Stupid Question…..(about contributions)

My client is self employed and has been on contributory ESA for just over a year (support group). Her problem is that she has twice attempted to pay voluntary class two contributions to protect her entitlement to ESA should she fall ill again after returning to work (which is anticipated to be in the next 6-10 months).  HMRC telephone advisers insist that she can’t pay voluntary contributions because she is receiving credits. This is not my understanding. However, whilst a an exhaustive trawl through the HMRC website hasn’t disabused me of this view, I can’t find any mechanism for paying class 2 contributions apart from setting up a direct debit (which they won’t do) or responding to a demand for unpaid contributions (which she hasn’t got). My queries are:

1) Am I completely confused, is there any valid reason why she can’t pay voluntary contributions?

2) Can anyone identify any other way simply to make contibutions and get them properly creditted without any further ado?

3) Failing that the only other course I could think of was making a complaint to HMRC and asking them to either explain their refusal or set up a direct debit?

Thanks in advance…

In order to be liable for NIC she would have to be working, no? If she is on ESA, she can’t be doing (much) work. I’m not hot on the rules for class 2 conts, but would you be liable, even if working the maximum permitted number of hours per week?

Perhaps I’m off the mark and if so, I hope someone can set me right.

Thanks Edmund,

You made me think twice, but I’m still inclined to think that she should be able to pay:

1) she is doing permitted work and still registered with HMRC as self-employed and required to complete tax returns.

2) If she was an employee her earning would be below the NI threshold and she wouldn’t be required to pay them. But you can pay voluntary contributions even as an employee.

3) All self employed people, are liable for class 2 contributions, unless their earnings are below a given threshold and they apply for an exemption certificate—which she has not done. Even then people who hold a certificate can pay voluntary contributions if they wish.

Any other takers?

1) I don’t think being registered as SE necessarily affects the NIC situation. I may be wrong.

2) Voluntary contributions for employed earners - meaning class 3? These do not count for contributory benefits except SRP and bereavement benefits (for now).

3) This one I don’t know about. I note CPAG 845 does state one can pay class 2 SE NIC even when exempt.

In short, good question. Do NI credits and NI conts conflict and which takes precedence for benefit purposes?

I might call Tax Aid (adviser line) if a satisfactory answer is not forthcoming.

Section 1 Contributions & Benefits Act 92 provides that “self employed earners” pay class 2 contribs.

Self employed earner is defined under section 2 as follows:

“2.—(1) In this Part of this Act and Parts II to V below–

(a)“employed earner” means a person who is gainfully employed in Great Britain either under a contract of service, or in an office (including elective office) with [6general earnings]; and

(b)“self-employed earner” means a person who is gainfully employed in Great Britain otherwise than in employed earner’s employment (whether or not he is also employed in such employment).”

So to be self employed you have to be gainfully employed.  The commentary to section 2 in volume 1 of the Legislation books refers to Vandyk V Minster for Pensions for the test of gainful employment and DMG Chapter 50 appears to set that test out in DMG 50023.  But the DMG is only concerned with whether the person is a self-employed earner for ESA entitlement purposes.  You say s/he is doing permitted work that is self employment.  So presumably the DWP are treating him/her as a self employed earner.  You’ll see one of the factors that the DM would have had to consider in the process is whether the person is regarded by HMRC as self employed.  But even if HMRC had chosen not to treat the person as s/e it would not be conclusive for the DM’s decision - see DMG 50025 & 50026.

But that still leaves the question what criteria do HMRC use in deciding whether you’re liable for class2/remain self employed?  Possibly a similar test to the one set out in DMG50023.  I understand that any decision about contributions including whether you’ve paid enough is appealable but it’s a tax tribunal rather than social security that deals with that.  So if your client pays (or tries to pay) 26 weeks’ worth of class 2 contribs (and that’s all they would have to pay) in the present tax year with a view to possibly having to use the year concerned to satisfy the 1st contrib condition re a future CESA claim, and DWP turns that future claim down based on HMRC records that show s/he has insufficient class2 contribs, the HMRC decision re class 2 contribs would be appealable to a tax tribunal.  But I wouldn’t risk waiting until a future ESA claim is turned down in order to appeal the class 2 decision.  I’d appeal the HMRC decision re class2 contribs at the earliest opportunity which I guess would be end of tax year 2014/15.  Perhaps even earlier than that if they won’t allow those contribs to be paid now. 

Edit: It’s a very interesting question.  Certainly not stupid.

I’m not sure whether an award of credits stops you being liable for Class2 contribs.  I very much doubt it though given that the earliest credits can be awarded is end of tax year.  And the reason for that is to see whether you need them.  You don’t need them if you have enough contributions.  If you don’t have enough contributions then you can be awarded credits to top you up - see Reg 3 of the Credits Regs 1975.  Eg, I claim ESA from 6/4/14 - 5/4/15, ie 52 weeks.  I pay class 2 contribs for 26 of those weeks in order to make 2014/15 count for the first ESA contribution condition in case I have to reclaim ESA in future in either 2016 or 2017.  The DM who decides whether I can be awarded credited earnings (credits) for 2014/15 looks at whether I have 50 weeks of either contributions or credits or a combination of the two.  Well, I’d have 26 weeks of paid contributions, so the DM would be able to award me LCW credits for 24 of the 52 weeks I was on ESA.  That means for 28 weeks (ie 52-24) I get no credits at all despite being on ESA for each of those 28 weeks.  That’s simply because I don’t need the credits - you can only be awarded credits if you need them.  Point being, for benefits at least you look at paid contributions first when awarding credits.  Not the other way round.

Edit2: I think it might be different where the ESA claimant is not doing any permitted work.  Reg 43 of the 2001 Contribution Regs (SI 2001/1004) refers to a “self-employed earner” being able to pay class2s despite being in receipt of IB (I don’t know if it has been amended to include ESA).  However, Reg 43 is expressly dependent on him continuing to be classed as a “self employed earner”.  I think there’d come a point when, because the person has not physically worked for so long, that s/he is no longer regarded by HMRC as gainfully employed so no longer a self-employed earner for Reg 43 purposes.  Given the factors considered in DMG 50023 I suspect a decision about gainful employment might change with the passage of time (I am assuming HMRC apply a similar test as the DMG).  Whether it could change in the space of 26 weeks (ie all you’d need to pay class2s for) is a moot point.  But this Edit2 point appears n/a in the present case as your client is doing permitted self employment.

Tom thanks, yes I think you’ve answered it very comprehensively and confirmed my hunch with a thoroughly thought out (and very thoroughly editted!) post.