Imaginary NIC debts

Some small employers have received letters and calls from HMRC’s debt management department this month, accusing them of deliberately underpaying the PAYE and NIC due for April to June. Those employers are certain that they have paid the correct amount of tax and NI for the period.

On closer inspection the amount that HMRC say is due equals the employer’s NIC for the months concerned. Where the employer has claimed the Employment Allowance, this should cover up to £4,000 of employer’s class 1 NIC for 2020/21 and the allowance should be set against the NIC liability for the month in which the claim is made and the following months until it is fully utilised.

The root of this problem is HMRC’s computer, specifically the National Insurance and PAYE System (NPS). For some reason the NPS is not picking up the employer’s claim for the Employment Allowance made in the first quarter of 2020/21. It is a known problem, which HMRC hope to solve with its IT business partners by 19 August.

In the meantime, the debt management letters may continue to arrive with many clients, but at least you know how the payment difference may have arisen. You can confirm whether your Employment Allowance claim has been accepted by checking your business tax account (BTA).

Where you have had your entire workforce on furlough for April to July, your full payroll costs, including employer’s NIC and pension contributions should have been covered by the CJRS grant. In such cases it made sense not to claim the Employment Allowance in the first quarter.

If the Employment Allowance was claimed, the CJRS claims for April to July should not include the costs of the employer’s class 1 N1C, if the total class 1 NIC liabiities are less than £4,000.

From 1 August 2020 the CJRS grant does not cover the employer’s class 1 NIC, or the employer’s contributions to the workplace pension, for employees on furlough. It thus makes sense to now make a claim for the Employment Allowance so it can be set against the employer’s NIC for August and later periods.

Remember there are additional conditions for claiming the Employment Allowance for 2020/21; the class 1 NIC liability for 2019/20 must have been less than £100,000 and the state aid threshold must not be exceeded. Employment allowance eligibility

"This information is taken from the weekly Tax Tips, published by the Tax Advice Network, for which you can subscribe at www.TaxAdviceNetwork.co.uk"