NIM09500 | Earnings Periods: Notifications & directions: Their purpose

Regulations 3(2B), 30 & 31 of the Social Security (Contributions) Regulations 2001 (SSCR 2001) (SI 2001 No 1004)

The adoption of certain pay practices by employers can result in liability for contributions being avoided or greatly reduced, either intentionally or not. This is because the earnings period applied to that pay practice could reduce or eliminate a liability that would otherwise exist if the earnings were paid differently. To counteract this, these regulations allow HMRC to direct or give notice to an employer to use a different earnings period.

These directions and notices do not, and cannot, require the employer to change the way in which he pays an employee. What they do require is the employer to change the earnings period applied to those earnings and to commence calculating NICs using the new earnings period from a specified date. Where a new earnings period is notified it applies equally to the calculation of primary and secondary NICs.

Directions and notices are normally issued by an officer of HMRC following a compliance review, but either an earner or a secondary contributor can request one at any time.

Where the issue of a direction or notification is considered appropriate both the employer and any affected employee is first notified of HMRC’s intention to issue a direction or notice. This affords both parties an opportunity to provide reasons why a direction or notification is not appropriate. The direction or notification itself is then issued by means of a decision which carries a right of appeal.

The issue of decisions and any resulting appeals are dealt with in the same manner as anyother NIC decision and appeal. Full guidance on issuing NIC decisions and dealing with appeals is provided in the Decisions and Appeals for NIC and Statutory Payments (DANSP).

The three direction or notification types are:

Regulation 3(2B)

This provision allows HMRC to change the earnings period to be applied to a pay practice which, although perfectly legitimate, is likely to affect an individual’s earnings factor for benefit purposes. A notification under regulation 3(2B) can be issued if the greatest part of an employee’s earnings is normally paid at the longer of two or more regular intervals of payment - see NIM09510 onwards.

Regulation 30

This provision allows HMRC to decide any question relating to a person’s earnings related contributions, if the pay practice used by the secondary contributor

• reduces or avoids liability; and

• HMRC considers it abnormal for the employment.

This provision is mainly used against pay practices which appear to be designed to avoid contributions - see NIM09600 onwards.

Regulation 31

This provision allows HMRC to issue a direction changing a pay practice which reduces or avoids liability due to unequal or irregular payments - see NIM09650 onwards.

Authorisation of Notifications and Directions

Your manager will be able to advise the authorisation process for regulation 3(2B) notifications and regulation 31 directions. Authorisation of regulation 30 directions is reserved to IPD (Technical).

HMRC officers should be wary of implying that an employer is deliberately avoiding or reducing liability unless it is clear that the employer is manipulating a pay practice. For example, although a notification under regulation 3(2B) may be issued to change the earnings period to be applied to the longer or longest interval the employer and employee are in fact paying NICs in accordance with legislation by applying the shorter interval.