Summary

We think that including Class 2 NICs within the self-assessment process will make it administratively simpler for both HM Revenue and Customs (HMRC) to collect and the self-employed to pay the correct Class 2 liability, especially when an individual starts and ceases self-employment. There will however need to be widespread publicity about these changes in the run up to April 2015. Existing direct debits will need to be stopped. Taxpayer education will be key to ensure that those affected fully understand the changes. The Government must ensure that an adequate publicity campaign is put in place well before April 2015.

We acknowledge that now that Finance Act 2014 has been enacted it would be inconsistent if similar measures regarding follower notices and accelerated payment notices were not introduced for NICs. However, we had many reservations about how these proposals would operate, particularly with respect to the internal HMRC governance process and some of the points we made at the time of the progress of the Finance Act through Parliament are equally valid here.

It would be similarly inconsistent if a targeted anti-avoidance rule (TAAR), replicating a similar provision made in Finance Act 2014, to prevent circumvention of the new tax and NIC rules for tackling avoidance involving agency workers and employment intermediaries were not introduced for NICs. However, we have one particular area of concern, which is where individuals work for their own Personal Service Company (PSC), where we think further clarification is needed whether it is intended the TAAR should apply to the PSC.

Simplifying NICs paid by the self-employed (Clauses 1 & 2, Schedule 1)

According to the Tax Impact Note issued alongside the Bill, arrangements will be offered to those who wish to spread the cost of their Class 2 NICs throughout the year which will be especially useful to some low paid workers who may find payment of Class 2 NICs in a lump sum at the same time as income tax and Class 4 NICs financially difficult. However, these arrangements are not mentioned in the Bill itself. HMRC should announce the details of the arrangements as soon as possible before April 2015 in order to provide clarity and certainty to taxpayers who may wish to take advantage of them. It would also be helpful to know if the arrangements will be offered to everybody or whether there will be restrictions on who can use them.

We think that by including the small earnings exemption (SEE) process within self-assessment and removing the requirement to apply for exception from paying Class 2 NICs is a welcome simplification. Allowing voluntary payments of Class 2 NICs is also welcome, and sufficient publicity about this should be provided to those affected so that they don’t miss out on some contributory benefits. This could be done, for example, on the self-assessment tax return, but note that some affected self-employed individuals may be outside the self-assessment system. Clearly there will also need to be appropriate differentiation from voluntary Class 3 contributions, which are much more expensive.

It is disappointing that there is no reference in the Bill to simplifying the deferment application process, despite it also having been consulted on last year. We would like to see the Government address this as it is a significant driver of complexity in the Class 2 system.

There will be a gap of 22 months between the collection of Class 2 payments for 2014/15 and the collection of payments for 2015/16, as liability moves from a weekly basis to arising at the end of the tax year. Thereafter, the payment of Class 2 will be in arrears on the 31 January following the end of the tax year. This could affect entitlement to benefits because under the current system, the entitlement to many contributory benefits is based on the claimant having paid contributions.

We would ask the Government to confirm that they have considered what changes may be needed to the entitlement rules in Schedule 3 of the Social Security Contributions and Benefits Act 1992 in respect of the benefits that are payable based on the claimant having paid contributions, for example state retirement pension, to ensure that moving the payment of Class 2 NICs to after the end of the tax year does not adversely affect entitlement to contributory benefits.

It is our view that the proposals to allow women to continue to become eligible for the standard rate of MA post reform are impractical (paragraph 26 annex A to the Explanatory Notes [1] ). They would have to make voluntary contributions before they file their self-assessment returns. This demands a very high level of forward planning on the woman’s part. Good publicity and taxpayer education are vital here, so that women don’t lose out on the standard rate of MA through ignorance. We suggest that a review is carried out once the new regime has been in place for two years in order to assess whether the number of claims for the standard rate of MA have reduced as a result of these changes

It is disappointing that the Government has not also taken the opportunity to simplify NICs for the self-employed by amalgamating Class 2 and Class 4 into a single class of NIC.

Extending new rules for follower notices & accelerated payments to NICs (Clauses 3 & 4, Schedule 2)

Follower Notices

HMRC have said that they are putting in place strict internal governance and safeguards so that follower notices can only be issued following approval at senior level within the organisation, and will be scrutinised by staff other than those who have been working on the detail of the case [2] . However, it remains the case that HMRC will be reviewing their own decisions. In addition, we do not know how the internal governance process operates. This is a key part of the practical operation of the legislation and it would help if the process was made transparent. We ask that the Government are more forthcoming about how the governance process will operate.

