|
In our news item on this subject in August we explained how, in circumstances where an employer is found to have used a scheme to avoid the payment of NICs and the resulting liabilities are backdated, the retrospective earnings on which NICs should have been calculated must be included when calculating average earnings for SSP, SMP, SPP and SAP purposes.
We commented at the time that the draft Regulations do not currently define a specific requirement for employers to recalculate the average earnings if the liability for NICs on retrospective earnings is determined after the statutory payments have been calculated initially or after payment to the employee has started. We queried this under the consultation arrangements for the draft Regulations.
HMRC has responded to our enquiry after discussing our comments with both the DTI and DWP. Their joint view is that the requirement to recalculate average earnings for the purposes of statutory payments is implicit when there is a ruling that payments that have already been made must subsequently be treated as retrospective earnings for NICs purposes. The employee and employer are liable for Class 1 NICs on the retrospective earnings and, if the payment was made in the "relevant period" for the average earnings calculation, the employee's entitlement to any of the statutory payments must also be reviewed.
- Example: A woman is given an option on convertible shares worth £;5000 in August 2004, but no tax or NICs are paid as the employer provides the shares under a tax avoidance arrangement. The scheme is brought retrospectively within the tax and NICs legislation under provisions contained in the Finance Act 2006 and, when regulations made under the National Insurance Act 2006 come into force in early 2007, the £;5,000 becomes retrospective earnings. The employer is required to account for tax and NICs on the payment in the pay period in which the legislation comes into force.
The employer's records show that, in December 2004, the woman went on maternity leave. The relevant period used to calculate her average earnings included the salary payments for July and August 2004. Her earnings for NICs in the relevant period are now £;5,000 higher, so her SMP payments for the six weeks starting in December 2004 must be recalculated and the shortfall, about £;3,115, paid to her.
HMRC's response draws a distinction from the explicit requirement to recalculate average earnings in the "Alabaster" situation, i.e. where the effect of a pay rise must be applied to earnings in the relevant period. Unlike retrospective earnings, payments resulting from the pay rise, in most cases, were not actually paid in the relevant period, so specific provision has to be made for the recalculation in the legislation.
The explanation seems reasonable enough but we have responded to HMRC's explanation expressing concerns about statutory requirements that are implied, especially where, as a result of a change in circumstances, a taxpayer is required to do something that is not necessarily obvious. Many employers will not automatically check to see if payments, which have already been made and which have become retrospectively liable for tax and NICs, were made in the relevant period for one of the statutory payments, especially as there is still considerable ignorance of the 'Alabaster' recalculation requirement and, where it is understood, considerable resistance to it. It would still be better for the recalculation requirement to be stated explicitly, using wording such as "for the avoidance of doubt" to reinforce the requirement. The expression "for the avoidance of doubt" appears 60 times in payroll/HR related legislation. However, as HMRC is aware of those employers affected by any new anti-avoidance legislation with retrospective application, it is to be hopes that the recalculation requirement will be made clear to them at the time.
...UK Payroll News - Latest
|
For Payroll and Human Resource Professionals
