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21 August 2014
Article taken from the August 2014 edition of the Taxation magazine.   
Are HMRC confused about whether a liability to class 2 National Insurance arises on income from property?

  • Client receives a letter from HMRC contending that a National Insurance liability has arisen for previous years, but no copy is sent to the agent.
  • HMRC are contending that class 2 National Insurance contributions are arising in respect of property rentals.
  • In the case of Rashid v Garcia, the Special Commissioners concluded that class 2 contributions were not payable on let property.
  • HMRC appear to have ignored the Rashid case and also the answers to their own questionnaire and have not fully explained their reasoning.
  • There appears to be an ongoing campaign by HMRC to impose a class 2 National Insurance contributions liability on let properties.

In May, I received a scanned copy of an HMRC letter from a worried client. It was a demand for class 2 National Insurance contributions going back to 2010/11.

This had been sent to the client in March, but had not been copied to me as agent. Checking my records, I saw that the client did not have self-employment income in this period, although he did have a number of investment properties.

At the time I thought these were irrelevant and simply sighed at what I thought was another example of an overstretched government department making a mistake. I therefore wrote back advising HMRC that no class 2 National Insurance was due because the client had no self-employment.

Fast forward to early June and another letter arrived, this time copied to me. Instead of the retraction I had been expecting, HMRC were stating that the class 2 National Insurance was still due.

“Please note that the person may be considered as self-employed through property income and as such may be liable to class 2 National Insurance contributions,” they said.

A quick poll of the office revealed that none of my colleagues had come across this argument from HMRC because, as everybody knows, simply receiving investment property income is not a business.

I decided to do my own research.

Self-employed earner

My first discovery was a rather pertinent case: Rashid v Garcia [2003] SSCD 36. There, the point of contention was whether the taxpayer was a self-employed earner within the meaning of SSCBA 1992, s 2(1)(b) for class 2 National Insurance purposes.

Unusually, the taxpayer was arguing that there was a liability while HMRC were arguing that there was not.

In Rashid, the taxpayer had income from four letting properties on which he carried out quite a bit of work. This included drawing up tenancy agreements, collecting rents, making arrangements for repairs, drafting advertisements, making credit checks and cleaning and maintaining common gardens.

He stated that he spent between two and four hours each week on this work, with family members contributing between 16 and 24 hours on his behalf due to his ill health.

The Special Commissioners found that the taxpayer was not a self-employed earner and his property rental activities did not entitle him to pay class 2 National Insurance contributions.

“Perfect,” I thought, realising that this case was so relevant to the specifics of my issue.

The second interesting item I discovered was a Taxation article, For those about to let [1] by Ken Voller from 2012, which analysed the Rashid case.

I was pleased to see that he had reached the same conclusion as I had that property income, received in the capacity as a passive investor, should not be subject to class 2 National Insurance.

HMRC’s enquiry

Having gleaned some background information, I turned my attention to the helpful questionnaire that HMRC had included with the letter.

The letter stated:

“In order that we may determine if your client’s income from property should be classed as self-employed income, please compete and return the enclosed questionnaire.”

The questions were as follows.

1. How many properties do you have in your portfolio, and for what purpose are they used?
2. If your properties are within the UK and let as furnished holiday accommodation to the public, how many days a year are they let for?
3. How much of your time (hours per month) is actively spent on looking after the properties?
4. Do you advertise your properties? If yes, please give details of how you advertise and as what? (sic)
5. What happens to the service you provide to your tenant(s), if you are unavailable for any reason?
6. Who collects the rent(s)?
7. Who looks after the letting process, for example, draws up tenancy agreements and inventories?
8. Who looks after the physical aspects (decorating and repairs) of the properties?
9. Do you have any other source(s) of income, for example employment or self-employment? If yes, please give details below (if you are self-employed, please tell us what you do and if you are currently registered as self-employed).

I was now feeling pretty smug, sure that the answers I could provide in relation to my client would indicate a much lower level of involvement in the property than in the case of Mr Rashid. My client’s properties were all managed by an agent and he did not undertake any of the work personally.

The questionnaire form duly filled in, I sent it to HMRC sure that this would be the last I would hear on the subject.


