Working Together - Issue 21 May 2005

Contents

HM Revenue & Customs

The bill creating HM Revenue & Customs (HMRC), merging the former Departments of the Inland Revenue and HM Customs and Excise, received Royal Assent on 7 April 2005. The new Department was formally launched on 18 April 2005.

David Varney, Chairman said, 'We are adopting an incremental approach to change. I want to reassure you that your contacts with the new Department will be through the same channels as before.'

The activities of HMRC include

  • collection of direct and indirect taxes and National Insurance Contributions
  • payment of tax credits and child benefit
  • administration of child trust funds and the repayment of student loans, and enforcement of the National Minimum Wage
  • frontier protection, the facilitation of international trade, including the negotiation and maintenance of Double Taxation Agreements and the collection of trade statistics
  • the Valuation Office Agency.

This means that it will be some time before the new Departmental logo is adopted across all the whole of the Department. Forms, etc using the titles of the two former Departments will continue to be used in the interim and they will continue to be legal and valid.

Working Together will keep you up to date on progress, and we are particularly interested in receiving your feedback as the new Department is established. We are looking closely at how to take Working Together forward in the context of the new Department.

Agent Authorisations (form 64-8) - An Update

We told you in issue 19 that we were setting up a single team (Central Agent Authorisation Team - CAAT) to handle the processing of most new agent authorisations (forms 64-8) for individuals, trusts and partnerships. That team is now set up and the early progress is promising.

CAAT handles forms 64-8 (and CWF1s) for most

  • individuals
  • trusts
  • partnerships

A slightly revised 64-8 form is now on the website showing the CAAT address (at Longbenton, Newcastle upon Tyne NE98 1ZZ). Please do not send the form to the Area Office for these types of client, as this will delay matters for you.

There have been inevitably some initial teething problems, some of which are caused by the team receiving a lot of correspondence, Tax Returns and even cheques attached to the 64-8s and CWF1s. They are unable to deal with these attachments. They have also received a number of forms without either a National Insurance number or a UTR.

This creates additional work for the team and therefore delays in processing the 64-8s and the CWF1s.

CAAT does not handle

  • 64-8s for claims cases dealt with in our Claims Offices
  • 64-8s for expatriate or complex personal return cases
  • 64-8s for companies, or
  • 64-8s and CWF1s accompanied by CIS Registration Card applications

These forms/authorisations should be sent to the appropriate Area office, as you have in the past.

Any correspondence should be sent direct to the appropriate office. We hope that once the new arrangements have settled down, your agent details will be put on our systems more quickly.

Although HM Revenue & Customs is up and running, form 64-8 will continue to cover just those matters which were within the responsibility of the former Inland Revenue for the time being.

Many thanks for your co-operation.

Filing Employer's Annual Returns 2005-06

Although most of the text that follows is about online filing of Employer's Annual Returns, there is some information about submission of Returns on paper.

An issue relating to the authentication of messages between us and the Government Gateway was resolved by 7 April, and since then employers have been able to submit Returns. During the first weeks, to mitigate any risks to our online filing service, we actively managed the availability of the Secure Mailbox. We are very sorry about the inconvenience that the early problems and restrictions to the mailbox may have caused you.

Since 6 April, a record number of employers have filed their Employer's Annual Return online. As at 3 May 466,000 Returns had been submitted via the Internet with another 25,000 filed online using Electronic Data Interchange.

So as to carry out rigorous testing of our new computer system that will process Returns, we have delayed its switch-on. Since April, a temporary system has been accepting Returns, applying initial quality checks, and storing them until they are passed to the new computer.

The effect of this is that further quality checks will be done later, so employers may be contacted about errors in Returns. But we will only make contact when absolutely necessary. And because Returns passed initial checks, there is no question of small employers losing out on their entitlement to the online filing tax-free payment, nor of any employer getting a late filing penalty (as long as the original Return was filed by 19 May).

Large Employers Must Not File on Paper

Employers with 250 or more employees must file 2004-05 Returns online, even if we have sent them a paper Return. Employers who submit Returns on paper when they should be filed online will incur a non-online filing penalty.

