Introduction

The Chartered Institute of Taxation (CIOT) welcomes the opportunity to comment on the provisions in the National Insurance Contributions (NICs) Bill 2013. This submission incorporates comments from the CIOT’s Low Incomes Tax Reform Group.

We would, in passing, like to also comment on the accompanying Explanatory Notes (EN). The commentary in the EN contains little detail as to the intention of the various measures and how individual clauses are intended to work. We think this is detrimental to proper Parliamentary scrutiny of the Bill.

Executive Summary

Employment Allowance (Clauses 1-8, Schedule 1)

The legislation needs to be clear as to the extent of the limitations on who can/cannot claim the allowance. At present the legislation is not sufficiently clear on this. Additionally, companies which have multiple PAYE schemes or where the business is transferred mid-year may be unfairly treated under the current proposals.

Application of GAAR to NICs (Clauses 9-10)

The extension of the GAAR to NICs is logical and reasonable. Although the legislation permits modifications to the GAAR for NICs purposes there should not be any deviation from the ‘double reasonableness’ test used in the tax GAAR.

Oil and gas workers on the continental shelf (Clause 11)

While we understand the rationale for the proposals it does give rise to a lot of practical issues, which will need careful thought and we would urge the committee to take heed of industry concerns over the workability of the proposals. The legislation will need to be clear as to what falls within the scope of the new rules (for example, who falls within the proposed new, sector specific, definition of ‘mariner’ and which employees are ‘continental shelf workers’).

Partnerships (Clause 13)

This clause disapplies section 4(4) of the LLP Act 2000 for NIC purposes without putting anything in its place. As a result there is a lack of clarity as to how members of an LLP should be treated for NIC purposes (as employees or as partners?).

Office holders who receive ‘earnings’ to be employed earners - Clause 14

It is unclear why a change effected as part of the work carried out by the Tax Law Rewrite Committee needs to be repealed. This would seem a retrograde step at a time when we should be aiming for greater integration of the operation of income tax and NICs.

Employment Allowance (EA) – Clauses 1-8 & Schedule 1

From April 2014 qualifying employers will not have to pay, or will be able to reclaim, the first £2,000 of their secondary Class 1 NICs liability (but not any Class 1A or Class 1B liability).

Publicity

It is clearly important that qualifying employers, particularly smaller employers, are made aware of the allowance (particularly the ‘digitally excluded’). We understand that HMRC are considering how best to publicise the existence of the allowance but would suggest HMRC could also query with employers why an allowance is not being claimed either during or following the end of the tax year.

Carers etc (Domestic employers)

A policy decision has been made to exclude ‘non-business’ employers from claiming the allowance. This includes those employing care support workers, nannies, gardeners, etc. We understand the Government wants to concentrate on business start-ups and similar and does not want to expend limited funds on purely domestic employers. This means, for example, that accidental employers of carers (eg elderly, disabled people etc who employ carers to look after them – often funded in part by the state) will not benefit from the allowance.

However, it would appear that if a person has always engaged a carer, nanny, gardener etc through that person’s company and with the company paying the individual a wage, the company may be able to claim the allowance. Is this what the Government intend? (There is anti-avoidance legislation but this seems directed at arrangements specifically entered into in order to claim the allowance).

Where people employ a carer for the sole reason that they are elderly or disabled, and are therefore forced into being an employer by their circumstances, they are unable to benefit from an easement extended to most other employers because they are not ‘in business’. The Government should be invited to explain what they see as the justification for this exclusion which prima facie constitutes discrimination against this vulnerable group of employers.

Public authorities

Similarly, it may be understandable that the Government does not want a publicly funded body carrying on its public duties to qualify for the allowance, but it is not clear what the extent of the exclusion is. For example, if a public body commissions a commercial enterprise to undertake part of the body’s public duties it would appear that the third party employer can claim the allowance because the third party is engaging in a commercial activity. However, what if an NHS Trust sets up a wholly owned medical research company, can that business claim the allowance?

