Class 2 NIC confusion

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A mis-match of data between two legacy computer systems is creating problems for  self assessment calculations relating to 2015/16 and beyond.

System error

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.

Continuing story

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.

Future problems

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.

Replies

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By chewmac
20th Jan 2017 19:22

My old process was enter cessation date on ITR and have client phone to stop c2 NI. Without thinking of it I suppose that informed both NI and tax office.
Now, I suppose that this online form "Stopped self employment" should be used which I never knew existed.
Mind you, if overlooked, I imagine it would be spotted when 2016/17 amended SA302 will be received requesting full years NI.
Is this how others see it working?

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By skhan
22nd Jan 2017 10:59

NIC is a big issue. We use HMRC online portal and this NIC is still an issue. HMRC systems are not that organised.

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By Chris Mann
22nd Jan 2017 15:53

Regretfully, this is further evidence that HMRC are already operating an MTD system. Making tax difficult -that is.

As you say Rebecca, Class 2 NIC is a fundamental element of the self-employed state pension arrangements.

One could almost be forgiven for suggesting that this is culpable negligence by the senior hierarchy within HMRC. Others, in the private sector would now be checking their professional indemnity arrangements.

One of my client's is at present being denied access to the employment support allowance, due to (allegedly) lack of Class 2 contributions and, has received a questionnaire which asks "how long would it take you to sell your business assets"? Talk about kick a man when he's down?

I have a copy of his cheque, which he paid last June, specifically to settle his Class 2 NIC account, for 2015/16!

As each day goes by I become more and more convinced that HMRC is unfit for purpose and, such conversations as this, only firm that opinion.

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By Chris Mann
to Chris Mann
23rd Jan 2017 07:55

Member edit;

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22nd Jan 2017 17:19

It's almost as if HMRC haven't had the funding to merge the NI, VAT and PAYE system over the last ten or so years

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By Chris Mann
to the_Poacher
23rd Jan 2017 07:54

I think that, away from what has become the fantasy world, of HMRC, they call it - "joined up thinking".

It's clear that the quality of the higher levels of this agency simply aren't up to scratch.

Let's be clear, this is a department where individuals are regularly rewarded for failure.

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23rd Jan 2017 09:41

Even when you notify the NI team that there is a problem on the SA system with the class 2 they do nothing. My own personal tax return didn't have class 2 on it. I rang up and queried were it was. After much passing the buck I was told someone had created 2 national insurance records for me. Why -because when I got married my records were not update as they should have been. I've been told there is nothing they can do I'll always have two records. I expected a paper bill to pay the class 2 but so far nothing. I've no idea what the 2nd NI number is.

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25th Jan 2017 10:23

Class 2 is not the only problem. I have a number of clients with high income, both employed and self-employed and we are receiving tax calculations from HMRC that differ from the Return submitted because no relief has been given against class 4 for the class 1 paid. The class 2 shown as due is also sometimes wrong. Two weeks ago, after being repeatedly bounced between SA and NI, I was told NI had to fix the problem, which they were doing by a "work around". Last week, I was told SA have to do the work around instead, because they had been arguing about which office was responsible and it had been decided to switch. You really couldn't make it up and we are expected to take MTD seriously after this, and the earlier debacle with the marriage allowance.... HMRC systems are hopeless and cannot even get very basic changes right, even after they have been announced for several years, despite spending billions on them. January is a difficult month at the best of times, and we just don't need these problems right now!

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By txcjg
25th Jan 2017 10:55

It is not just SA and NIC that do not talk to each other!
A Client has both Employment paying Class 1 over UEL and Self Employment. Class 2 was coded in as a"debt" in a year where profits were under the lower limit.
In another year Class 2 was coded in where a large repayment of over £900 of class 4 was due to the client. Thus it appears the overall NI record is not checked before they demand monies.
You only have a short time period to reclaim Class 2 NICunlike class 4.
It has been clear for many years that SA and NIC records do not update each other. If you make a reclaim for overpaid Class 4 NIC (Form CA5610). Even if the taxpayer makes a claim online they still have to provide documentary evidence of earnings. NI Office refused to accept a SA302 produced by commercial software until we pointed out that HMRC will only issue a SA302 in exceptional circumstances!

