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HMRC internal manual

National Insurance Manual

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Tips, gratuities and service charges: commentary: Nerva v R. L. & G Ltd [1997] ICR 11 (CA): commentary: HMRC v Knowledgepoint 360 Group plc

Commentary on Knowledgepoint

On 28 March 2013 the Upper Tribunal (UT) published its decision HMRC v Knowledgepoint 360 Group PLC [2013] UKUT 7 (TCC). Thedecision (PDF 150KB) is final.

This case was heard as a result of an appeal by HMRC against the decision of the First-tier Tribunal UKFTT438 (TC) (30 June 2011).

The UT decided that payments to employees through an Employee Benefit Trust (EBT) were not ‘gratuities’ and could not therefore be disregarded in the calculation of earnings for the purposes of earnings-related contributions. Class 1 NICs liability arises on such payments.

In simple terms, the decision informs that where an employer has funded the EBT the gratuity disregard cannot be applied. It also helpfully sets out the conditions under which the gratuity disregard rules can be applied and has relevance generally for cases involving gratuities for NIC.

A change of legislation was introduced from 23 February 2004 [SI 2004/173] which served to remove any doubt about payments through a third party, including trustees. From that date onwards it became clear that such payments could not be disregarded from earnings so it is unlikely that an EBT - or similar vehicle - would be used to deliver ‘gratuity’ payments thereafter.