National Insurance Contributions and Statutory Payments Act 2004

This Act received Royal Assent on 13 May 2004. It has five measures; two to make the administration of National Insurance simpler when employers reward their employees with security based earnings, and three to help bring the National Insurance, Statutory Payments and equivalent tax regimes closer together. The following is a summary of an article that appears in the recently published Tax Bulletin 71.

Recovery of NICs from employees' share-based earnings
Employers are able to retain or sell shares equal to an employee's NICs liability when making payments of share-based earnings. Prior to the new provisions, this could only be done where an employee

• had left the employment and the payment was made subsequently but in the same tax year, or
  
  
• had received the payment, was leaving in the same tax year, and the employer was unable to recover the NICs from the employee's subsequent monetary earnings.

The new Act relaxes the rules almost completely and allows the employer also to retain or sell shares equal to the employee's NICs liability where an employee

• is continuing in employment, whether or not the recovery could be made from the employee's subsequent monetary earnings, and
  
  
• had left the employment and payment was made subsequently in the following tax year.

The existing and new provisions apply to securities of any kind, i.e. shares, company loan stock, Government gilts and a number of specialised financial instruments.

Regulations to be made under the new Act will require the employer only to have obtained the employee's written consent for the employer to withhold or sell some of the securities. As long as consent is obtained prior to the day on which payment is made, the new rules can apply to share options that were granted before the new legislation took effect.

The new rules do not prevent an employer from using the alternative, and recently improved method of recovering NICs on the provision of securities, i.e. by deducting the NICs from the employee's earnings in each pay period in the current and next tax year, and without any limit on the amount of each recovery. See Newsletter of 23 May 2003.

Joint Agreements and Elections
When an employee exercises share options, the employer incurs a secondary NICs liability on the gain. As the amount of this liability cannot be quantified until the time of exercise, at which time the liability could be a considerable sum of money, the NICs legislation allows the liability to be transferred to the employee if the employee agrees.

There are two forms of agreement,

• a joint NICs election, where the liability for the secondary NICs transfers to the employee, and
  
  
• an agreement for the employee to reimburse the employer's liability.

The new Act extends these facilities to restricted and convertible shares. The award of such shares can give rise to an NICs liability at the time of a post-acquisition chargeable event that increases the value of shares to an employee, such as the lifting of restrictions that apply to the shares or conversion of the shares to other more valuable shares.

These new provisions take effect on a date yet to be set out in Regulations.

When an employee bears the employer's liability under these arrangements, the employee is entitled to income tax relief on the amount of the employer's NICs paid. This year's Finance Bill includes measures to extend this tax relief to NICs liabilities arising on restricted and convertible shares.

Other provisions
Three other measures help to align the National Insurance, Statutory Payments and equivalent tax regimes.

1. In the context of the recovery by the Inland Revenue of a tax debt,
   • the defined period for distraint action (i.e. seizure of goods in repayment of a debt) for NICs is aligned with the periods defined for the recovery of tax, and
     
     
   • the powers of the Inland Revenue to levy distraint in England and Wales are extended to Northern Ireland.
     
     

2. In the context of the Inland Revenue's powers to investigate cases involving National Insurance,
   • the power to enter premises and examine persons on the premises is removed, thereby limiting the powers to requesting the provision of documents and information, as already applies for tax.
     
     
   • new powers will be introduced by Regulation to all SSP and SMP records to be inspected in the same way as PAYE records.
     
     

3. Failure to meet SSP and SMP obligations, until dealt with as minor criminal offences, is brought into line with the civil penalty system that applies in the case of SPP and SAP.

Commencement dates
With the exception of the changes to compliance powers, which will be brought into force from 6 April 2005, these new provisions are expected to take effect in mid-July.

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...back to 25 June 2004

Sources: www.inlandrevenue.gov.uk/bulletins/tb71.pdf
www.hmso.gov.uk/acts/acts2004/20040003.htm

New National Insurance Contributions Act

The National Insurance Contributions and Statutory Payments Bill received Royal Assent on 13 May and will come into force at a date to be confirmed, likely mid-July 2004. The new Act contains measures to help employers with their NICs obligations and align aspects of the administration of NICs and statutory payments with those for income tax. It does not make any changes to the structure or rates of NICs or disturb the principle of the contributory system.

Other objectives of the Act are to

• encourage employee share ownership by extending employers' choices about the way in which they meet NICs liabilities arising when employees are rewarded with share and securities-based earnings, and
  
  
• protect employees' rights to statutory sick pay and statutory maternity pay by improving the means of tackling employers who fail to meet their obligations.