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25th Jan 2017 10:51

I've had 2 calculations this week with the Class 2 NI which I included with the SA calculation now removed. Others earlier have rightly included it...................
And they want to press ahead with MTD - they can't even get the basics to work now

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By SXGuy
25th Jan 2017 10:57

I'm confused. With the software we use. Keytime personal tax. If the net profit is above the threshold to pay class 2 nic you can't submit a tax return without first adding class 2 nic under the rde.

So if accountants are missing the calculations it can only be because of hmrc online service or their own software allowing submission without the calculation?

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By Oppco
25th Jan 2017 11:04

I was told by HMRC that cessation of trading marked on my client's IRIS generated tax return did not update the NIC record because I was not using HMRC software!

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25th Jan 2017 11:18

Get James Harra on the case.
Could add a new dimension to Making Tax Difficult.
How about National Insurance Complications ?
This abysmal, declining service - continually fantasising with new ideas, rather than fix the creaking administration - should be renamed.
How about Her Majesty's Reprehensible Cogitators.

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25th Jan 2017 11:19

That's not all. SA302's are arriving saying the self assessment calculation is wrong where there is Class 1 and Class 2/4 liability as well. Sage Tax software calculates the Reg 100 relief in the computation. HMRC, it seems, cannot so issues spurious calculations that hack clients off no end.

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25th Jan 2017 11:23

I am currently locked in an on-going battle with HMRC on this very matter where the whole sorry saga has included HMRC issuing my client with a new UTR number and creating a second self-assessment account, deleting all the client's original self-assessment history, removing me as agent from my client's account, reinstating the previous agent and corresponding with them instead of me ...... and months and months of false promises and hollow apologies for the mess HMRC has caused. I have lost count of the number of HMRC managers I have spoken with who have assured me they will stick with it to get the case resolved but then disappear behind the call centre system. Every direct phone number I have managed to eek out of the various managers is permanently engaged.
The time I have lost on this case is off the scale and mounting and I would be interested to know if anyone else in a similar situation has had any success in invoicing HMRC for their lost time.

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to L Haldane
25th Jan 2017 18:41

I have obtained compensation many times in the dim and distant past. Once it is all settled, you have to make a formal complaint to the relevant tax office and ask them to forward it to the Complaints Office. Include a bill for your lost time -- it will have to be paid as the claim will be on behalf of the client, who will be compensated, not you -- and give a detailed breakdown. Obviously, if you have retained copies of letters, and notes of phone conversations, they may be needed as back-up.
Good luck!

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to L Haldane
26th Jan 2017 22:02

Complain to the Ombudsman and claim ALL costs involved in getting nowhere.

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25th Jan 2017 11:29

I had one where an SA302 came in removing the Class 2 and then a week later another one arrived putting it back again.

They're too busy harassing accountants who use their logo on a link to their own website, instead of trying to do anything right.

Not fit for purpose is probably understatement of the year.

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By Annetax
25th Jan 2017 11:31

Last night I was helping my sons friend to do his first tax return under self employment. It calculated no Class 2 due on profits of £16k...
We tried ticking pay Class 2 voluntarily just to create the liability and the system reported errors as he could not pay voluntarily when they were due on profits over £5,965...
I've told him to pay them and wait for HMRC to work it out!
My daughters friend showed Class 2 of £88 due for a full year of self employment. Not sure why. Help was no help.

It really is a mess on a system that is supposed to be used by 'Joe Public' who generally have a touching faith that HMRC must be right.

