Demands for Class 2 NICS on rental income

Have you seen demands from HMRC for class 2 NICs due on rental income? An article in today's Taxation magazine says the author has seen several such demands, and believes this is a new campaign by HMRC. If it is, the professional  bodies need  to talk to HMRC at a high level about this, as previously  HMRC have argued that class 2 NICS were not due on rental income: Rashid v Garcia, SpC 348
  • I am the aforementioned author of the Taxation article 'Twisted kNICkers', and I have indeed seen several of these demands now.  In addition, following the publication of the article I have heard from others who have also come across this issue.  I agree that it would be useful for the professional bodies to raise the problem with HMRC, and would be more than happy to assist in any way.
  • We wrote to HMRC last year when they announced the new policy on limited and sleeping partners (ie, liable), and a team from the Employment Taxes & NIC Committee met HMRC early this year to discuss this issue, with a particular focus on where the mooted reform of Class 2 might go.  Predictably, they refused to accept that their current policy of asking for Class 2 on rental income was incorrect, because self-employment for this purpose includes any 'business', and somebody making a living from managing property is in business, although somebody merely living off rents is an investor and is not in business. The difficulty is usually in spotting the dividing line. 

    The Special Commissioner in Rashid v Garcia held that a man who made his living from letting four properties did not have a 'business', so he was not a self-employed earner and was not eligible or liable to pay Class 2.  The question of whether there is a business is one of fact and degree.  If a company had been letting four properties, it would have been in business, but because the case involved an individual, the Commissioners were able to take a different view and regard his income as being from investment.

    We pointed out to HMRC the absurdity of the current policy, because NICs are supposed to be charged on earnings, which implies earned income, and rents are clearly not earned income.  This has been true ever since NICs were invented, and was a point made by the Special Commissioner in Rashid v Garcia: the term 'business' is used in the NIC legislation alongside trade, profession, office and vocation, implying activity to earn money rather than mere investment. 

    For the future, the NIC Bill 2014 currently before Parliament is set to ensure that rents are never subject to Class 2 after 5 April 2015, because the basis of the liability is moving to the same as Class 4, ie, profits from a trade taxed under Ch 2 Pt2 of ITTOIA, so the problem of the current position has been recognised, and the dividing line between trading and investment will be clearer.

    However, while that is a positive sign, it is not an admission by HMRC that the current view is incorrect.  The law sweeps up any business into the scope of 'employment' (SSCBA 1992, s122) , and if income from lettings looks like an active 'business' rather than a passive investment, Class 2 will be demanded (Class 4 is already on a different basis and not in point in this context).  It is very odd to claim that rents, which are plainly investment income, should be NICable, but it brings in extra Class 2 so HMRC is unlikely to back down.  Given that a demand for Class 2 will never be for more than £143 per year, and only six years can be enforceable, there's little financial incentive for any affected taxpayer to incur costs fighting the demand before the FTT, which is sad because that's the only way that HMRC could be forced to see the error of its ways.  It arguably demeans HMRC to take such a position, and it diminishes taxpayer trust in the organisation, but it appears to some that yield is the main priority and logic is pushed aside.
  • Thanks David - your summary is very helpful.
  • New gudiance from HMRC on this issue:
    Does this make sense following the changes introduced by NIC Act 2014?
  • The new guidance looks like it was written for the old rules, last year.  Under the post-NICA regime that is now in force, anyone in 'business' without a trade, profession or vocation pays Class 2 voluntarily, not compulsorily, and it is strange that this is not mentioned in the new guidance.