First-tier Tribunal Decision – No Class 1A National Insurance where Benefits in Kind Made Good!

The First-tier Tribunal has ruled that Class 1A National Insurance Contributions (NICs) are not due on benefits in kind which are made good by an employee.

The income tax provisions (section 203 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)) broadly provide that income tax is chargeable on the cost of an employment-related benefit, but after deducting any amounts made good by the employee.

In Marcia Willett Ltd v HMRC [2012] UKFTT 625 (TC), the employer provided benefits to its directors, who made these good through company loan account adjustments. Accordingly, no income tax charge arose on such benefits under section 203 ITEPA.

However, HM Revenue and Customs (HMRC) asserted that Class 1A NICs were due on the basis that such NICs charge was referable to the amount chargeable to income tax (section 10, Social Security Contributions and Benefits Act 1992) and were determined at the due date (regulation 71, Social Security (Contributions) Regulations 2001 (SI 2001/1004)). The argument put forward by HMRC was effectively that since the directors made good the benefits after the due date, this was too late to negate the Class 1A NICs charge.

Whilst the Tribunal agreed with HMRC that there is no specific wording in section 203 ITEPA which makes it clear that a “making good” payment has retrospective effect for the purposes of section 10, the Tribunal considered that, on a plain reading of section 203(2), a “making good” payment extinguishes an income tax charge ab initio and, therefore, there are no general earnings or income tax charge to which section 10 can apply.

Furthermore, the NIC rules aim to charge benefits actually received and allow chargeability to vary through subsequent legal or factual changes. The Tribunal viewed HMRC’s approach as imposing a charge under the regulations (by crystallising the charge at a particular time) that was not imposed under, and contrary to the purpose of, the primary legislation.

Accordingly, the Tribunal did not agree with the reasoning put forward by HMRC and held that, whilst a section 10 charge relies on a charge existing under section 203, any making good of that employment benefit extinguishes this charge retrospectively.

The Tribunal’s reasoning could extend to earnings charges arising if a director fails to make good tax paid on his behalf (section 223, ITEPA 2003), but not to “section 222” notional earnings charges. For the latter, the charge is crystallised on expiry of the statutory 90-day period and cannot be removed retrospectively.

In our view, the Tribunal has given the right decision in that a Class 1A NICs charge should not arise on amounts which have been made good by an employee.

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