Employers who have provided benefits in kind that have been used for both private and business use may be entitled to a refund of Class 1A NICs for the years 2003/04 to 2005/06.

Where an employer provides a director or an employee with a benefit in kind that has mixed use (both private and business use), the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) may allow a deduction from taxable earnings in respect of the business use.

However, such deductions are disregarded when calculating the amount of general earnings on which Class 1A NICs are due. Class 1A NICs are therefore payable on the full cost of the benefit chargeable, before deduction, to income tax under ITEPA.

The exception to this is where the benefit is used solely for business purposes and ITEPA allows a deduction of the full cost of the benefit. Where this is the case, there is no liability to pay Class 1A NICs.

An appeal was heard last year by the First-tier Tribunal (Tax Chamber) in which the appellant claimed that partial deductions under section 365 of ITEPA were also deductible for Class 1A NICs for tax years from 2003/2004 to 2005/2006.

The Tribunal judge found in favour of the appellant, Antique Buildings Limited, and allowed the appeal. HMRC considered its position and decided not to seek permission to appeal against the decision.

HMRC consequently now accepts that partial deductions under sections 363 to 365 of ITEPA are not disregarded in the assessment of earnings liable to Class 1A NICs for the 2003/2004 to 2005/2006 tax years.

A refund can therefore be claimed in any case where Class 1A NICs have been calculated and paid without taking into account a deduction allowed by any of sections 363 to 365 of ITEPA.

HMRC stressed that this applies only to deductions under sections 363 to 365 of ITEPA and only to tax years from 2003/2004 to 2005/2006. The legislation prior to 6 April 2003 and from 6 April 2006 is clear in disregarding partial deductions for tax when calculating earnings for Class 1A NICs.

Claims for overpaid Class 1A NICs should be made in writing to the following address:

HM Revenue and Customs
Customer Operations PAYE Employer Office
BP4009
Chillingham House
Benton Park View
Newcastle
NE98 1ZZ

HMRC are requesting that refund claims for the 2003/2004 year should generally be made no later than 5 April 2011. Claims made after that date will only be accepted if the applicant can show there was a reasonable excuse for not making the application in time and that the refund claim was submitted without unreasonable delay after that excuse ceased.

Claims for 2004/2005 must generally be made by 5 April 2012 and claims for 2005/2006 by 5 April 2013.

For more information go to http://www.hmrc.gov.uk/thelibrary/tax-paye/nicsrefund2003-06.htm