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Peter Arrowsmith FCA highlights a selection of NIC matters, and provides a tip about employees remaining in employment after reaching state retirement age.

Securities and options acquired before Royal Assent

Up until Royal Assent to what is now Finance Act 2008, the law as it stood previously was in full force. After Royal Assent, the wider application of the changed ITEPA 2003, Part 7 rules (reflecting changes to residence rules and introducing the remittance basis charge) for tax and, by knock-on, National Insurance contributions on securities and options has retrospective effect from 6 April 2008.

No PAYE or National Insurance contribution responsibilities (other than reporting requirements on Form 42) apply to chargeable events that occur in the period between 6 April 2008 and Royal Assent if the law as it stood then did not impose them. Employers are not now required to revisit events prior to that date, even though the new law has retrospective effect from 6 April 2008.

In some circumstances employers should have operated PAYE and National Insurance contributions in respect of awards of securities or options granted between 6 April 2008 and Royal Assent that, following Royal Assent, should not have given rise to such charges. So, for example, where resident but not ordinarily resident employees acquired options or securities that were forfeitable within five years, since ITEPA 2003, Part 7, Chapters 5 and 2 did not apply, the exemptions in those Chapters from a money's-worth general earnings charge similarly did not apply. It might therefore be the case that an employer faced PAYE and National Insurance contributions obligations on the award of an option or securities which - post Royal Assent - are removed, as the awards were exempt from an income tax charge by virtue of the rules of Part 7. Where this is the case, the employer should make amendment of the pay record to remove what is now the 'non taxable' payment. In the next tax period(s) the tax and employee's Class 1 should be repaid to the individual.

Employee Benefit Trusts...They Just Roll On

Sempra Metals was a metal dealing business in the City of London which from 1995 replaced the previous practice of paying bonuses, by establishing an Isle of Man employee benefit trust. The employer made payments to the trust; the trust offered loans to, or to make investments on behalf of, various employees. Following the takeover of the company, a new family benefit trust was established in 2002.

In Sempra Metals Ltd v HMRC (SpC 698), HM Revenue and Customs contended that the payments to the two trusts were not allowable for corporation tax as the payments were made with a view to them becoming relevant emoluments (and without then having done so) and in the case of the 2002 trust they fell within Finance Act 2003, Sch 24, para 9(1). HMRC further contended that the payments to the trusts were subject to PAYE and Class 1 National Insurance contributions.

The Special Commissioners found that whilst the payments were in principle wholly and exclusively expended for the purposes of the employer's trade, they were indeed made with a view to becoming potential emoluments and in the case of the 2002 trust were within FA 2003, Sch 24. However, it was also held that the payments made to the trusts were not liable to PAYE and NIC in the hands of the affected employees.

In terms of its effect, the decision is similar to that in the House of Lords in Macdonald (HMIT) v Dextra Accessories Ltd & Others (2004), though in making settlements in other Employee Benefit Trust cases HMRC ignored that decision and offered corporation tax relief if the tax and Class 1 NIC were paid.

Holiday Homes

HM Revenue and Customs has confirmed that individuals who have paid income tax for 2007/08 or any previous year in circumstances where the relief afforded by ITEPA 2003, ss 100A and 100B (inserted by Finance Act 2008 and which are deemed always to have had effect) can claim repayment by applying to -

Michael Robinson,
c/o Debbie Green,
HM Revenue & Customs,
CPPT Directors Office,
5th Floor, Trinity Bridge House,
2 Dearmans Place,
Salford,
Manchester M3 5DT.

In fact I am not aware of anyone ever actually having paid tax on foreign holiday homes of the kind now relieved by this Finance Act 2008 change (please contact me if you know otherwise). However, if there are such instances then it is likely that the associated Class 1A liability will also have been collected from the company. HMRC has - as so often - conveniently ignored NIC in its announcement, but I would suggest contact be made as above in the first instance where necessary.

Changes to Statutory Sick Pay Paperwork

The Statutory Sick Pay (General) (Amendment) Regulations 2008 (SI 2008/1735) make changes that will come into effect from 27 October 2008, ie at the same time as the introduction of the employment support allowance that replaces (inter alia) incapacity benefit. It paves the way for an amended SSP1 containing less information. The following details will no longer be required on the new version of the form:

• First date of sickness
• Number of weeks and days of SSP paid
• Qualifying days for SSP
• Details of any linking spells (see also below).

The regulations also abolish (from the same date) the little used leaver's statement SSP1(L) together with the link with any periods of sickness with a previous employer. Employers are instructed by HM Revenue and Customs not to issue an SSP1(L) to any employee who leaves their employment on or after 27 October 2008 nor to accept or take into account an SSP1(L) for any period of incapacity for work (PIW) that commences on or after 27 October 2008 in the case of a newer employee. The new SSP1 is now available for use in cases where the SSP entitlement will expire on or after 27 October. For any employer sufficiently masochistic, the old (longer) version may however continue to be used.

Both versions can be found by entering 'SSP1' in the HMRC website search engine - the one likely-looking result lets you choose from both versions. They can also be found at www.dwp.gov.uk/lifeevent/benefits/statutory_sick_pay.asp#download

Salary Sacrifice

HM Revenue and Customs has issued further guidance, available at www.hmrc.gov.uk/specialist/sal-sac-question-and-answers.htm However, it says little that is new, probably bringing together in a single place earlier statements.

Wrong Procedures Are No Problem

In August 2005 HM Revenue and Customs issued PAYE determinations on PA Holdings Ltd and issued NIC Notices of Decision in respect of the same employment income, not to PA Holdings Ltd but to P Ltd. In March 2007 HMRC issued Notices of Decision to the correct company. HMRC subsequently applied for the tax and NIC appeals to be heard together using Form 209B and to which was attached the 2005 Notices of Decision but not the 2007 ones.

The Special Commissioners held that the fact that the incorrect decisions were attached did not prejudice the appellant's position as the subject matter of the appeals was quite clear despite the obvious error and furthermore ordered that the two appeals be heard at the one sitting.

(PA Holdings Ltd v HMRC Commissioners SpC 707)

Tip of the Month

Often overlooked is that where an employee remains in employment after state pension age, the employer's continuing NIC liability (only the employee liability ceases at that age) will be at the full not contracted-out rate even if the employee remains in the employer’s contracted-out pension scheme. This produces the odd effect that the employee’s liability reduces (to nil in fact) whereas the employer’s increases.

Unless your employer clients are avoiding this elephant trap then arrears of contributions – with interest and penalties – will be building up.

The above is taken from 'NIC Newsletter' (01/10/2008), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.