Service company workers

The legislation will prevent the business from claiming the allowance on the secondary NICs liability that arises from deemed employment payments under IR35 and Managed Service Company (MSC) legislation. This is a sensible exclusion.

Transfers of businesses

The legislation will stop an employer claiming the allowance then transferring the business to another employer for that second employer to also claim an allowance for the same employees in the same tax year. This is also sensible.

However, because it is not limited to such cases it means, for instance, if Q transfers a business to P in, say, April 2014, P cannot claim any or part of the allowance even if Q does not, cannot or has not claimed the allowance (or has claimed only part of it). We can understand the intention of preventing multiple claims from what is in effect the same business each year but this exclusion does seem to go further than this.

Multiple PAYE Schemes

The connected persons’ exclusion will prevent businesses, eg groups of companies, with multiple PAYE Schemes from claiming the allowance more than once.

However, it is not clear what happens where there are joint ventures, mergers, franchises etc. We would assume that in a joint venture, for example, if one of the participators has a greater than 50% share they will be connected. But Schedule 1 of the Bill refers to situations concerning ‘companies whose relationship is not one of substantial commercial interdependence’ and sets out various further criteria to determine whether one is or is not connected with another. It is not clear to us exactly how these provisions are designed to operate and some examples would, we think, be helpful in this respect. The Explanatory Notes do little more than replay the legislation which is not terribly helpful.

Also, we understand that if one connected business cannot claim the full £2,000, the balance cannot be claimed by another connected business. This means that either connected persons have to estimate at the s tart of a tax year which business is most likely to exceed £2,000 in secondary Class 1 or wait until the end of that year and make a retrospective claim for a refund. This seems unduly restrictive.

General Anti-Abuse Rule (GAAR) to apply to NICs – Clauses 9-10

We think it is logical and reasonable that the GAAR should be extended to NICs.

The NIC’s Bill allows for the tax GAAR to be applied with modifications which may be prescribed by regulations. It is not yet clear what modifications would be necessary but we would not expect any deviation from the tax GAAR ‘double reasonableness test’ in the application of GAAR to NICs.

Oil and gas workers on the continental shelf (CSW) – Clause 11

Clause 11 derives from the consultation on Offshore Employment Intermediaries and the Government’s intention to clamp down on the avoidance of PAYE and NIC in relation to those working in the UK but employed by a company which is based offshore.

For the oil and gas sector, a certification process will operate whereby offshore employers employing individuals working on the continental shelf will be able to be certified by HMRC (ie where they are operating PAYE/NIC voluntarily) and if so the licensee of the oil field will be protected from any comeback from HMRC. 

Alternatively, where the offshore employer has a UK presence by way of branch or ‘associated company’ then that entity will in any event itself be required to account for PAYE/NIC and again the licensee will be protected. Where there is no certificate and no UK presence of the offshore employer then the licensee will have to account for NIC/PAYE. The definition of mariner will also be amended so that a special oil and gas definition applies for those working on the UK continental shelf. This will likely be based on that applying for the seafarers’ earnings deduction (SED). However, the NICs Bill is restricted to giving authority for the issue of certificates by HMRC to prescribed persons.

This is a complex issue and the present proposals hinge on being able to ascertain whether or not the employee is a ’Continental Shelf Worker’ (CSW). We understand that the sector has concerns about the workability of the proposals and would encourage the committee and the Government to take these concerns seriously. In particular, the definition of a CSW will require careful thought.

For example, it will be important to be clear as to where the boundary is to be drawn between who is a CSW and who is not, and whether this will be readily apparent in practice. Will the definition include all support staff, specialists, divers, directors of offshore staff, administrators, those working partly on the continental shelf and partly not etc? And what happens when somebody’s role changes over time? We understand that regulations are to be issued very shortly and these will be key, in our view, in determining whether the proposed approach is workable in practice.

