Class 1A NIC - the dividing line with Class 1

The forms P11D, on which employers report to the Inland Revenue benefits in kind (perks, for example company cars and private medical insurance) and reimbursed expenses (travelling and subsistence payments), require completion for the tax year 2001/02, the deadline being 6 July 2002. Filling in the P11D is supposedly easy as all items not involving the giving of cash to the employee go on it. For tax purposes it has never been necessary to distinguish between the reimbursement of expenses and pure benefits in kind, since the P11D is a return of both.

However the distinction is vital now that Class 1A NICs are due on all taxable benefits in kind. It is believed that many items which employers have correctly recorded on P11Ds for many years but which should always have attracted a Class 1 NIC liability are only now being discovered. The marking of certain boxes ‘1A’ on the forms highlights this. The key factor is whether the employer has made the contract for the goods or services (benefit in kind) or whether the employee incurred the original expense personally and is then reimbursed by you.

The treatment of medical expenses, in particular, highlights this point well. Medical treatment or insurance under an employer’s contract is entered at section I of the P11D and correctly attracts a Class 1A liability. This is the most usual circumstance. But reimbursement to an employee of medical insurance premiums under policies which the employee himself has taken out (perhaps before he joined your company) are entered in section B, not attracting Class 1A – such amounts have always been liable to Class 1 NIC and remain so.

It should be noted that where medical expenses are incurred outside the UK and the treatment arises while the employee is working outside the UK for the employer, no entry falls to be made on the P11D, and neither Class 1 nor Class 1A liability (nor tax, in fact) arises.

Home telephone bills constitute another type of expense where the treatment can vary. Usually, the bill is that of your employee and you reimburse it. In this case section O of the P11D applies and there is Class 1 NIC (not Class 1A) on any private element that you have reimbursed. If you paid the whole of the bill direct to the supplier, section B is applicable, with the same NIC consequences. If, however, you the employer have made the contract for the supply of the telephone at the employee’s home, then Class 1A is due as it is a pure benefit in kind, and section N (the brown box though, not the blue one) is the correct section. Where Class 1A – as opposed to Class 1 – is in point, then unless there is no private use at all (unlikely), or it is ‘insubstantial’, Class 1A is due on the entire amount, even though the employee will claim a tax deduction for the business element. This principle applies to all ‘mixed use’ (that is part business and part private) benefit provision. This point, in particular, highlights just how complex the whole system has become.

With mobile phones the position is different yet again. As these are not taxable and do not go on the P11D at all, there is consequently no Class 1A liability. However this relates only to an employer owned mobile. There is a trap in that where you merely reimburse the employee’s own personal expense, this will be subject to Class 1 contributions, except on identifiable business calls. Until its abolition a few years ago, the income tax scale charge of £200 also only applied to employer provision and not reimbursement.

PAYE/NIC problem areas

Thankfully, little has changed for 2002/03 and the PAYE documentation and information that needs to be accumulated by payroll software remains broadly unchanged.

Although cumbersome, it is important that all the NIC columns (1a to 1g) are completed accurately in each pay period, otherwise your P14s are likely to be the subject of Inland Revenue query in due course. Once year-end documents are queried in large volume, a visit from the PAYE auditor may be only a short time away.

More and more forms can now be submitted to the Inland Revenue securely over the internet. Although now too late for your recent P35, there may still be time to register and then submit your Class 1A return (Form P11D(b)) in this way. Visit www.inlandrevenue.gov.uk or telephone the IR Electronic Business Helpdesk on 08456 055999.

Free fuel and mileage payments

Do you still provide your employees with fuel for private use with their company cars? In many cases this will not be fiscally worthwhile unless private mileage is substantial – over 10,000 miles a year. This is so even where the question of ceasing to provide a company car has been looked at and the status quo adopted. Not providing private fuel may save the employee some tax - possibly a lot - and will also save you the Class 1A NIC. Of course, employees may need some persuasion to give up a pre-existing benefit - but point out to them the income tax they pay on the scale charge and then compare that with the actual cost of private fuel. They may then wish to start talking! Any change to procedures needs to take place before 6 April in any year as a full year’s scale charge applies otherwise. So if you have already provided any private fuel this tax year, start planning for next year – you have plenty of time to get employees used to the idea!

You may wish to introduce a system whereby employees using company cars are reimbursed for their business mileage at an agreed rate. The Revenue has recently published some suggested rates for guidance.

An alternative is for the employer to continue paying for all fuel but to require the employee to reimburse the cost of the fuel used for non-business purposes. In this case the requirement to reimburse must also exist for the whole year and it is important that the calculation is done accurately. It is imperative that a detailed record of private miles travelled is maintained, as if there is a question over the reimbursement made by the employee there is a risk that the scale benefit charge will apply in any event.

Statutory Maternity Pay (SMP)

The lower weekly rate increased substantially to £75 from 7 (not 6) April 2002. As the lower earnings limit is also £75 per week, there could now once again be situations where the 90% of average earnings payable in the first six weeks has to be topped up to £75.

Employers can generally reclaim 92% of SMP paid by reducing their PAYE/NIC deductions. For 2002/03 more employers will be entitled to reclaim a higher percentage of SMP paid as they will be treated as ‘small employers’. For payments of SMP paid in 2001/02 only employers whose gross NIC bill for 2000/01 was less than £20,000 were entitled to claim 100% of the SMP paid plus a compensation payment of 5%. The term ‘small employers’ has been redefined as regards payments of SMP made on and after 6 April 2002. A small employer for this purpose is now one whose gross Class 1 NIC liability in the previous year was less than £40,000, although the additional compensation has reduced slightly to 4.5%.

If you were paying SMP to an employee as at 5 April and paid more than £20,000 Class 1 NIC in 2000/01, but paid less than £40,000 in 2001/02 you can recover 104.5% of payments made on and after 6 April. And if this has so far been overlooked it is not too late to reduce your next monthly or quarterly remittance.

How much do you owe?

It is a common misconception that arrears of NIC can only be demanded for the last six years. The legislation contains no limit and the Revenue may request payments for an indefinite period.

However often arrears beyond the last six years need not be paid and great care is needed in handling such requests. Once payment is made it is too late – no repayment claim will be entertained. We can advise on the correct handling of such requests.

Another recent change - intermediaries

If you are an intermediary and affected by the colloquially named ‘IR35’ rules, you will be glad to know that the concession that applied last year has been extended indefinitely. So there will be no penalty imposed if you did not submit a complete and accurate 2001/02 P35 by 19 May, provided it is finalised and submitted by 31 January 2003. A provisional calculation should have been made to enable an estimated payment to be made by 19 April and interest will run until the correct payment is made – the concession relates only to penalties, and even then will not apply in the case of fraud, etc.

End of year procedures are becoming increasingly complex. If you would like to discuss any of the issues raised in this bulletin, or any wider areas of concern, please get in touch.