http://www.legislation.gov.uk/ukpga/2014/7/notes/division/2Explanatory Notes to National Insurance Contributions Act 2014HM Revenue & Customs (HMRC)King's Printer of Acts of Parliament2014-05-02 7 13 March 2014 4 The National Insurance Scheme was first established in 1911 and expanded in the late 1940s to provide funds for a more comprehensive and inclusive range of contributory benefits and to provide assistance with the funding for a new National Health Service. 5 Briefly, the scheme consists of a number of benefits financed by NICs payable by earners, employers and others. Employees pay NICs on their earnings, employers pay NICs on the earnings they pay to their employees and the self-employed pay NICs on their profits and gains. 6 An earner can be either an employed earner or a self-employed earner. An employed earner is a person who is gainfully employed in Great Britain or Northern Ireland either under a contract of service, or in an office (including elective office) with general earnings. A self-employed earner is a person who is gainfully employed in Great Britain or Northern Ireland otherwise than as an employed earner. Provision is made within the scheme to allow those who are not compulsorily covered to protect their entitlement to the state retirement pension and bereavement benefits by means of voluntary NICs payments. 7 NICs are divided into six classes. Class 1 contributions, which are paid by both employees and employers on the employee’s earnings – the employee’s share is known as the primary contribution, the employer’s as the secondary contribution. Class 1 contributions are payable on all gross earnings including commissions, overtime and bonuses, on readily convertible assets given to employees and on employees’ liabilities paid by employers. Primary contributions are payable at 12% of earnings above £149 up to £797 per week and 2% of all earnings above this limit. Secondary contributions are payable at 13.8% of all earnings above £148 per week. There are arrangements for reducing the rates of both primary and secondary contributions where the employee has contracted out of the State Second Pension. Class 1 contributions are normally collected monthly by HMRC along with income tax deducted under Pay As You Earn (PAYE). Class 1A contributions are payable annually, by employers only, on most taxable benefits in kind. Class 1A contributions are payable at a rate of 13.8%. Class 1B contributions are payable annually by employers on items which are dealt with under a PAYE Settlement Agreement (PSA) for income tax. Class 1B contributions are payable at a rate of 13.8% on the value of the items included in the PSA and on the total tax payable by the employer under the PSA. Class 2 contributions are paid by the self-employed at a flat rate of £2.70 per week. A self-employed person can apply to be exempted from liability where earnings are below £5,725 per year. Class 2 contributions are paid either monthly or six monthly. Class 3 contributions are paid on a voluntary basis, at a flat rate of £13.55 per week, by people who fall outside the scope of Class 1 and Class 2 contributions. Class 4 contributions are paid annually by the self-employed on profits that are immediately derived from a trade, profession or vocation and which are chargeable to income tax under Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act 2005. Class 4 NICs are payable at a rate of 9% on profits between £7,755 and £41,450 and 2% on profits above £41,450. 8 At Budget 2013 the Government announced that it would introduce an “employment allowance” of up to £2,000 a year for all businesses, charities and Community Amateur Sports Clubs to offset against their liability for secondary Class 1 NICs. The Act introduces the allowance and sets out how a person qualifies for it. 9 The employment allowance will be delivered through standard payroll software and HMRC’s Real Time Information system. Employers will self-declare their eligibility through their regular payroll processes and this confirmation will ensure that up to £2,000 in any one tax year will be deducted from their secondary Class 1 NICs liability over the course of the year’s payments under PAYE. 10 In his Autumn Statement on 5 December 2013, the Chancellor of the Exchequer announced that the Government would bring forward legislation that will effectively remove the requirement for employers to pay secondary Class 1 NICs in respect of the earnings of any employee under the age of 21. The measure will apply both to new and existing employees aged under 21 with effect from 6 April 2015 and will be restricted to earnings below an amount equal to the Upper Earnings Limit (UEL) which is forecast to be £813 per week (annual equivalent £42,285) in 2015-16. 11 The Act also provides for a regulation making power, exercisable by the Treasury, to add an age group to those in respect of whom a reduced rate of secondary Class 1 NICs applies (“the age-related secondary percentage”) and to specify what that reduced rate is and to reduce (or further reduce) the age-related secondary percentage for a previously specified group. 12 The Government announced at Budget 2012 that it had accepted the recommendations of the Aaronson Report to introduce a GAAR targeted at abusive tax avoidance schemes. The GAAR was introduced by Part 5 of the Finance Act 2013. 