'Period of grace' for Online and Paper Returns

We recommend that no-one leaves it to the last minute to file their Return. But Extra Statutory Concession B46 allows employers and agents up to seven more business days after the Employer's Annual Return filing deadline of 19 May to file the Return before a late filing penalty is charged. This concession - to allow for postal delays or problems with Internet connections - applies to all Returns, whether submitted online, by paper or by magnetic media. As long as the Return is received by 26 May 2005, we will not charge a late filing penalty, nor will we charge employers with 250 or more employees a non-online filing penalty as long as the Return was filed online.

More online

There is much more information in Do it Online: Online filing and electronic payment handbook, available from our website. This online handbook is often updated so we recommend you view the online version to be sure of getting the best possible online filing guidance.

Practicalities of Filing 2005-06 Returns

FBI 2 scrapped for online submissions

Employers no longer have to send us authorisation on form FBI 2 if they want an agent to send their PAYE information to us online.

But we must have a signed FBI 2 authorisation before we can send information to an agent. Employers can have as many agents as they want, but we can only issue information or discuss issues with one FBI 2-authorised agent. Agents registered for PAYE Online can send their client's Returns without an FBI 2 by following the 'Filing for authorised client's link' on the PAYE for Agents page.

A form 64-8 is still needed for an agent to send clients' Self Assessment and Company Tax Returns online, or to enable us to discuss issues relating to these types of Return with the agent.

Sending 'Supplementary' Returns

There is no provision in law for second or amended Returns, also known as 'supplementary' Returns. So where employers or agents need to make changes or send 'supplementary' information after 19 May

  • amended P14 and P35 details must be sent to us showing only the value of the changes
  • along with a letter to the employer's HMRC office setting out the reason the Return was not full and complete in the first place.

Each incidence of 'supplementary' information will be looked at on its merits, and a penalty will be considered under Section 98A(4) Taxes Management Act 1970.

We recommend that this information is not sent until the end of May when the new computer system is up and running, although we can accept amended details now.

Second or amended ('supplementary') Returns can be made online or on paper, regardless of how the original Return was made. For example, if the Return was filed using Electronic Data Interchange, employers and agents can register to use our free Online Return and Forms - PAYE Internet service to file amendments. Anyone using Online Return and Forms to send an amendment must first create an employee record: only for those where amended information is to be sent. Add the details to 'Employee List' before completing the P14(s) and P35.

Third party software is needed if Online Return and Forms is not used. Full details.

Electronic Data Interchange users sending amendments via the Internet must decide how they want to receive PAYE notices and reminders. Those who prefer to carry on getting them by Electronic Data Interchange, magnetic media or paper can opt out of getting them via the Secure Mailbox. To do this - for individual clients or for an entire client list - activate PAYE Online for Agents (Internet) and once clients have been added to the client list, select 'change your statutory notice option' from the PAYE service page.

Making Copies of Returns

An agent who completes a Return on an employers behalf should make a copy of the Return and ask the client to make a declaration confirming that it is correct and complete. The agent can then submit the Return. We advise agents to discuss and agree with employers what copies of records - including the declaration - are appropriate for the business. Agents can decide how best to keep copies using whatever method they choose, including electronic copies (for example, on email), paper, or a secure web process.

Incentives - New Anti-Avoidance Provisions

Changes to the incentive regulations (Statutory Instrument SI2005/826) came into effect on 19 March. These changes are intended to deny incentive payments to a tiny minority of employers who we believe intend to abuse the incentive process. The changes also clarify how the incentives will be applied or paid.

The changes introduce an anti-avoidance provision in order to refuse an incentive (or recover it where already paid) where the employing entity appears to have been set up, or to have paid PAYE income, wholly or mainly to gain the tax-free incentive payment. This provision will have no impact on our processing routines and is not intended to prevent the genuine small employer from benefiting from the incentive payment.

The provision has been widely drawn to ensure that those abusing the incentive provisions cannot readily circumvent the new provision by making small changes to their artificial arrangements, or claiming that the motive for the arrangements was other tax-related advantages. However, we do not intend to use the provision to deny incentive payments to existing businesses that appear to have incorporated primarily to take advantage of wider tax breaks.

