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National press reports earlier this year indicated that HM Revenue & Customs had ‘lost’ around £1.3Billion in National Insurance Contributions. TaxationWeb’s National Insurance editor Peter Arrowsmith answers some questions and gives his expert opinion on the real issues underlying the headlines.

Q1 These National Insurance Contributions (NICs) aren’t really ‘lost’ but they are the aggregate of NICs which HM Revenue & Customs (HMRC) has not been able to allocate to any individual’s NIC record. £1.3Billion seems like a lot of money. Whilst it stands to reason that there will always be some cases where HMRC has difficulty in tracing individuals’ records, is this higher than normal, or “just another day at the office” for HMRC?

A. It is a big number but looked at more closely, over the five year period in question it’s £28 per person, per year on average. This is within the usual tolerances at HMRC’s Newcastle processing centre which deals with cases where contributions are paid with no National Insurance Number (NINO).

And it’s nothing new. But it’s true that there are a lot of unidentified NICs that have built up over some decades – and the amount continues to grow year on year. Also, it should be appreciated that an employee does not necessarily need to pay actual NICs – earnings at or above the Lower Earnings Limit are all that are needed to count for benefits and it’s not clear whether some of these “zero-contribution cases” (there is a ‘deemed’ contribution element) have also ended up in the suspense account, or have been omitted from the figure of £1.3Billion.

Q2 In the press reports, HMRC seems basically to be blaming employees and employers for not providing sufficiently accurate information for HMRC to be able to identify the correct employee. Do you think this is fair? Is it always just that the employer gets the NINO wrong, or that the employee can’t remember his or her NINO correctly?

A. With electronic filing, employers have to meet the HMRC-imposed ‘Quality Standard’. This deals with unimportant things like the NIC earnings boxes (1a, 1b, 1c) and whether you’ve used the right sort of dash or comma, but it doesn’t actually validate the NINO at the time of submission. Indeed, it is possible to supply only a name, address, gender and date of birth instead of the NINO. So rather than blame employers, why not beef up the so-called Quality Standard?

 The reality is that HM Revenue and Customs records are believed to be so messy (remember, for example, the Codings Debacle in 2010 - Tax Demands Misery - HMRC Says "Sorry" and Good News for People with Large Underpayments) that they wouldn’t in fact be able to validate in real time – or anywhere near real time.

Q3 In its press release at the time Media Wrongly States HMRC has Lost Pension Contributions HMRC said categorically that nobody should suffer because of these ‘unallocated’ funds - HMRC said that it would identify where people had missing contributions histories, and write to them. Do you think that these statements were accurate, or overly optimistic?

A. That simply isn’t true!

First, HM Revenue and Customs said that everyone with a gap is written to. That is not so. Only people who are ‘wholly employed’ are written to. They don’t write to people who are only self-employed nor, I believe, those who are employed and self-employed.

Second, the unallocated funds are indeed just held in suspense. Occasionally, some will be traced to an individual retiring or receiving a ‘Deficiency Notice’ but equally, cases arise where people claim to have paid and cannot prove it to the high degree required by the law and the First-tier Tax Tribunal – as reported on numerous occasions here on TaxationWeb. See, for example,

• Thomas Joseph Beamish v HMRC (TC217); NIC Update - December 2009
• Martin Breen v HMRC (TC383); NIC Update - April 2010
• McLaggan v HMRC, TC588; NIC Update - September 2010
• Hywel Davies v HMRC (TC 890); NIC Update - February 2011...

Q4 HMRC says that if a case of missing contributions is reported to them, they’ll remedy it. Are these systems as reliable as HMRC seems to think? And how will people find out if they have a gap in their contribution history anyway?

A. A gap will only be identified by the individual either receiving a ‘Deficiency Notice’ AND understanding the importance of it AND challenging any inaccuracies, or by taking the interest to get a State Pension Forecast (BR19 is the application form for this - see Getting a State Pension Forecast). I fear that a great many people will not understand what their ‘Deficiency Notice’ means, or will not get a State Pension Forecast.

Q5  Is there anything that employers should be doing? Do they have a responsibility as regards missing/inaccurate NINOs? What about the NI Number Tracing Service?

A. Instructions are that they ought to request a NINO trace. However, employers don’t necessarily need the NINO if they have the date of birth, gender, name and address. And if the Quality Standard allows this alternative, then there may be little incentive for them to use the Tracing Service.

Q6 And what should individual taxpayers be doing – should they be concerned? In your experience, is it a good idea for them to be checking their contributions record? Should we all be sending in BR19s just to be on the safe side anyway?

A. In a perfect world, individuals should get a State Pension Forecast from the Department for Work and Pensions every 5-10 years. But many don’t and I don’t think that even this publicity surrounding missing NICs will change that – I’m afraid it’s all too easy to put off worrying about pensions until it’s too late.

Q7  Finally, whilst this NICs issue is the latest in a number of public problems for HMRC, what’s your overall opinion of where HMRC finds itself?

A. I think there are few people who think HMRC is doing a good job, and I’m no exception. It appears evident that, despite mandatory e-filing by employers, very many employees’ tax and National Insurance details remain unposted for a year or more, certainly from earlier years, and I strongly suspect that some from 2004/05 still haven’t been posted.

HM Revenue and Customs always brags about how many employers’ returns have been filed on time – but that is only the start of it all. The details have to be posted for tax, posted for NIC and then there’s all the supposed “customer service” that flows from that, such as NIC ‘Deficiency Notices’, PAYE Coding Adjustments, End-of-Year tax reconciliations... To say nothing of how long it takes them to issue penalty notices where there has been no filing.

Looking forwards, I see HMRC’s proposed ‘Real Time Information’ service for PAYE as a big crunch point – and let’s remember this is not being done for tax purposes, but to facilitate Ian Duncan-Smith’s Universal Tax Credit. I suspect that ‘Real Time Information’ filing – due to start in late 2012 for some employers – will expose the true nature of HM Revenue and Customs’ systems and records. And even then it won’t do the job for the self-employed or for employees with non-employment income.

And what about those missing CDs from 2007, with all the Tax Credits claimants’ information on them? Are they still behind a radiator in HMRC’s Newcastle office?!