Fast forward and I recently received a call from my client to say that he had another letter from HMRC. He scanned this to me because, at the time of writing, I have yet to receive an agent copy. My heart sank when I read it:

“I note your agent feels you are not self-employed as you play no active part in property management. I feel it may help matters if I explain how liability to pay National Insurance contributions (NICs) is determined and, in particular, how this can differ from the income tax treatment.”

Reading on, I looked forward to a lesson in National Insurance legislation. I was disappointed. The letter waffles on about how the liability to pay National Insurance is established by law. It then starts to refer to gainful employment and the definition of that.

Carrying on, it talks about the continuing liability to pay National Insurance contributions and refers to “the legal advice we have been given”. It became clear that there was some confusion at HMRC’s end as to exactly what point they were trying to argue.

I found the reference to “legal advice” particularly interesting because it indicates that HMRC may be on the attack in this particular area. It states:

“The legal advice we have been given on the interpretation of the term ‘ordinarily self-employed’ is the employment is seen to continue, or is treated as continuing until such time as the individual self-employed [sic] gives up that employment altogether.”

That’s all very well and good, but exactly how is that relevant here?

The next section of this wonderful letter was entitled “Disparity with the tax authorities”. This stated that HMRC accept that the tax authorities may be dealing with the income differently on the basis that it is unearned, but that this does not prevent a liability to pay class 2 National Insurance contributions:

“It must be remembered that there are two different laws.”

The penultimate paragraph states:

“This is one of those incidences where the government accepts that the differing legislation means that a consistency of treatment between the two authorities cannot be achieved.”

I would like to feel that this is not, however, one of those incidences where the government feels that HMRC can ignore case law.

The letter finishes by asserting that HMRC consider my client still liable to pay class 2 National Insurance contributions and concludes: “If you disagree with the contents of this letter, please tell us as soon as possible.”

Rest assured, dear reader, I have.

Considered decision?

The letter to my client did not, at any point, explain how HMRC have come to their decision. Apart from quoting some, not entirely relevant, legislation, they did not explain which answers that were given to the questionnaire resulted in their decision.

I have realised that completing the questionnaire was a pointless waste of my time (and my client’s) because at no point was it even referred to.

I have concluded that HMRC did not read the responses because if they had surely common sense would have prevailed at some point when they compared my client’s position to that of Mr Rashid. Readers may well be able to imagine the following conversations.

Mr Rashid: I do everything in my property business. I prepare all my own paperwork, advertise the vacant properties, interview tenants, and even carry out cleaning and maintenance tasks personally.
HMRC: We’re sorry Mr Rashid; that simply isn’t sufficient activity to qualify you to make class 2 National Insurance contributions.

My client, Mr X : I do nothing; I leave it all to my property agent.
HMRC: We’re sorry Mr X, that is far too much activity. You are a self-employed earner with a gainful employment and must pay class 2 National Insurance.

When we consider that HMRC were the party arguing for no National Insurance to be payable in Mr Rashid’s case, the whole situation smacks of the department having their cake and eating it too.

More knickers?

Unfortunately, this is not an isolated incident. Since I received the first letter regarding this particular client I have seen several more.

I had hoped to find a common name at the foot of these letters, anticipating that a rogue inspector had decided to solve the government deficit single-handedly through the collection of £2.75 a week.

Unfortunately, they all came from different case workers at HMRC and, after the second letter had arrived, I rang HMRC and was advised that this was now HMRC policy.

There will be many individuals who receive these letters and do not refer to their professional advisers. Instead, thinking that HMRC know what they are talking about, they will pay the contributions.

Further, HMRC do not appear to be copying advisers in on these letters; readers may therefore be unaware that their clients have even received a demand and paid it.

In a conversation with my client, he stated that he had been frightened of HMRC anyway.

Reading about all their new powers, especially the direct recovery of debts, has made him even more eager not to anger them.

We are not yet in a position where HMRC are judge, jury and executioner, but I do wonder if they, themselves, are aware that this is not the case, just yet.

With all the media coverage about how they are becoming too powerful, are HMRC employees believing the hype?