NIM13180 – Class 1A NICs: Liability for Class 1A NICs: Identifying whether a payment of earnings has been made or a benefit has been provided: Establishing the contractual arrangements

In the majority of cases the identification of Class 1 NICs earnings or Class 1A NICs benefits will be straightforward. Earnings will normally take the form of cash, or cash equivalents such as vouchers or credit card use, whilst benefits will be something other than cash.

The usual way of identifying whether a benefit has been provided is to establish ownership of the item immediately before the employee receives it. Again, this will normally be straightforward. An employer who owns a car and allows his employee to use it is providing a benefit. Equally an employer who owns a television and then transfers ownership of it to the employee has supplied a benefit but an employer who reimburses the employee the cost of a television, or gives the employee cash to purchase a car has made a payment of earnings.

Remember though, that some items which fit this ownership test have been specifically regulated into Class 1 NICs liability and are not disregarded as benefits in kind, see NIM04002 onwards.

As a general rule, the most important consideration in identifying ownership is to establish who it is that makes the contract with the supplier to purchase or supply the item. Where it is the employer, the item will normally be a benefit. Where the employee makes the contract and the employer pays for the item or reimburses the employee the cost, it will be earnings.

Less easy to establish are cases where it appears that an employer is meeting a personal expense, normally referred to as a pecuniary liability, incurred by an employee but it is argued that a benefit is being provided. In these cases it will be necessary to check the contractual arrangements in place for the purchase. In some cases investigations will reveal that the contract to provide or supply an item is with the employer and renders what has been provided to the employee a benefit on which Class 1A NICs are due. In other cases, the employee will have contracted to purchase the item and the employer will be meeting the employee’s personal expense – a pecuniary liability – and Class 1 NICs will be due. This is best illustrated by way of an example.

Example

An employee arranges for his home telephone bill to be paid by his employer. The contract to supply the telephone line is between the employee and the telephone provider. In meeting his employee's home telephone bill, the employer is meeting the employee's personal expense (pecuniary liability) and a payment of earnings on which Class 1 NICs are due has been made.
If, on the other hand, an employer contracts directly with the telephone provider to install a telephone line in the employee's home and then meets the cost of the bills, the employer is providing a benefit. The contract is between the line provider and the employer. The employer is providing the employee with a benefit - the service of a telephone - and Class 1A NICs are due.

For guidance on the NIC treatment of pecuniary liabilities see NIM02270