Payments of security-based earnings
The payment of earnings in the form of securities, e.g. shares and related benefits from unapproved schemes, are subject to Class 1 contributions. When the employer makes the payment, there are no "cash" earnings from which the primary contributions can be deducted. Prior to the 2002/03 tax year, this was rarely a problem because there was a ceiling, the upper earnings limit (UEL), on primary contributions. However, with the introduction of the 1% additional primary contributions on earnings above the UEL, there is no limit to the amount of primary NICs that the employer may have to bear and subsequently attempt to recover from the employee.

Sections 1 and 2 of the Act allow for the making of Regulations that will extend the ability of employers to recover primary contributions by

• with the employee's consent, retaining or requiring the employee to sell an amount of securities equal to their contribution liability, and
  
  
• in the case of employees who have left the employment, doing so in the year of termination and in the following year.

When an employee exercises an employment-related option to acquire securities through a joint NICs "Election" or "Agreement", the liability for the employer's secondary NICs passes to the employee. As this liability depends entirely on the gain from the future exercise of the option, this arrangement removes the need for employers to provide for an unpredictable amount of secondary contributions in their accounts.

Sections 3 and 4 extend the same arrangement to the awarding of restricted and convertible securities. Employers have a similar difficulty in accounting for the unpredictable post-acquisition secondary liability on such awards and they will be allowed to ask the employee to fund the secondary contributions.

A series of Frequently Asked Questions on the use of "Elections" and "Agreements" for restricted and convertible securities have been posted on the Inland Revenue's website, at http://www.inlandrevenue.gov.uk/shareschemes/ni_stat_pmnts_act.htm.

Aligning distraint notice periods and procedures
Distraint involves taking possession of a debtor's goods and, if the debtor fails to pay the sum owed in the time allowed, removing them and putting them up for sale by public auction. The measures in the Bill are intended to align the various existing arrangements for taking distraint action in the case of unpaid tax and NICs. The existing provisions are different for tax and NICs, and the procedures differ in each country of the UK. Sections 5 and 6 align all of the different arrangements.

Powers of Inland Revenue officers
The powers that officers have to investigate fraud, including entering property without a warrant and compelling employers to provide information, are different for tax than they are for NICs. Sections 7 and 8 extend the income tax rules to NICs.

Similarly, in the case of fraud involving SSP and SMP, sections 9 and 10 align the rules for the statutory payments to those that apply for income tax.



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...back to 28 May 2004

Source: www.legislation.hmso.gov.uk/acts/acts2004/20040003.htm

NICs alignment with income tax

In his Pre-Budget Report in 1999, the Chancellor made a commitment to reduce technical differences between tax and NICs. To that end, the Government has published the National Insurance Contributions and Statutory Payments Bill. It contains measures to help employers with their NICs obligations and align aspects of the administration of NICs and statutory payments with those for income tax. It does not make any changes to the structure or rates of NICs or disturb the principle of the contributory system.

Other objectives of the Bill are to

• encourage employee share ownership by extending employers' choices about the way in which they meet NICs liabilities arising when employees are rewarded with share and securities-based earnings, and
• protect employees' rights to statutory sick pay and statutory maternity pay by improving the means of tackling employers who fail to meet their obligations.

Payments of security-based earnings

The payment of earnings in the form of securities, e.g. shares and related benefits from unapproved schemes, are subject to Class 1 contributions. When the employer makes the payment, there are no "cash" earnings from which the primary contributions can be deducted. Prior to the 2002/03 tax year, this was rarely a problem because there was a ceiling, the upper earnings limit (UEL), on primary contributions. However, with the introduction of the 1% additional primary contributions on earnings above the UEL, there is no limit to the amount of primary NICs that the employer may have to bear and subsequently attempt to recover from the employee.

Clauses 1 and 2 of the Bill allow for the making of Regulations that will extend the ability of employers to recover primary contributions by

• with the employee's consent, retaining or requiring the employee to sell an amount of securities equal to their contribution liability, and
• in the case of employees who have left the employment, doing so in the year of termination and in the following year.

When an employee exercises an employment-related option to acquire securities through a joint NICs election or agreement, the liability for the employer's secondary NICs passes to the employee. As this liability depends entirely on the gain from the future exercise of the option, this arrangement removes the need for employers to provide for an unpredictable amount of secondary contributions in their accounts.

Clauses 3 and 4 extend the same arrangement to the awarding of restricted and convertible securities. Employers have a similar difficulty in accounting for the unpredictable post-acquisition secondary liability on such awards and they will be allowed to ask the employee to fund the secondary contributions.

Aligning distraint notice periods and procedures

Distraint involves taking possession of a debtor's goods and, if the debtor fails to pay the sum owed in the time allowed, removing them and putting them up for sale by public auction. The measures in the Bill are intended to align the various existing arrangements for taking distraint action in the case of unpaid tax and NICs. The existing provisions are different for tax and NICs, and the procedures differ in each country of the UK. Clauses 5 and 6 align all of the different arrangements.

