Partner Article

NIC Bill confuses auditors

The National Insurance Contributions Bill published recently includes a change of definition that may be significant for company ‘officers’ of all kinds.

In the official eagerness to harmonise tax and NIC rules ten years ago, the definition of ‘earnings’ was changed, but Parliament clearly did not know what it was doing, and it has taken until now for the problem to be corrected.

The meaning of ‘earnings’, on which tax and NIC liabilities are based, is subtly different in the tax and NIC rules. The changes ten years ago adopted the tax definition for both tax and NIC, but that unintentionally left some types of income out of charge and created a loophole where company ‘officers’ were concerned.

This year’s Finance Act has extended the IR35 rules to company ‘officers’ who are supplied by another business – another loophole that was not spotted when IR35 was introduced – and this has led to a re-appraisal of definitions, which have now been fixed. But there are again unintended side-effects.

The change brings into question some long-standing practices. HMRC now appears to believe that company auditors, who are officers of the company under the Companies Act, should have PAYE and NIC deducted from their ‘earnings’.

Auditor independence is one of the cornerstones upon which commercial trust is built, so it seems extremely odd that HMRC should introduce a rule that means that they apparently have to go onto the company payroll.

Auditors with multiple appointments (which is how audit practices work) would have to be given multiple PAYE codes and ‘deferment’ of NIC, with lots of sorting out to do after the year-end.

Quite apart from the administrative chaos this would cause, how does a company work out how much profit its auditor has made (since that is the figure on which tax and NICs are due) so that it knows how much to process through the payroll?

In the immortal words of John McEnroe, they cannot be serious.

This was posted in Bdaily's Members' News section by Baker Tilly .