Where an employer provides a director or an employee with a benefit in kind that has mixed use - ie the director or employee uses the benefit for both private and business use - the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) may allow a deduction from taxable earnings in respect of the business use
However, such deductions are disregarded when calculating the amount of general earnings on which Class 1A NICs are due. Class 1A NICs are therefore payable on the full cost of the benefit chargeable, before deduction, to income tax under ITEPA.
The exception to this is where the benefit is used solely for business purposes and ITEPA allows a deduction of the full cost of the benefit. Where this is the case, there is no liability to pay Class 1A NICs.
An appeal was heard last year by the First-tier Tribunal (Tax Chamber) in which the appellant claimed that partial deductions under section 365 of ITEPA were also deductible for Class 1A NICs for tax years from 2003-2004 to 2005-2006. The Tribunal judge found in favour of the appellant. HMRC consequently now accepts that partial deductions under sections 363 to 365 of ITEPA are not disregarded in the assessment of earnings liable to Class 1A NICs for the 2003-2004 to 2005-2006 tax years.
Liability to pay Class 1A NICs arises under section 10 of the Social Security Contributions and Benefits Act 1992 (SSCBA). When Class 1A NICs were extended from 6 April 2000 to cover most benefits in kind a new section 10 was introduced.
Paragraph 7 of the new section 10, though allowing for no Class 1A NICs liability where there was a fully matching deduction, set out the specific deductions allowed under the Income and Corporation Taxes Act 1988 (ICTA) that were to be disregarded when assessing Class 1A NICs.
The introduction of ITEPA, which replaced ICTA, brought consequential amendments to paragraph 7 of section 10 of ITEPA, and the introduction of paragraphs 7A and 7B. Those amendments were intended to mirror the previous paragraph 7 so that all of the deductions that were previously disregarded continued to be disregarded for Class 1A NICs.
A query received by HMRC raised some doubt as to whether the new legislation did replicate the previous version. Specifically, it was suggested that deductions allowed under sections 363 to 365 of ITEPA were no longer to be disregarded when assessing liability to pay Class 1A NICs.
Although HMRC's position was that the overall application of the new legislation did achieve the intended policy, a further amendment was made to put beyond doubt the fact that the new legislation replicated the original provisions for mixed use benefits. This amended inserted, with effect from 6 April 2007, sections 363 to 365 of ITEPA into the excluded provisions listed in paragraph 7B of section 10 of SSCBA.
HMRC's position on the legislation in force from 6 April 2003 to 5 April 2006 was challenged and the case of Antique Buildings Limited and The Commissioners for HMRC (Appeal number: TC/2009/10182) was heard before the First-tier Tribunal (Tax Chamber).
The appellant, Antique Buildings Limited, claimed that partial deductions allowed by section 365 of ITEPA for tax years from 2003-2004 to 2005-2006 were also deductible for Class 1A NICs. The Tribunal judge's decision (decision number TC 00408) found in favour of the appellant and allowed the appeal.
HMRC considered its position and decided not to seek permission to appeal against the decision. This means that HMRC now accepts that, for tax years from 2003-2004 to 2005-2006, partial deductions allowed by sections 363 to 365 of ITEPA are not to be disregarded when calculating liability to pay Class 1A NICs.
A refund can therefore be claimed in any case where Class 1A NICs have been calculated and paid without taking into account a deduction allowed by any of sections 363 to 365 of ITEPA.
It must be noted however, that this applies only to deductions under sections 363 to 365 of ITEPA and only to tax years from 2003-2004 to 2005-2006. The legislation prior to 6 April 2003 and from 6 April 2006 is clear in disregarding partial deductions for tax when calculating earnings for Class 1A NICs.
If you think that you have overpaid Class 1A NICs because you did not take into consideration deductions allowed by sections 363 to 365 of ITEPA you should write to:
HM Revenue and Customs
Customer Operations PAYE Employer Office
BP4009
Chillingham House
Benton Park View
Newcastle
NE98 1ZZ
Refund claims for the 2003-2004 year should generally be made to HMRC no later than 5 April 2011.
HMRC can only consider claims made after that date if the applicant can show that he had a reasonable excuse for not making the application in time and that he applied without unreasonable delay after that excuse ceased.
Claims for 2004-2005 must generally be made by 5 April 2012 and claims for 2005-2006 by 5 April 2013.
