The strange affair of Class 2 NIC on property letting

From time to time this issue raises its ugly head, mainly when a client receives a questionnaire from HMRC raising the spectre of Class 2 on property income. One of the problems is the difference between Class 2 and Class 4 NIC.

Class 2 NIC is due where an individual is categorised as a self-employed earner (s11 SSCBA 1992). A self-employed earner is someone who is '...gainfully employed in Great Britain otherwise than in employed earners' employment...'(s1(b) SSCBA 1992).

S122 SSCBA 1992 defines 'employment' as '...including any trade, business, profession, office or vocation and 'employed' has a corresponding meaning', so it appears that if a portfolio of properties constitutes a business, Class 2 is due.

Therefore, the question boils down to whether a business is being carried on. This was addressed in Rashid v Garcia (SpC 348), where the taxpayer argued that Class 2 was due on rental income. The taxpayer owned four let properties, including both residential and commercial lets, one of which was let to DSS tenants for lets of only a few weeks at a time. It was estimated that the taxpayer spent two to four hours a week and members of his family acting on his behalf spent 16 to 24 hours a week.

The Commissioner considered that there was insufficient activity for this to constitute a business and stated that:

'...it is an investment which by its nature requires some activity to maintain it, rather than a business'.

On the other hand, s15 SSCBA 1992 clearly limits Class 4 NIC to profits from trade profession or vocation as defined by Part 2 Ch 2 ITTOIA 2005 i.e. not rental income.

Therefore, whilst it seems counter-intuitive, there appears no direct link between Class 2 to Class 4.

The question on Class 2 would appear to be on what basis do HMRC feel that rental income = self-employment under s2 SSCBA 1992'? It would be useful if HMRC published some consistent guidance, particularly as the Property Income Manual clearly states that furnished holiday letting is not a trade for Class 4 NIC (PIM4120).

So much for simplification!