COMPLIANCE
Aggregation of earnings
Peter Minchinton, employment taxes senior manager at PSTAX , discusses the implications of a question which has recently arisen at a NHS Trust and could be set to become amajor national issue
W here an employee has more than one job with the same employer, the employer must consider whether the earnings need to be aggregated for the purposes of calculating class 1 National Insurance contributions (NICs). ‘Aggregation’ here is the process of adding together the earnings from two, or more, employments and calculating NICs on the total. Currently the National Health Service (NHS) Trust in question has employees who are paid via both the substantive monthly payroll and, from time to time, the weekly ‘bank’ payroll. The Trust calculates the class 1 NICs on both the weekly and monthly earnings using the monthly payroll. HM Revenue & Customs (HMRC) has advised the Trust that NICs on all the earnings must be calculated using a weekly earnings period. The impact of using a monthly earnings period, rather than weekly, is that employer (secondary) NICs are under-deducted but employee (primary) NICs are over-
deducted. The HMRC view is that they will collect the underpaid employer NICs – which, in this instance, could be around £250,000 per year – but will not repay the annual overpaid employee NICs of circa £1,240,000. Bear in mind that these sums are for just one NHS Trust. We have been advised that HMRC will be taking action to address this matter across the sector. At this stage, however, it is unclear whether HMRC will approach NHS Business Services Authority (BSA), which is responsible for the Electronic Staff Record (ESR) payroll used by NHS Trusts, consider the wider implications and issue revised guidance, or whether it will try and pick-off Trusts one by one through employer compliance reviews. What is the position in law? The relevant legislation is contained in the Social Security Contributions and Benefits Act 1992 and the Social Security (Contributions) Regulations 2001. Regulation 14 of the latter allows employers not to aggregate where, due
to calculating earnings separately, it is ‘not reasonably practicable’ to do so. This is a complex area with a considerable history across public bodies. There were several contentious cases involving local authorities around fifteen to twenty years ago, where the key issue was how what is now Regulation 14 should be interpreted. The term ‘not reasonably practicable’ is not defined in NICs legislation, so HMRC uses its ordinary meaning. HMRCs National Insurance Manual (https://bit.ly/2HUh7D3) provides a detailed description of the ‘not reasonably practicable’ test, based on the available case law. Importantly, HMRC observes that it can be ‘reasonably impracticable’ to aggregate earnings on the grounds that they are separately calculated, even if the employments concerned are with the same employer and covered by the same payroll system. Its guidance also acknowledges that the cost to the employer is to be taken into account, not only in terms of finance, but in terms of time, effort and the effect on the business because “the weight of the cost of compliance should not be disproportionate to the loss of [NICs] and benefit entitlement”. The guidance is written in a way which places the burden of proof on the employer. To justify such a decision the
...using a monthly earnings period, rather than weekly, is that employer (secondary) NICs are under-deducted but employee (primary) NICs are over- deducted.
| Professional in Payroll, Pensions and Reward | December 2020 - January 2021 | Issue 66 20
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