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25th Jan 2017 11:32

Perhaps the more bizarre situation is that we are now receiving amended statements from the SA Unit removing the Class 2 liability which has been correctly calculated and entered on the Return. Presumably because the NPS has overridden the SA position. As I recall, HMRC wrote to Self Employed people advising of the change in Class 2 collection and HMRC advised that it may be necessary to cancel direct debit instructions. I don't however recall that advice extending to " and when you have done that we will treat your business as having ceased" . Of course the advent of Digital Tax Accounts operated accurately by HMRC within the next 3 years is completely realistic........ I can't stop laughing at the prospect

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to sherodwilliams
25th Jan 2017 13:40

I received the same answer from HMRC over the phone.
They said that my client ceased trading when direct debit was cancelled. I tried to argue saying that with submitting a tax return and stating that my client was self-employed clearly does not mean she stopped trading.... Still I was advised that my client should register again for Class 2 NI

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25th Jan 2017 11:42

From the Horses mouth at the NIC Office. If our records dont show that the client is self-employed then class 2 will not appear on the Tax Calculation.... So where did the CWF1 we sent you go and how did you know that our client had to be in self-assessment.

The fix is that we write to NIC office with a list of those who should pay class 2 and the NIC office will change the records. Any Class 2 paid will be refunded... You cant make this up.
The previous system was poor this system.... I do wonder whether not a lot will happen because class 2 is being phased out soon. Mr Chancellor probally a good idea if you phase it out from 31 March 2017.

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25th Jan 2017 11:46

I have clients who continued to pay the Class 2 NI direct debit until July 2015.
The self assessment calculation does not take account of monies paid for the 2015/16 Class 2 liability and merely charges the £145.60.
I have only left a note in the narrative box of the return, but I don't suppose anyone at HMRC will read / register the overpayment.

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to nuttingm
25th Jan 2017 12:02

nuttingm wrote:
I have clients who continued to pay the Class 2 NI direct debit until July 2015. The self assessment calculation does not take account of monies paid for the 2015/16 Class 2 liability and merely charges the £145.60.

The payment made by direct debit in July 2015 was the final payment for 2014/15 and not a payment for 2015/16. So the £145.60 for 2015/16 is correct.
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By John R
to nuttingm
25th Jan 2017 12:06

Everyone who paid class 2 by DD paid up to July 2015 as this relates to 2014-15!

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to nuttingm
26th Jan 2017 11:58

Class 2 is paid 3 months in arrears, so the direct debits paid up to July 2015 were for 2014/5. What a simple system we have in this country!

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25th Jan 2017 11:49

Thanks to this discussion I checked on the HMRC site for a client who had ceased to be self employed in 2015/16. The SA return had been submitted but as already highlighted the full year's class 2 NI was shown as payable.

I rang HMRC SA agents line about this. They put me through to their NI department who have agreed to update their records. they confirmed that this will filter through to the SA record to correct the NI liability but takes about 36 hours to go through.

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25th Jan 2017 12:14

How could the timing be better? I have just received an email from HMRC headed, "Self-Assessment returns – We have the tools to help you". Should I reply -
a) "you are the tools"; or
b) "thank you, but I already have a chocolate hammer and sourdough screwdriver"?

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25th Jan 2017 12:42

In addition, if you fall below the threshold but want to make voluntary Class 2 payments, the links provided on the HMRC website ask you to provide the 18-digit reference number from HMRC's payment request.

HMRC's site warns "Your payment may be delayed if you use the wrong reference number", so I have elected to submit amended tax returns on our clients' behalf to generate a payment reference.

No doubt HMRC's next step will amend our amendments to revert the SATRs back to nil returns.

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By Sparkly
25th Jan 2017 13:14

Can't you just tick box 36 on the Self Employment pages to pay voluntarily as under threshold in your scenario?

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to Sparkly
25th Jan 2017 18:47

The clients decided they wanted to make voluntary contributions [i]after[/i] the submission of their tax returns. And doing just as you suggest, as an amendment to the initial submissions, was the most (time) efficient way to let HMRC know that.

And I am still not sure the message has been received anyway. Our online agent account only acknowledges submission of the original returns some time (about two weeks now) after the amendments.

