Child benefit and pensions, ATED and developers, Class 2 NIC mismatches

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.

RTI penalties, Class 2 NIC errors, SEIS investments

Seven weeks into the 2016/17 tax year and HMRC finally tell us what is happening with RTI late filing penalties, and we explained the the details in last week’s newsletter. We also had alarming news about the mistakes HMRC are making with class 2 NIC liabilities, and a lesson to learn when applying for approval for investments under SEIS.

This is an
extract from our topical tax tips newsletter dated 26 May
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Class 2 NIC errors 
From 2015/16 class 2 NIC should to be collected through the taxpayer’s self-assessment, rather than paid separately by direct debit or cheque. Most commercial tax return software has been amended to incorporate this change for the self-employed, but it appears the HMRC computer has not. 

If you submit a 2015/16 tax return, your commercial software will calculate the class 2 NIC liability if the taxpayer’s self-employed profits exceed £5,965 for the year. HMRC’s computer will then “correct” the tax calculation and strip out the class 2 NIC liability, and it may repay that amount to the taxpayer.   

The HMRC computer is wrong, but you will be wasting your time arguing with the HMRC operative who answers the phone at the call centre as they can’t override the computer. The call-centre person may also tell you that your client is not registered for class 2 NIC, which is also likely to be incorrect. The problem apparently stems from HMRC’s NIC computer and SA computer not talking to each other, and this situation should be fixed soon.    

In the meantime, your client may have received an unexplained tax refund of £145.60, which he has forgotten to tell you about. It’s important the taxpayer’s NIC record is corrected and that he pays the class 2 NIC due for 2015/16 in order to build up qualification for the full state pension. 

Where your client has been paying class 2 NIC on a voluntary basis because he lives outside the UK, he should still be billed for the class 2 NIC in late 2016 for payment by 31 January 2017. Problems occur where the individual returned to the UK part way through 2015/16 and thus should pay class 2 under self-assessment for part of the year. The HMRC computer can’t cope with that situation.

This is an
extract from our topical tax tips newsletter dated 26 May
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>