This is not least because the certification process is, we understand, to work alongside a more general new approach – operating for all but the oil and gas sector and designed to deal with offshore structures in a different way. For businesses operating outside the oil and gas sector, and with an offshore employer and one or more intermediaries based in the UK, the idea is that the PAYE/NIC liability will fall on the intermediary contracting with the UK end user. So, for all concerned (including HMRC) it will be important to understand who is responsible for PAYE/NIC – the (certified) offshore employer, an associated UK company or the licensee (for the oil and gas sector) or the relevant intermediary (for non-oil and gas).

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Partnerships – Clauses 12 & 13

5.1

Members of LLPs (Clause 13)

Current HMRC interpretation of existing tax rules mean that individuals who are members of a limited liability partnership (LLP) are taxed as if they are partners in a partnership established under Partnership Act 1890 (traditional partnership) even if they are engaged on terms closer to those of employees.

5.2

Various issues arise including:

· Low paid workers are taken on as LLP members giving rise to loss of employment benefits and protection; and

· High paid workers benefit from self-employed status leading to loss of employment taxes payable.

5.3

This is because an individual member of an LLP who is treated as a partner receives more favourable treatment of income tax and NICs (‘employment taxes’) than an individual who is an employee engaged on similar terms. As a result, LLPs can be used to ‘disguise employment’ and to avoid employment taxes.

5.4

In order to combat the above perceived avoidance, Clause 13 simply disapplies section 4(4) of the Limited Liability Partnerships Act (LLPA) 2000 for the purposes of the Social Security (Contributions & Benefits) Act (SSCBA) 1992.

5.5

In our view, LLPA 2000, section 4(4) has been misinterpreted. We believe it was intended to mean that you treat an LLP for tax purposes as if it were a partnership and, in doing so, you treat the LLP members as if they were a partner (rather than an employee) if, and only if, they would be a partner had it been an ordinary partnership. Therefore, an LLP member that is in broadly the same position as a ‘salaried’ partner ought to be treated as employed and only those members who have an equal status to full equity partners should be treated as self-employed.

5.6

In specifically disapplying LLPA 2000, section 4(4) it is unclear whether one then applies the definitions of ‘employed earner’ and ‘self-employed earner’ in SSCBA 1992, s 2(1)(a) and (b) respectively or whether one now has to ignore the special tax status of LLPs and consider them as body corporates and, as a consequence, treat the members as officeholders in a body corporate and, therefore, as employed earners for tax purposes.

5.7

Our assumption is that the former is intended, as this would be the sensible approach, but if this is what is intended the legislation should make this clear. Otherwise there is a real danger that by trying to solve one problem we end up by making another.

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Other provisions – Clauses 14-17 & Schedule 2

6.1

Office holders who receive ‘earnings’ to be employed earners (Clause 14 and Schedule 2)

Currently SSCBA 1992, s2(1)(a) (Categories of earners) reads:

‘‘employed earner’ means a person who is gainfully employed in Great Britain either under a contract of service, or in an office (including elective office) with general earnings’.

There are similar references to ‘general earnings’ elsewhere in SSCBA:

· The term ‘general earnings’ was substituted by ITEPA 2003, s 722, Sch 6 paras 169, 171 with effect from 2003-04.

· The proposed amendment is to repeal the reference to ‘general earnings’ and substitute the term ‘earnings’.

· ‘Earnings’ is defined for NICs purposes by SSCBA 1992, s 3(1)(a): ‘‘earnings’ includes any remuneration or profit derived from an employment’.

6.2

It is unclear why the reference to general earnings inserted in 2003 as part of the Tax Law Rewrite is suddenly defective. It would have been helpful if the Explanatory Notes could have explained the rationale but they do not.

6.3

At a time when we would like to see greater integration of the operation of income tax and NICs, for example, common definitions of earnings, it is odd that the Government is proposing what appears, on the face of it, to be a retrograde step.

6.4

It is also worth noting that this change will come into effect two months after the Bill receives Royal Assent rather than from the start of a tax year. Again, it is unclear why a change to the definition of employed earner needs to be made (potentially) mid-tax year.

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The Chartered Institute of Taxation

7.1

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.