Powers of Inland Revenue officers

The powers that officers have to investigate fraud, including entering property without a warrant and compelling employers to provide information, are different for tax than they are for NICs. Clauses 7 and 8 will extend the income tax rules to NICs.

Similarly, in the case of fraud involving SSP and SMP, clauses 9 and 10 will align to rules for the statutory payments to those that apply for income tax.

SSP and SMP compliance

Failure by employers to meet obligations under the SSP and SMP schemes are currently treated as minor criminal offences. Similar failure for SPP and SAP are treated as civil offences. Clauses 9 and 10 of the Bill make failure to meet SSP and SMP obligations subject to civil penalties.
(Source: www.gnn.gov.uk/gnn/national.nsf/IR/7D38...
www.publications.parliament.uk/pa/cm200304/cmbills/002/2003002.htm
www.publications.parliament.uk/pa/cm200304/cmbills/002/en/03002x--.htm )
...back to 28 November 2003

Non-cash vouchers exempt from Class 1 NICs

In The Social Security (Contributions) (Amendment No. 7) Regulations 2003, effective 10 December 2003, the Inland Revenue has amended Schedule 3 of The Social Security (Contributions) Regulations 2001 to reflect, for Class 1 NICs purposes, the tax exemptions that apply to the provision of non-cash vouchers and the inclusion in the tax legislation of most of the former extra-statutory concessions.

Added to the exemptions previously listed are Class 1 NICs exemptions for non-cash vouchers that are provided to obtain

• support for public bus services
• the provision of cars for disabled employees
• mainland transfers for offshore oil and gas workers.

Following an enquiry to the Inland Revenue on a number of other tax exemptions for non-cash vouchers are do not appear to have an equivalent NICs exemption, we received the following comments.

There is currently no equivalent NICs exemption for the following provisions that have tax exemption:

• welfare counselling
• shopping trips in works buses
• assets made available to disabled employees

The Revenue states "there seems no reason why the tax exemption should not be mirrored here too, and this is under consideration".

The other provision for which there is a tax exemption but no NICs exemption is cyclist's meals. An exemption is also to be made for this, but it does not appear in the latest amendment regulations.

We still have some outstanding issues in the area of tax exemptions for non-cash vouchers, for example, although the provision of mainland transfers for offshore oil and gas workers, the provision of suggestion awards and employer-provided childcare enjoy tax exemption within the defined rules, there is no provision that exempts the use of non-cash vouchers that are used to obtain those provisions.
(Source: www.inlandrevenue.gov.uk/si/2003-2958.pdf )
...back to 21 November 2003

Tax and NICs alignment

In preparation for the consolidation of the Social Security (Contributions) Regulations for Great Britain with those for Northern Ireland, the Government has made a number of technical changes to NICs rules to bring them into line with income tax rules. The consolidation will bring together all of the amendments that have been made to NICs regulations since 1979 and all Regulations will, in future, cover the whole of the UK.

The technical changes are set out in The Social Security (Contributions) (Amendment No. 3) Regulations 2001. NICs and income tax rules are brought into line in the following situations:

From 6th April 2001, there is no longer a Class 1 NICs liability where an employer
• pays for, reimburses or provides a voucher in respect of workplace car parking, motorcycle and cycle parking
• rewards an employee for a suggestion and the conditions for tax relief in Extra Statutory Concession (ESC) A57 are met
• provides a long service award and the conditions for tax relief in ESC A22 are met
• provides non-cash vouchers or payments to car sharers in exceptional circumstances and the conditions for tax relief in ESC A66 are
met
• provides non-cash vouchers to cover:
- use of a works bus service, or the loan of a bicycle or cycle safety equipment
- travelling and subsistence when public transport is disrupted and the conditions for tax relief in ESC A58 are met
- transfers from or to the mainland by workers on offshore oil and gas rig platforms and the conditions for tax relief in ESC A65 are
met
- late night journeys where the conditions for tax relief in ESC A66 are met.

Also from 6th April 2001:

• where an employer pays personal incidental expenses (PIEs) to employees who have to stay away from home overnight on business,
they must add the various elements of the payment together for NICs, as they do for tax, to determine whether the total is within the
prescribed exemption limits
• the NICs rules for home travel expenses for workers seconded into the UK and seconded abroad are aligned with the tax position, for
example
- the cost of journeys from the employee's home in the UK to the place of work abroad and return journeys home
- the cost, where the employee works abroad for 60 days or more, of up to 2 journeys a year by a spouse and children to visit or
accompany the employee and up to 2 return journeys.
- Payroll Briefing 197 - 15 March 2001