NIM02985 – Tips, gratuities and service charges: National Minimum Wage: HMRC published views on the impact on NICs liability

Published view before June 2005

In the E24 booklet and Tax Bulletin issued in February 2004 IR’s view was that where employers used payments of or in respect of gratuities to make employees wages up to the National Minimum Wage (NMW), they were influencing or determining the amounts to be allocated to employees and therefore condition 2 ( NIM02922) of the gratuity disregard could not be satisfied.

Published view from June 2005

After considering legal opinion, HMRC changed its view and published a revised E24 and included an article in issue 77 of the Tax Bulletin in June 2005. At that time HMRC considered that payments of or in respect of gratuities used to make employees’ wages up to the NMW were contractual earnings and not payments of or in respect of gratuities so the gratuities disregard could not apply.

Published view from 17 February 2006

HMRC’s view in the E24 booklet published in June 2005 was challenged. After considering further legal opinion HMRC announced its revised view on 17 February 2006 on it’s website. An article was also published in issue 82 of the Tax Bulletin issued in April 2006. HMRC’s current view is set out in NIM02983.

Effect of change of view

IR’s and HMRC’s views are changes to our interpretation of existing legislation following consideration of legal opinion. The legislation has not been amended. Where NICs have been paid in error because the contributor has followed the available published guidance they may be entitled to a refund of those NICs. When guidance was revised in both June 2005 and February 2006 procedures were put in place to allow those who paid NICs in error to claim refunds.