13 The GAAR, as this Act would apply it with modifications, is designed specifically to target only those NICs arrangements which are regarded as abusive. The rules will consider whether an arrangement is abusive, by considering whether the arrangement can reasonably be regarded as a reasonable course of action. This is known as the “double reasonableness” test - and if it cannot, then any resulting NICs advantage would be counteracted by making adjustments to charge the right amount of NICs. 14 At Budget 2013 the Chancellor announced that the Government would strengthen legislation in respect of offshore employment intermediaries. The measure is, in part, intended to address avoidance schemes in the oil and gas industry involving employers of oil and gas workers (who are working on the UK Continental Shelf) that are located outside the UK. This will be addressed largely by means of using existing powers (mainly contained in section 120 of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992)) and the Act supplements those powers so as to include new certification provisions. The Social Security (Contributions) (Amendment No. 2) Regulations 2014 makes provision for the secondary contributor. 15 The Act amends section 120 of the SSCBA 1992 to enable provision to be made in regulations for a system of certification where certain National Insurance obligations are fulfilled by someone on behalf of the secondary contributor. 16 Equivalent provision will be made in the Finance Act 2014 enabling regulations to provide for a similar certification scheme for PAYE obligations. 17 As announced at Budget 2013, and following a formal consultation in the Partnerships Review between May and August 2013, draft Finance Bill 2014 legislation (clause 68 and Schedule 13) was published for consultation between December 2013 and February 2014 to: prevent the disguising of employment relationships (and consequential reduction of employment taxes and NICs) in relation to salaried members of Limited Liability Partnerships (LLPs); and counter tax-motivated allocations of profits and losses in partnerships, not just LLPs where the partners include both individuals and non-individual partners (i.e. mixed membership partnerships), as well as tax-motivated disposals of assets through partnerships. 18 The Government is also setting up a new statutory mechanism for alternative investment fund managers (AIFMs) who operate as a partnership to collect tax from the partnership, rather than from the individual member, on profits allocated to that individual but subject to deferral under an EU Directive on AIFMs (2011/61/EU). This addresses the issue arising from members having to pay tax on profits that they are unable to access as a result of the regulatory requirements without the need to turn to tax-motivated mixed membership partnership arrangements. 19 This Act only covers the associated NICs changes that relate to salaried members and AIFMs. There are no changes to NICs legislation to counter tax-motivated allocations of profits and losses in and disposal of assets through partnerships. With regard to (i) section 14 of the Act provides a regulation making power to allow the Treasury with the concurrence of the Secretary of State to reclassify certain LLP members as employed earners for NICs purposes (and employees for the purpose of the legislation governing statutory payments) when certain conditions are satisfied. The conditions will follow those set out in income tax legislation to be included in Finance Act 2014 and will broadly be that the individual member of the LLP is rewarded by a fixed salary, does not have significant influence over the affairs of the firm and carries no or little economic risk in the LLP. 20 The powers additionally allow the Treasury with the concurrence of the Secretary of State to counter-act the use of companies or other intermediary structures to avoid the impact of the measure. 21 Section 13 of the Act provides a regulation making power to modify the way in which liabilities for Class 4 NICs of partners in firms are determined, where a provision of the Income Tax Acts relating to such partners is passed or made. The power is intended to be used to address a specific issue concerning restricted access to profits earned by members of AIFM partnerships, which arises as a result of the regulatory requirements on their remuneration contained in the EU Directive. The corresponding tax legislation relating to such partnerships is to be introduced in the Finance Act 2014. 22 The Act also: changes the definition of "employed earner" in the SSCBA 1992 and the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (SSCB(NI)A 1992). The change provides that in order to be regarded as an employed earner, an office holder has to be in receipt of "earnings" as defined for NICs purposes (as opposed to “general earnings”) and gainfully employed in Great Britain; retrospectively disregards Armed Forces early departure payments from liability for NICs for the tax years 2005-2006 to 2012-2013 inclusive; repeals two redundant Class 4 NICs reliefs; and corrects minor omissions and errors in the SSCB(NI)A 1992, relating to the procedure for making certain instruments; and makes clear that instruments made by the Secretary of State under the Social Security Administration (Northern Ireland) Act 1992 should be by statutory rule. 1 The consultation and response documents were published on a dedicated site on GOV.UK: https://www.gov.uk/government/consultations/a-review-of-two-aspects-of-the-tax-rules-on-partnerships. This site also contains detailed tax guidance and new forms for alternative investment fund managers (see the following footnote). 2 The Alternative Investment Fund Managers Directive (2011/61/EU) can be found on the European Commission’s website: http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32011L0061 The Financial Conduct Authority published guidance on the UK implementation of this Directive on their website: Finalised Guidance: General Guidance on the AIFM Remuneration Code” on 31 January 2014 (http://www.fca.org.uk/static/documents/finalised-guidance/fg14-02.pdf ) (see paragraphs 11-14 on p14-15 which describe the new statutory tax mechanism for AIFMs).