ed. ]

The above is taken from 'NIC Newsletter' (01/03/2011), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.