We will challenge the relevant employers with a view to not paying or withdrawing an incentive which has already been paid, where we have reason to believe that the incentive provisions are being unfairly exploited. The employer will have the right of appeal to the Appeal Commissioners.

Incentive clarification

The anti-avoidance provision will apply to 2004-05 incentives for employers who made the first 2004-05 payment, which required the creation of a P11 deductions working sheet (or equivalent IT record), after 18 March 2005.

For 2005-06 and subsequent years, the provision will apply to all employers.

The amendments to the regulations also clarify how the incentives will be applied or paid. With effect from April 2005, when any request for a cheque repayment of the incentive is made we will first set the £250 against any outstanding arrears of tax, National Insurance Contributions etc and we will only send a cheque for the balance. Claims for cheque repayments of the incentive can only be considered by our Accounts Office after the employer has received written confirmation that the incentive has been credited to their payment record.

Employers can authorise agents to receive the incentive only when they make their claim to the Accounts Office. The authorisation must make it clear if it relates to the online filing incentive payment only, or any 2004-05 PAYE overpayment as well.

These changes do not affect our advice to employers about utilising the incentive credit by deducting it from future payments.

Filing Online or by Paper: Hints and Tips

P9d and P11d

Forms P9d and P11d can be filed now using our free Online Return and Forms - PAYE service, or using third party software or paper. The deadline for filing P11d forms is 6 July. Electronic Data Interchange users can already file their P11ds but we have no plans at the moment for P9d submission.

2005-2006 Cessation Returns

2005-06 cessation Returns can be filed online now.

csv download

Employers using .csv download are finding that Week 1/month 1 markings for non-cumulative codes are not being carried forward from the style sheet to the .csv spreadsheet. We are sorry, but we cannot correct this before October. In the meantime, users can instead view P6 messages online and print off the week 1/month 1 notices. Third party software with the facility to download mailbox messages straight to the software is unaffected by this problem.

Duplicate or Additional Paper P35s and P14s

Anyone who needs another paper P35 (for example, to send amended information) should contact their PAYE office. Additional P14s are available from the Employer's Orderline on 0845 7 646 646

SA Online Services Update

On 23 February 2005 we made improvements to our Self Assessment Online for Agents-Internet service. All agents who were registered for this service can now

  • View 'real time' liabilities and payment details of individuals set up for Self Assessment Online for whom a valid form 64-8 is held.
  • Check if repayments have been issued, how payments have been allocated or if interest has been calculated.
  • View a full history of your client's Self Assessment account over previous tax years.
  • Check the filing status of your client's Self Assessment Tax Return for the current year and any outstanding Returns from previous years.

You will also be able to view copies of Statements of Account issued since 30 November 2002 to Self Assessment clients who are either Individuals or Trusts.

If you have not registered as an online agent you can register on our website at www.hmrc.gov.uk and select the Practitioner zone. From the 'do it online' section select 'file your tax return'.

Tax Returns - New Guidance

The article referred to on page 3 of Working Together issue 20, was published in Tax Bulletin 76.

Working Together with the PAYE Concentrations

Following the article in Working Together 18 which told you about the inaugural meeting of the Working Together panel for the PAYE Concentrations: Bradford, Cardiff, Centre 1, Chapel Wharf, East Hants & Wight, Lothians, North East Metropolitan Area, North Wales - Wrexham & Sefton. The second meeting was held on 18 March 2005.

The dates of the future meetings are:

Wednesday 6 July 2005
Wednesday 5 October 2005
Friday 6 January 2006 (This date is provisional and will be confirmed at a later date).

How the consultation process will work:

  • 2 weeks prior to each meeting an email window will be opened which can be accessed via the Working Together pages of the HMRC internet.
  • Notification of the window opening will be published on the Working Together /What's New pages and via Professional body web pages.
  • If you have day-to-day dealings with PAYE concentrations and have issues you wish to raise, send these via the email window.
  • What are the opportunities?
  • improving processes on a large scale from feedback
  • widening the scope of interaction
  • identifying common problems and solutions.

