Overview of the Act
5.An explanation of the various classes of National Insurance contributions is at Annex A; a description of statutory payments, is at Annex B; and a glossary of abbreviations is at Annex C.
Power to make regulations to create a retrospective liability for National Insurance contributions etc
6.The provisions in section 1 will enable the Treasury to make regulations under specified existing powers that will have retrospective effect from dates as early as the 2 December 2004, if necessary. The new power may only be used where a provision of the Income Tax Acts which relates to income tax chargeable under the employment income Parts of ITEPA 2003 is passed which has retrospective effect and the Treasury consider it appropriate to make NICs regulations under any of those existing powers for the purpose of reflecting the whole or part of the retrospective tax provision. It must also appear expedient to the Treasury for the NICs regulations to have retrospective effect in consequence of the retrospective tax provision. The regulations can ensure that payments made under a tax and NICs avoidance scheme or arrangement, used since the 2 December 2004, can be treated as earnings for NICs purposes. The resulting NICs liability will be calculated as if a liability had existed at the time the payments were made. The Government only envisages exercising these powers where the retrospective tax provision is a provision tackling avoidance of the income tax payable on employment income.
7.Section 1 also provides for wide powers to make consequential changes or other changes that may be required through exercise of the powers described in paragraph 6 above for the purposes of contributions, contributory benefits, statutory payments, contracted-out pension rebates or other purposes. In particular it is anticipated the powers will allow for:-
earnings that originally avoided NICs liability to count towards benefit entitlement and statutory payments (SMP, SSP, SPP and SAP);
the NICs paid on avoidance earnings to be treated as having been paid in the year in which the avoidance occurred.
8.Section 3 introduces powers to enable the Treasury to make regulations in relation to matters affecting the law relating to Class 1A NICs where this is expedient in consequence of retrospective tax legislation which affects a person's general earnings. The regulations may have retrospective effect to dates as early as the 2 December 2004, if necessary.
Voiding of NICs Agreements and Elections
9.Currently, employers and employees can jointly agree or elect to transfer any future potential secondary NICs liability, due on certain employment income from shares and securities acquired by employees, from the employer to the employee. These provisions are found in paragraphs 3A(2)-(4) (agreements) and 3B of Schedule 1 (joint elections) to the CBA 1992. This facility was introduced on 28 July 2000 by the Child Support, Pensions and Social Security Act 2000, to help employers deal with the problem of their unpredictable future NICs costs due on gains from share options. Amendments made by the National Insurance Contributions and Statutory Payments Act 2004 extended this facility to include employment income derived from restricted securities and convertible securities.
10.Section 5 ensures that Joint NICs Agreements and Elections can only be used for their intended purpose and specifically prevents the use of these agreements and elections by employers who seek to recover from their employees any NICs liability that may be imposed retrospectively under the powers introduced by this Act.
Disclosure of NICs avoidance schemes and arrangements
11.Part 7 of the Finance Act 2004 requires disclosure of arrangements or proposals for arrangements where:
use of the arrangements might be expected to confer a tax advantage;
that tax advantage might be expected to be the main benefit, or a main benefit, of using the arrangements; and
the arrangements fall within a description prescribed in Treasury regulations.
12.The Finance Act 2004 disclosure provisions apply to income tax, corporation tax, capital gains tax, stamp duty land tax, stamp duty reserve tax, inheritance tax and petroleum revenue tax. The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 (SI 2004/1863), as amended, describe the notifiable arrangements in relation to income tax, corporation tax and capital gains tax. These include arrangements that concern employment. The Tax Avoidance Schemes (Information) Regulations 2004 (SI 2004/1864), as amended, specify the information required to be disclosed. The Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations 2004 (SI 2004/1865), as amended, specify the circumstances in which persons are not to be treated as promoters.
13.It was recognised that many employment schemes relate to both tax and NICs. However, NICs were not included in the disclosure rules because that would have required NICs primary legislation. In practice the tax disclosure rules provide the information necessary to counter both tax and NICs avoidance in the usual situation where a scheme seeks to avoid both. But they do not provide information in relation to schemes seeking to avoid only NICs. Section 7 provides for the tax disclosure rules to apply to NICs proposals and arrangements as they apply to income tax schemes.
Application of the Act to Northern Ireland
14.Sections 2, 4 and 6 mirror for Northern Ireland the provision made in sections 1, 3 and 5 for Great Britain. Section 7 extends to Northern Ireland as well as Great Britain. Under the provisions of Schedule 2 to the Northern Ireland Act 1998 NICs are an excepted matter. The Act therefore amends relevant Northern Ireland legislation relating to NICs.
15.Where the powers in the Act allow for retrospective changes to earnings, Treasury regulations made by virtue of the Act which make consequential changes to matters which are the responsibility of a Northern Ireland department require the concurrence of that department. Contributory benefits and statutory payments are transferred matters under the Northern Ireland Act 1998 and responsibility for them lies with the Department for Social Development and the Department for Employment and Learning (in respect of SPP and SAP).
