As an accountant you will be practised at pointing out tax traps to your clients, and helping them out of the holes they have fallen into. Last week we highlighted two tax traps; for parents who haven’t claimed child benefit, and property developers who haven’t claimed ATED relief. We also explained how mismatches between class 2 NIC and self-assessment occur, and how to resolve them.
What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.
Class 2 NIC mismatches
When the collection of class 2 NIC was transferred to the income tax SA system for 2015/16 onwards, most advisers assumed that the calculation of the class 2 liability would also be generated by the data included on the SA return. This is not the case.
HMRC continues to run two separate computer systems; SA for income taxreturns, and the NPS which contains class 2 NIC records. The liability for class 2 NIC is based on the NPS record, not on the information from SA returns.
Entries on the SA return do not update the taxpayer’s NPS record. Recording a commencement or cessation date for a self-employment on the SA return will not affect the liability for class 2 NIC. HMRC must be separately informed of that information.
However, data from the NPS is used to overwrite data from the SA return. For example, when the direct debit mechanism for paying class 2 NIC stopped in mid-2015, the taxpayer may have cancelled their direct debit. The NPS computer interpreted this as a cessation of self-employment, and transmitted this information to the SA computer. As a result the taxpayer has no class 2 NIC collected as part of his SA liability for 2015/16, although it continues to be due.
Check that your self-employed client has a class 2 NIC liability for 2015/16. Non-payment of class 2 NIC may affect the taxpayer’s eligibility for a state pension.