The follower notice legislation gives HMRC very broad powers. It is important therefore to be sure that they will be used only in suitable cases. We can envisage there will be difficulties in identifying appropriate follower cases. There will no doubt be cases that look to have similar principles (or reasoning) laid down as those in a ‘relevant judicial ruling’, but which are arguably not the same. It would be helpful to know exactly how follower cases are to be selected by HMRC, particularly as there is to be no formal right of appeal to the Tribunal following the issue of a follower notice, only the opportunity to send written representations to HMRC objecting to the notice on specified grounds.

We think it is inevitable that the lack of a formal appeals process will lead to more judicial review applications being made. If the taxpayer does not consider it is reasonable for a follower notice to be issued in his particular case, in the absence of any specific appeal powers, his only remedy would be to resort to judicial review to have the notice quashed. We ask that the Government provide assurances that HMRC will not issue follower notices except when cases are on precisely all fours with the precedent case, so that the occasions where a taxpayer might have to resort to judicial review would be kept to a minimum.

Accelerated payments notices

Schedule 2 paragraph 17 (2) states that an accelerated payment of the understated Class 1 and 2 NICs is a payment of the understated contributions, not a payment on account (unlike its sister provision for other taxes in Section 223(3) FA 2014). This is because of the need for sums to be treated as contributions and so that their payment can count toward the qualifying conditions for contributory benefits.

There are provisions in paragraph 17 (7) dealing with the repayment of an accelerated payment of contributions and, as this legislation is meant to mirror that in FA14, one assumes that HMRC intend to repay accelerated payments of NICs in appropriate cases. However, we were concerned that there appears to be no provision in the existing social security regulations or the NIC Bill to permit HMRC to make a refund if the contributions are ultimately found not to have been due. Regulation 52 of the Social Security (Contributions) Regulations 2001 refers to applications for return of contributions that have been paid in error or in excess of the annual maxima, but nothing else. We have therefore sought clarification from HMRC. HMRC have assured us that they do not consider that they would have to rely on Reg 52 in order to repay NICs, because, depending upon the precise circumstances of the matter in dispute, either they would have authority for repayment from the binding nature of the final determination as between the parties and also under Regs 10 to 12 of the Social Security Contributions (Decisions and Appeals) Regulations 1999 or the principles of public law would require them to repay the accelerated payments of NIC. They do not consider that express provision in the NIC Bill for repayment of accelerated payments of NICs is therefore necessary.

We ask that the Government provide further information on how the internal governance process will operate to give both taxpayers and advisers a better understanding and more certainty of how and when cases will be selected to receive an accelerated payments notice, given the potentially large sums of money involved.

Another concern we have had with these measures is that they do not specifically address how the underlying disputes will be settled. We ask that the Government provide an update on the measures it has been putting in place to provide support and focus for its operational work on implementing the Finance Act 2014 measures.

Extending new rules for ‘high-risk’ promoters to NICs

Mainstream compliant advisers will want reassurance that inadvertent or unintentional mistakes will not result in the issue of conduct notices. This is especially important because there is no right of appeal against the issue of a conduct notice, only the opportunity to comment on the proposed terms of the notice. It is disappointing that we are having to rely on HMRC guidance to determine the situations which will not be treated as warranting the issue of a conduct notice because they are considered to be insignificant or because they meet the tax impact safeguard. This approach generates unnecessary uncertainty.

Introducing a Targeted Anti-Avoidance Rule for intermediaries (clause 5)

Clause 5 introduces a new         TAAR into the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689) to ensure that workers who would be employees as a result of paragraph 2 of Schedule 1 (and paragraphs 2 and 9 of Schedule 3) of SI 1978/1689, but for the imposition of ‘artificially constructed     i ntermediary arrangements’, are treated as employees for NICs purposes.

The TAAR is modelled on Section 46A of the Income Tax (Earnings & Pensions) Act (ITEPA) 2003 (introduced by Section 16, Finance Act 2014) which is the parallel TAAR applying for income tax purposes in relation to agency workers. 

The TAAR in Clause 5 is however more broadly based in that it extends beyond purely agency workers. It also applies to (i) employees employed by a foreign employer who are supplied to a host employer in Great Britain and (ii) cases where an individual provides their services further to a contract between an end client and a UK agency.

Retrospective effect and vires

The     TAAR has retrospective effect from 6 April 2014. However, despite this, the liability to secondary contributions only apples in relation to payments made after the Bill receives Royal Assent.

