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Peter Arrowsmith FCA highlights a selection of NIC matters, and outlines how potential Class 1A NIC savings may be made by family companies.

Class 2 NIC - Changes to Payment Dates

You may recall an announcement in the 2008 Pre Budget Report about changes in Class 2 payment dates to match Self Assessment tax due dates. I am now led to believe that for 2011/12 and future years, the statutory payment dates for Class 2 National Insurance will be changed to 31 January and 31 July.

I'm currently expecting that HM Revenue and Customs will issue a mail shot to existing direct debit contributors in October 2010 explaining the changes and a reminder with the annual notification in February/March 2010. There will be details sent with the October 2010 and April 2011 quarterly bills. There should also be information on the HMRC website very soon.

I'm not specifically aware of the likely position regarding Class 3 for those who do not simply pay annually in arrears but I would be very surprised if the equivalent change was not made at the same time.

Mileage Allowance Not NIC-able

An obvious common sense statement, I hope, to most of my subscribers.

But not to HM Revenue and Customs.

A training organisation paid business motoring expenses in two ways to its employees. Those who did only a small amount of business mileage were paid 40p per mile. Those undertaking considerable amounts of business travel were paid a monthly travel allowance topped up with a reduced rate per mile (typically 12p or 13p).

In Total People Ltd v HMRC Commissioners (TC661), HM Revenue and Customs contended that the monthly travel allowance was no more than disguised earnings and liable to Class 1 National Insurance.

The Tribunal found it relatively easy to decide in favour of the employer. It was helped by the fact that the staff handbook referred to the payment as a travel allowance and set out the terms, and also the fact that it did not increase as often as salaries nor in the same proportion.

The employer is now due a refund of £146,000. I wonder why they ever paid it in the first place?

More Common Sense - Private Use of Pooled Vehicles

Industrial Doors (Scotland) Ltd v HMRC Commissioners (TC571) was another case involving the allegation that cars were pooled vehicles. The company supplied and fitted industrial doors and security systems, employing six people. The company claimed that a BMW car and a '4 x 4' were pooled cars, there being insurance only for business use and all conditions being met. In addition, on joining the firm, the managing director personally explained the terms on which the pooled vehicles were available and that private use of any kind was forbidden. HMRC could not dispute that the pooled car conditions were met, but said that in the absence of records and evidence and an internal checking and monitoring system it could not possibly be so. The tribunal found in favour of the company saying that whilst it was clearly preferable to have written records showing that the conditions at ITEPA 2003 s 167 were met, such written records were not part of the statutory requirements. In the case of a small employer, control could be achieved informally without written records. The insurance position was clear, there was parking space available at the premises and the nature of the trade was such that journeys would from time to time need to start at an employee's home. The tribunal found the written statements and evidence presented to it were within the requirements of ITEPA 2003 s 167.

Gender Dysphoria

M had been born male, but lived as a woman from Summer 2004, was divorced later in 2004 and received a full gender recognition certificate late in 2006. M reached the age of 60 in summer 2002. The case of M v HMRC Commissioners (TC638) followed a similar one to the Social Entitlement Tribunal in respect of state pension - which was lost. The argument here was similar but in respect of National Insurance contributions, namely that the two-year waiting period in the Gender Recognition Act 2004 was contrary to the Human Rights Act 1998 and EC law. M was seeking the refund of two years' contributions paid from the end of 2004 to the end of 2006. The judgment was that the provisions of the Gender Recognition Act 2004 were not incompatible with EC law and contributions were properly payable as a man aged under 65 right up to the time of issue of the full gender recognition certificate. The position might have been different if the periods being considered were prior to the Gender Recognition Act 2004 coming into force such that European rights were being asserted absent any suitable UK legislation to cover the issue.

Adjudicator's Report

The Adjudicator's Annual Report was again not published this year until September. This one covers the year ended 31 March 2010 and, as has been the case for a while now, none of the case reports it includes, relates to National Insurance.

Of the 1,743 HMRC cases investigated, 1,239 were regarding Tax Credits (67%; previous year 80%). Of the remainder 28 were upheld (previous year 14), 74 partially upheld (previous year 55) and 374 not upheld (previous year 240). Other cases were withdrawn or reconsidered by the Adjudicator. (57% of Tax Credits complaints were either wholly or partially upheld).

For non-Tax Credit cases, HMRC was recommended to pay a total of £65,692 compensation (including costs) and give up tax and interest of £99,223 (previous year, £188,597 and £30,427 respectively).

Tip of the Month - October 2010

A recent Tribunal case (S Barnard Ltd v HMRC, TC 491) concerned a BMW car provided to the company secretary, wife of the controlling director. The company contended, unsuccessfully, that this was normal commercial practice and the benefit in kind should be taxed and NIC'd directly on the wife, rather than on the husband (as provision to a family member).
 
Evidently, the wife was not a director herself.

The car benefit (and fuel benefit) - together with any small salary - may have fallen below £8,500 and thus if taxed on the wife would not be taxed at all (as a low-earning non-director). The legislation is designed specifically to catch, inter alia, just this sort of situation.

Note, however, that in other circumstances if the planning aim were simply to pay a lower rate of Income Tax (assuming the wife's marginal rate was less than the husband's) the solution would be - commercial requirements so permitting - simply to make the wife a director so that the benefit would be taxed on her in her own right and not on someone else as a family member. On this occasion the overall Class 1A paid by the company would, of course, be the same either way.

The above is taken from 'NIC Newsletter' (01/10/2010), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.