843.Earnings-related National Insurance contributions (NICs*) are paid by both employees and employers on all cash earnings which reach a set amount. These contributions go into the National Insurance Fund to pay for contributory benefits. However, employees pay no NICs on most non-cash earnings (payments, or benefits, in kind).
844.Since 1991, Class 1A NICs, which are an employer-only charge, have been liable on car and fuel benefits provided for the employee. But most other non-cash benefits are provided NIC-free. Some benefits, which are readily convertible assets, such as shares or gold bars, as well as non-cash vouchers, are already subject to Class 1 NICs paid by both employers and employees. Such benefits are set out in Schedules 1A, 1B and 1C to the Contributions Regulations 1979.
845.All benefits in kind are subject to income tax as emoluments either under section 19 or Part V of the Income and Corporation Taxes Act 1988 (ICTA).
846.The Chancellor announced in the March 1999 Budget that all taxable benefits in kind not already subject to NICs would become liable to a Class 1A charge from April 2000. This will align more closely the tax and NICs treatment of provided benefits such as private medical insurance, beneficial loans or assets transferred to the employee.
847.This will implement a recommendation of the Task Force chaired by Martin Taylor, ex-Chief Executive of Barclays plc., in the report The Modernisation of Britain’s Tax and Benefit System.
848.Since 6 April 1999, gains made on share options granted after 5 April 1999, acquired by reason of employment, have been subject to Class 1 National Insurance Contributions (NICs). This does not apply, however, to share options awarded and exercised under an Inland Revenue approved scheme, nor to options where the shares, or the right to acquire shares, are not readily convertible assets, i.e. they are not readily convertible into cash.
849.Whilst companies can plan for NICs on regular pay, it is more difficult for them to plan for NICs on share option gains, particularly where the share price is volatile. Under accountancy rules, companies are required to make a provision in their accounts for the anticipated NICs liability on share options, based on the market price of the shares on the date that they prepare the accounts. Employers have expressed concern that their exposure to a highly unpredictable NIC liability could put at risk their investment strategies, and even make some technically insolvent.
850.The new measures contain provisions which are intended to make all non-cash earnings received by directors or employees earning £8,500 or more per year subject to Class 1A (employer-only) NICs, unless they are already subject to Class 1 NICs, or Class 1B NICs (if they are minor benefits which are included in a PAYE Settlement Agreement, an administrative arrangement under which an employer accounts directly to the Revenue for tax and NICs on minor or irregular payments).
851.The extended Class 1A charge follows the shape of the existing charge on car and fuel benefits. The Class 1A due will be calculated using the valuation figures already required for tax purposes which an employer enters on a P11D form – a report to the Inland Revenue of the value of benefits in kind provided throughout the tax year* to each employee. This is intended to keep extra reporting requirements to a minimum.
852.The new measures provide powers for Treasury Ministers to make regulations to except particular items or reduce the Class 1A liability where appropriate. The sections also give powers to prescribe penalties for failure to pay Class 1A NICs correctly and other matters, such as dates and forms of records, surrounding collection of the NICs.
853.The Act also includes measures to move the liability for Class 1A NICs on benefits in kind provided by a third party from the direct employer of the recipient to the third party provider. Typically, this would arise where a manufacturer wishes to reward or incentivise the salespeople in retail outlets that sell his products, for example by providing them with holidays, goods or sometimes non-cash vouchers. The staff are likely to be employed by the retailer, not the manufacturer. Currently, the employer is liable for NICs on these benefits, possibly without his knowledge, and without any involvement in their provision. In general, the third parties have indicated their willingness to meet NICs liabilities of providing incentive awards, as they can do for tax.
854.The measures in the Act provide a mechanism to do this, by moving the liability for the Class 1A NICs on provided benefits and any related tax to that third party. This new liability is to be a voluntary commitment for the tax year 2000-2001. If the third party chooses not to pay the Class 1A NICs, the liability will rest with the employer, but in future tax years, the liability will be compulsory for the third party.
855.To remove all need for the employer to be involved, regulations came into force on 6 April 2000 to make non-cash vouchers that are provided by a third party liable to Class 1A NICs, rather than Class 1 NICs as at present (SI 2000/761 in GB and 2000/758 in Northern Ireland).
856.A further provision allows any emolument received from employed earner’s employment which is subject to Schedule E tax also to be treated as earnings for National Insurance. This is intended to be used to clarify the NICs treatment of items bought using a company credit card or similar form of purchase. It could also be used for tax/NICs alignment, such as to introduce the NICs regulations relating to the proposed new all-employee share plan.
857.The provision in the Act does three things. First, it allows employers and employees to reach an agreement that a secondary contributor (usually the employer) may recover from the employee some or all of the secondary NIC in respect of a gain made from a right to acquire shares. These gains usually take the form of the exercise of share options.
858.Second, as an alternative, the employer may make an application for approval of an election to the Board of Inland Revenue. If approval is obtained, the employer and employee can jointly elect to transfer all or some of the liability to pay the secondary NIC on the share option gain to the employee. Elections can only be made when the Board are satisfied that the election to be used will transfer the liability, and that the accompanying arrangements will ensure that the NIC liability transferred to the employee is paid.
859.Third, the provision strengthens the existing statutory bar that prevents the employer recovering any part of the secondary NIC in respect of all forms of earnings (subject to the new exception for rights to acquire shares). It extends the protection to the employee by ensuring that the person liable to pay the Class 1A (on benefits in kind) or Class 1B (on Pay As You Earn Voluntary Settlement Agreements) cannot recover his liability from the employee.