What will Working Together add?

  • Identify quick wins around key dates in the taxes calendar
  • Education and support on change
  • Target agent access to advice, support and information

Summary

The inaugural meeting on the 15 November was the beginning of what we hope will be a useful and effective forum. The meeting was attended by partners in the National Working Together Steering Group from the HMRC side and the tax advisers/agents side. It also included representation from each PAYE Concentration office. The meeting set terms of reference for the panel, identified desired outcomes and proposed a method of evaluation. The meeting was very constructive with a lot of discussion points from both sides on the issues created by the remote customer base.

Both sides agreed that in the true sense of Working Together, problems and issues on both sides would be identified and addressed, as well as information supplied to assist understanding of both sides. Topics for discussion at the forum arise from day-to-day process problems encountered, deadline issues e.g. SA filing or via a wider adviser audience contacting the panel using an 'e-mail window'. Change will also form a major part, especially with the transition to the new HMRC Department.

The second meeting on 18 March was attended by representatives from the Concentrations and from each professional body.

A general review of 'why we were there' was followed by a discussion around the top 5 issues arising in the interaction between tax advisers and these large offices, and what was being done to address them

  • coding out of other income
  • on-line filing
  • 64-8 mandates
  • delays/receipts problems
  • enquiries conducted at a distance.

The discussion was frank and open and all felt that it was very helpful and constructive.

As a tax adviser, if you are interested in being involved, please contact us via the email window available prior to the next meeting. The next meeting will be 6 July and the window will be available via the Working Together pages of the HMRC site and, professional body web pages, 2 weeks prior to that.

Class 1 NI Contributions on Trade Profits

The Income Tax (Trading and other Income) Act 2005 (ITTOIA) came into force on 6 April 2005. From that date, Case I/II of Schedule D of the Income and Corporation Taxes Act 1988 has been replaced by a charge on trade profits. This includes the charge on the profits of a profession or vocation.

Some people pay Class 1 National Insurance Contributions (NICs) on income that is assessable to tax by a charge on trade profits. Class 4 NICs are normally payable on all income that is assessed as trade profits from self-employment. However from 6 April 2003 Class 4 NICs are not charged on any earnings as an employed earner that are assessed to tax by a charge on trade profits.

On the Self Assessment Return you should exclude all employed earner's earnings (not just those earnings on which Class 1 NICs have been paid) when calculating the taxable profits for assessing Class 4 NICs liability. There is no liability for Class 4 NICs on these earnings. However Class 4 NICs may still be payable on self-employment income that has taxable profits. Class 2 and Class 4 NICs will be payable on trade profits from self-employment.

If this applies to your client and you think that they may or will pay too much National Insurance, you can either

  • apply for deferment of Class 2 and or Class 4 NICs, or
  • apply for a refund of any overpaid Class 4 NICs at the end of the tax year.

(A refund of Class 4 NICs cannot be made until the Class 4 Self Assessment for the year has been finalised and fully paid. If it is not, then it is still possible to apply for deferment of Class 4 NICs.)

How to Complete the Tax Return

Since 2003-04 the Self Assessment Return refers to contributors who receive an amount that they have earned as an employee. When completing the Self Assessment Return, these earnings must be excluded from the total amount of profits on which Class 4 NICs are payable.

For the majority of taxpayers, the amount of profit on which tax and Class 4 NICs is calculated will be recorded at boxes 3.92, 4.22 and 3L.91 on the Self Assessment Return. This is the total (net) taxable profit after deductions (such as losses and expenditure).

You need to follow the Working Sheet for Class 4 NIC where the profits include:

  • employed earner's earnings that are included, by concession, in the business accounts (such as sub-postmasters, doctors and DEFRA employees), or
  • employed earner's earnings which are properly chargeable on trade profits (such as actors and actresses).

From the net taxable profit, you will need to remove any earnings that have not been taxed at source (an NT Tax Code) and therefore subject to Schedule D Income Tax. Any business losses that have been carried forward from a previous year will also be removed (this would be rare).

