A mis-match of data between two legacy computer systems is creating problems for self assessment calculations relating to 2015/16 and beyond.
When the collection of class 2 NIC was transferred to the income tax self assessment system for 2015/16 onwards, most tax advisers assumed that the calculation of the class 2 NI liability would also be generated by the data included on the self assessment return. This is not the case.
HMRC continues to run two separate computer systems which process data relating to self-employed taxpayers. The SA system processes information reported on income tax returns, and the national insurance and PAYE service (NPS) holds all the national insurance records, including those relating to class 2 NIC. The taxpayer’s liability for class 2 NIC is based on the NPS record held under his NI number, not the information reported on his SA tax returns.
One way conversation
Entries on the SA return aren’t used to update the taxpayer’s class 2 NIC record on the NPS. So reporting the date on which the taxpayer commenced or ceased self-employment on his SA return, won’t affect how HMRC calculate the taxpayer’s liability for class 2 NIC. HMRC must be separately informed of the start (on form CWF1) and finish dates for a self-employed trade.
However, data from the NPS is used to overwrite information reported on the SA return. For example, when the direct debit mechanism for paying class 2 NIC stopped in mid-2015, the taxpayer may have cancelled their direct debit. The NPS computer will have interpreted this as a cessation of self-employment, and transmitted this information to the SA system. As a result, HMRC stops collecting the class 2 NIC collected as part of the taxpayer’s tax and NI liability for 2015/16, although the class 2 NIC continues to be due.
I highlighted this issue on 31 May 2016: class 2 NIC cock-ups, but it appears that the problem hasn’t been resolved by HMRC. As recently as 7 November 2016 Astral reported that several of his clients have no class 2 NIC liability showing on their tax computations for 2015/16, and other members have experienced the same issue. Norstar recommends invoicing HMRC £25 plus VAT for each time the class 2 NIC goes missing from the tax computation.
This month an anonymous questioner found that two of his clients who ceased self-employment in 2015/16 were charged a class 2 NIC for the full year. This problem stems from the mis-match of the data held on NPS and the SA systems as described above.
Check that your self-employed clients have all paid their class 2 NIC liability for 2015/16, or that liability has been included in their tax computation for 2015/16. Non-payment of class 2 NIC may affect the taxpayer’s eligibility for a state pension when they eventually reach state retirement age.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.