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25th Jan 2017 13:37

Congratulations Ms Cave - you have managed to explain in two paragraphs why HMRC's on-line filing facility throws up these errors, something their helpline advisers seem to be unaware of.
This problem also exists if a client's earnings from self-employment are below £5,965; section 4 shows NIC owing. Anyone seeing this message on screen can rest assured that by the time the software has reached the calculation stage, this apparent debt has disappeared.

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By CazzyT
25th Jan 2017 13:39

This problem is extremely frustrating. Not only does it take time to resolve, it casts doubt on our calculations.
We tell the client an amount to pay and then HMRC write to them saying "we've amended it to this". Nine times out of ten the client thinks we are the ones who made the mistake.
If they are asking people to "self assess" then surely they should accept what we are reporting.

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25th Jan 2017 13:43

What's the point of Self-Assessment if, when we self-[***] on behalf of our clients, HMRC simply (and incorrectly) amend our calculations? What a horlicks!

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25th Jan 2017 14:08

A client asks who has just started to draw his pension has been told that his pension is reduced as he did not pay 2014-2015 NI Class 2. He has recepits to show that he did pay. A call to the Pension dept revealed that they have not yet had their computer updated with the 2014-2015 contributions. Anyone else had this problem?

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25th Jan 2017 14:43

The explanation doesn't quite fit my case - where a client moved from one partnership to another during the year. The HMRC calculation charged C2 only up to the date of the change, and I was told I should have submitted a new form in respect of his partnership with the new lot. I asked "where in the Taxes Acts does it say I have to fill out a form for this?" Silence. The calculation was duly amended back to the original figure, but what a waste of everybody's time!

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25th Jan 2017 14:44

Joined up ? I have had two tax refunds issued direct to SA clients recently. Refunds issued by a PAYE section on apparently overpaid tax with no reference to the SA record and the fact that large tax refunds had already been made for the same tex year. Tax had been deducted from new pension started in 20/15/16.
How much is the Revenue donating back to tax payers ?

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By 4b4
25th Jan 2017 16:22

And they are still ploughing ahead with MTD - how about sorting out ONE integrated system for what we've already got first?
I also object to the fact that it's down to us again to sort out this mess - client's are going to love (another) additional cost to sort out HMRC's [***]-up.

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25th Jan 2017 18:29

Its not just Class 2 NI that has been affected, its Class 4 also. Where a client is employed and self employed HMRC are taking into account the class 1 NI paid during the year and reducing the class 4 liability. HMRC have done this on their own accord and have not informed us that they were starting to do this. Previously the NI refund form was used but now they are just reducing the liability on the tax return. A little warning that they were starting to do this would have been nice!

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By JimH
to Lynn Mcalpine
25th Jan 2017 23:10

Or not! They aren't restricting Class 4 as they should be.

When supplied with Class 1 income between thresholds, our software calculates and reports the restricted Class 4 NIC for clients who've had several new employments, self-employments and partnerships in the year and the Class 2 based on number of weeks. HMRC's response is consistently unrestricted Class 4 NICs and no Class 2. ( the latter explained by Rebecca's article). On phone, an officer in HMRC's NIC team denies they have the Class 1 income information. Both HMRC and software house have suggested refiling. Trust me, don't waste your time with that.

If the clients had tax liabilities, I'd have said don't pay. But of course they are having insufficient tax repayments. If we contest the calculations within 30 days, will the repayments be stopped? I'm afraid I don't have many years' experience but as self-assessment is not working as it should, is the only solution to write separately for NIC refund?

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25th Jan 2017 19:25

We had a self employed client who died (aged 60) in 2015/16, we included in the 2016 tax return Class 2 NIC for the period to the date of death and this was paid to HMRC. It now shows as an overpayment on the client's SA account, why??

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26th Jan 2017 01:06

I use Pinacle (sic) software and early on they updated it to include the Class 2. However, the first few returns going in which didn't include Class 2 were simply amended by HMRC.

So personally, I haven't (yet!) encountered any of these problems.