The result of the working sheet is to be copied to boxes 3.96, 4.25 and 3L.94. This is the adjustment figure that will reduce the taxable profits on which Class 4 NICs are payable.

The calculation of the Class 4 NICs due for the tax year is completed on the Comprehensive Tax Calculation Guide, which takes into account the adjustment figure.

Where deferment of Class 4 NICs has been granted for tax years from 2003-04, Deferment Services will assess and collect any deferred Class 4 NICs. Even though deferment is granted, the contributor will still need to pay Class 4 NICs at a rate of 1% on profits above the Lower Profit Limit when they pay self-employment income tax.

Class 1, 2 and 4 NICs Liability from 6 April 2003

NICs legislation cannot give a universal maximum figure since each contributor who has more than one employed earner's employment, or who is both employed and self-employed, will have their own individual maximum. This is because of the introduction of:

  • an uncapped primary Class 1 NICs liability on all earnings above the Upper Earnings Limit (UEL); and
  • an uncapped Class 4 NICs liability on all profits above the Upper Profit Limit (UPL)

Instead, legislation provides a method to calculate an individual's maximum liability on their earnings and or profits. To calculate the maximum use the steps in Regulation 21 for Class 1 and 2 NICs and Regulation 100 for Class 4 NICs.

The National Insurance Manual (NIM) has more information about the structural overview of Class 1 and Class 4 NICs from 6 April 2003. (In particular the changes in the Class 1 and Class 2 annual maximum, and the calculation of Class 4 NICs.)

The following link will take you to the main contents page of the NIM:

www.hmrc.gov.uk/manuals/nimmanual/index.htm

Regulation 21 - The Social Security (Contributions) Regulations 2001, and the Calculation of Class 1 and Class 2 NICs liability by Deferment Services

Regulation 21 was amended from 6 April 2003 by The Social Security (Contributions) (Amendment) Regulations 2003, (Statutory Instrument 2003 No.193). The regulation now sets out, step by step, how to calculate the Class 1 and Class 2 individual annual maximum.

From 6 April 2003, each contributor who was employed in more than one employment, or was both employed and self-employed during the tax year, will have an individual maximum liability for either Class 1 NICs only or Class 1 and Class 2 NICs only.

Deferment Services will determine a person's annual maximum (using Regulation 21) before they determine if any further Class 1 or Class 2 NICs liabilities are due.

Regulation 100 - The Social Security (Contributions) Regulations 2001 and the Calculation of Class 4 NICs liability by Deferment Services

Regulation 100 of the Social Security (Contributions) Regulations 2001 was amended from 6 April 2003 by The Social Security (Contributions) (Amendment) Regulations 2003, (Statutory Instrument 2003 No 193). The regulation now sets out step by step, how to calculate the Class 4 NICs maximum.

Deferment Services will determine a person's annual maximum (using Regulation 100) before they determine if any further Class 4 NICs are due. If a refund of Class 4 NICs has been claimed, Deferment Services will also use this maximum to help determine the amount of refund due.

This calculation determines the NICs due at the main Class 4 NICs rate (8%) on profits between the Lower Profit Limit (LPL) and Upper Profit Limit, (UPL). It also determines if further Class 4 NICs are due at a rate of 1%.

The calculation also uses the amount of Class 1 and 2 NICs that the person had paid. Non-standard rate NICs are converted to standard rate for the purpose of these calculations.

When liability for deferred NICs has been reviewed for 2003-04 and later tax years, Deferment Services will take into account the changes when they issue calculation letters.

editorial

Working Together is a partnership with the CIOT, ICAEW, ATT, ACCA, ICAS and AAT. Although the material in this publication obviously reflects discussion and consultation with these bodies, HMRC is solely responsible for its contents and for the views expressed in it.

contact details and back issues

Back issues can be downloaded from our featured area. If you would prefer a paper copy, please write to or email the address below. Working Together is covered by ©Crown Copyright. There is no objection to firms copying the publication for their own use. Anyone wishing to re-publish Working Together or extracts more widely, should write for permission to

Greig Rattray, Working Together Team, 5S South West Wing, Bush House, London WC2B 4RD
or email:

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