Given the retrospective effect we wonder whether it could have been introduced earlier by way of a statutory instrument under existing powers (at Sections 2 and 7 of the Social Security Contributions and Benefits Act (SSCBA) 1992). It may be that the government does not consider that it has the vires to do this as paragraphs (3)-(6) of Clause 5 make provisions for amending the Social Security (Contributions & Benefits) Act (SSCBA) 1992 (and its Northern Ireland equivalent) to include provision for the making of regulations in the future to prevent the avoidance of NICs in respect of arrangements designed to prevent regulations intended to designate who is an employed earner from applying as intended. But Sections 2(2)(b) and 7(2) of SSCBA 1992 are quite widely drawn in allowing for regulations to prescribe that an individual can be re-categorised or a person treated as secondary contributor, so we would have thought this would have included making provisions for anti-avoidance rules within these regulations.

In any event, we agree that the better approach is to broaden the primary NIC legislation to make specific provision for regulations to address situations where a TAAR may be appropriate in determining the status of earners, and who should be the secondary contributor for NIC purposes. This is what Clause 5 does, by virtue of Clause 5(3) and 5(4), and with equivalent provisions relating to Northern Ireland.

Commencement provisions

As noted above, the TAAR has retrospective effect from 6 April 2014, except for Regulation 5A(6)(b), which deals with foreign agencies and employers, which only has effect from Royal Assent of this Bill. It is not apparent why the secondary liability of foreign agencies and employers is carved out.

Also, the TAAR has force in respect of the secondary contributor for arrangements entered into on or after 6 April 2014 but only in respect of payments made on or after the passing of the Bill, in regard to foreign agencies and employers. So, the liability of secondary contributors, where there is a foreign agency or employer, is not retrospective but that of primary contributors is. Why is that?

The TAAR

The approach in Clause 5 is to focus on ‘the main purpose, or one of the main purposes’ of the arrangements that have been implemented in testing whether or not the TAAR should bite. In particular, whether those arrangements are seeking to circumvent the specific NIC measures recently introduced to tighten the rules dealing with agency workers and offshore employment intermediaries. We appreciate the rationale for this given that it is difficult for Government to keep up with constantly evolving arrangements which could mean that the specific NIC rules on agency workers and offshore employment intermediaries may become quickly outdated. However, at the same time there is always the problem of unintended consequences, particular where a TAAR is concerned and so we think it would also be helpful if HMRC published guidance (with examples) on how they would intend to apply the TAAR, particularly where arrangements are implemented for genuine commercial purposes as opposed to being driven by avoidance of NIC

Personal Service Companies (PSCs)

There is a particular area which we think may require some further consideration and that is where individuals work for their own personal service company (PSC).

HMRC have said that generally speaking the recently enacted specific income tax and NIC legislation relating to agency workers (in particular) is not intended to apply to PSCs.

For example, HMRC say that ‘in most cases the agency legislation has never applied, and will continue not to apply, to PSCs because the agency legislation does not apply where…the remuneration is not in consequence of the worker providing their services under the contract…[and] it will not apply in most cases where profits are withdrawn as dividends as this is a return on capital distribution, not remuneration in consequence of the worker providing their services’ (see HMRC’s Summary of Responses on Onshore Employment Intermediaries, 13 March 2014, paragraphs 3.55 and 3.56).

HMRC has also said that in so far as the TAAR is concerned then ‘people who set up PSCs for a reason other than reducing tax – such as the limited liability protections incorporation provides – would not be within the TAAR. However, HMRC would be able to use the TAAR in the most egregious cases where, for instance, an agency requires all of their workers to set up PSCs to avoid the new legislation. HMRC will continue to monitor activity in these areas’ (paragraph 3.69).

However, it strikes us that the potential difficulty here is that PSCs are typically established for a variety of reasons and that things are not generally so black and white. For example, an individual may decide to establish a PSC both because of the attractions of limited liability and because they may be able to reduce their tax and NICs bill at the same time.

We think it would be helpful if HMRC could set out its position on whether it is intended the TAAR should or should not apply to the PSC in these circumstances.

Other comments

No provision is made within the TAAR in respect of paragraphs (9)(e) and (f) of Schedule 3 of SI 1978/1689. It is unclear why this is the case.

The Chartered Institute of Taxation (CIOT)

The 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. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. For further information, see our website here: http://www.tax.org.uk/about_the_ciot.