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26th Jan 2017 08:56

Complete shambles!

HMRC take something that was working quite fine, change it into a mess and then in 2018 abolish it (this is coming) to introduce more complexity to make up for revenue and keep contributory rights, via Class 4. More mess.

If HMRC can't get something as simple as assessing Class 2 NIC correct what chance when they take over assessing all liabilities under MTD. None.

Following the same pattern when MTD is a complete and utter mess they will change it again and Harra and his cronies will all retire on nice fat index linked pensions with a knighthood thrown in for good measure.

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26th Jan 2017 13:32

I have used the following in response to SA302s where there are Class 1, 2 and 4 liabilities, not surprisingly I am still awaiting replies. It amazes me how tolerant we are, HMRC has a software failing and we are commenting to each other, "try this as a work round". HMRC needs to sort itself out and while we do not force the issue, it will not. When the compensation claims start mounting somebody might realise it needs to do something about it.

"The SA302 is incorrect; it fails to give relief under The Social Security (Contributions) Regulations 2001, Regulation 100. As you are aware our client had earnings charged to Class 1 NIC as follows –
EARNINGS BETWEEN PRIMARY THRESHOLD AND UPPER ACCRUAL POINT £31,980 and UPPER ACCRUAL POINT AND UPPER EARNINGS LIMIT £2,340.00
We look forward to receiving the following –
1. your reason for asserting Regulation 100 does not apply; or
2. if Regulation 100 does apply, why you have not applied it; and
3. confirmation that the self assessment calculation submitted by our client is correct; and
4. the information to which you refer in the sentence, “Your Class 2 National Insurance figure has been corrected in line with the information we hold.”; and
5. why, as the PAYE data, submitted by the employers above, includes the relevant earnings details, which clearly you do hold, you have not acted upon it; and
6. advice on how our client may recover his costs incurred in making this representation, which results wholly from your avoidable error."

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26th Jan 2017 14:24

This is the worst government for fixing things that ain't broke, and this is just another example to go with abolishing paper tax discs, counterpart driving licences etc. etc.

If you look at the reference documents the switch was deemed cost neutral, but they obviously didn't factor in the HMRC proven track record of incompetence when implementing IT and software changes - anyone with half a brain would have foreseen the chaos that has ensued, and yet another pile of [***] for long suffering agents to sort out for HMRC!

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27th Jan 2017 10:12

Extract above
'HMRC continues to run two separate computer systems which process data relating to self-employed taxpayers'.

What I know about technology you could write on a stamp, (despite claiming otherwise) I used to prepare accounts on excel, transfer to word for presentation accounts and then file on HMRC software, looks like me and HMRC have a fair bit in common.

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27th Jan 2017 10:12

Extract above
'HMRC continues to run two separate computer systems which process data relating to self-employed taxpayers'.

What I know about technology you could write on a stamp, (despite claiming otherwise) I used to prepare accounts on excel, transfer to word for presentation accounts and then file on HMRC software, looks like me and HMRC have a fair bit in common.

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08th Feb 2017 11:51

This makes me weep, as a sole practitioner I am time poor at the moment. Can anyone advise what is the quickest way to solve the problem. I was advised by HMRC to register clients as self employed, but I can see that causing further problems.

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19th Jul 2017 21:24

Interestingly I have just received a revised assessment for 2016/17 for a client who has been, and continues to be, self-employed. Class 2 NI was originally entered as £145.60 (£2.80 x 52) however HMRC have adjusted it down to £142.80 (£2.80 x 51).

Even more interestingly, the tax refund is exactly the same as my original calculation - it appears that HMRC systems can no longer add up.

Now my dilema - do I call HMRC to tell them that their computer cannot add up, or do I do nothing, safe in the knowledge that my client will get the refund I advised he would get? I think the latter - the former is likely to make those in charge of HMRC's IT heads explode.

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By John R
to ccaspell
20th Jul 2017 09:38

If only 51 weeks are recorded then possibly that year will not count as a complete year for state pension purposes!

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