This is worth up to £3,000 per year to set against an employer’s Class 1 NIC bill, but some employers don’t know whether they can claim the employment allowance.
Purpose
The employment allowance was introduced in April 2014 to incentivise recruitment in general but especially for smaller employers, who are most likely to feel the benefit.
Since 2014, the allowance has been tweaked to target it more narrowly and, with more changes due from April 2020, it is important to review whether your clients are still eligible to claim.
Who can claim?
Most employers with a liability to pay employer (secondary) NIC are eligible including:
- Sole traders, partnerships and companies
- Charities and those with charitable status such as schools, academies and universities
- Community amateur sports clubs
- Employers of care or support workers (from 2015/16 onwards).
These broad categories are limited by a number of exclusions intended to target the relief.
Who cannot claim?
The following employers are not entitled to the allowance:
PSCs or MSCs
Where a personal service company (PSC) or managed service company (MSC) is subject to the intermediaries’ legislation (IR35) and there is a deemed payment of employment income, the employment allowance is not available against any secondary contributions that arise on the deemed
Single director company
This restriction was introduced from 6 April 2016. Where the only employee paid above the secondary NIC threshold is also a director of the company, the allowance is not available.
Confusingly, while referred to as the ‘single director company’ restriction, this can also apply in a company which has two or more directors but where only one of those directors is on the payroll and there are no other employees.
According to HMRC, if the company has another employee or director where a secondary NIC liability arises at some point in the year, then the allowance becomes available again in full.
Many commentators disagree with HMRC’s interpretation and consider that it is sufficient simply to have another employee at some point in the year, whether or not payments to them actually trigger a secondary Class 1 liability. On that interpretation, even a payment of £1 to a second employee or director would be enough to trigger an entitlement to the allowance.
Large employers
From 6 April 2020, there will be further restrictions to target the relief to smaller employers. Where the employer’s total secondary NICs are more than £100,000 in 2019/20, then no allowance will be available in 2020/21. Each year, the availability of the allowance will be tested by looking at the contributions in the previous year. HMRC estimates this will affect around 7% of employers currently claiming the allowance.
For most businesses, it will be clear whether they are affected. For those on the cusp of £100,000 in 2019/20, then the timing of (say) bonuses in that year could determine entitlement in the payroll for April 2020.
Further guidance on the new rules for large employers is expected to be released later in 2019.
Public bodies
Public bodies or businesses where 50% or more of their work relates to work is outsourced from the public sector cannot claim the allowance, unless the employer is also a charity.
This category includes local councils, health authorities and independent business carrying out a public body duty such as refuse collection. It does not affect businesses that supply services such as cleaning or IT support to public bodies.
Employers of domestic workers
The allowance is only available where the employee is exclusively providing personal care to someone who needs support due to age or physical/mental illness. Generally, an employer of private staff such as a nanny, cook or gardener, is not entitled to the allowance.
Connected complexity
The total value of employment allowance that can be claimed is restricted where two or more companies, which include LLPs, are connected. Similar provisions apply where two charities are connected. In this case, only one of the connected companies can claim.
Two companies will be connected if one controls the other, or both are under common control of the same person(s) at the start of the year of claim.
A company can also be connected to the company(s) of associates of the controlling parties if they are commercially interdependent: for example, one provides financial support to the other or they share customers, premises, management or employees. For example, a husband and wife each with their own company could be entitled to only one allowance between them if the two companies are commercially interdependent.
Various schemes to try and divide employees between multiple companies to facilitate the claim of multiple allowances have been blocked by this rule.
From April 2020, the employment allowance is to be restricted to those with only secondary class 1 National Insurance Contributions of less than £100,000.
As a result of this restriction of eligibility for employment allowance, from April 2020 the employment allowance is to be reclassified as de minimis state aid.
State aid
State aid is provided by a public body falls into one of three categories:
- De minimis
- Block grant
- Aid requiring prior notification and approval
We interest ourselves only with de minimis state aid.
De minimis state aid
De minimis aid can be given for many different purposes. The amounts are generally small and are subject to an overall ceiling of €200,000 over a three-year financial period.
The sterling equivalent amount is calculated by reference to the rate applicable on the written date of offer, which for the employment allowance will be 1 April.
Requirements must be met for a public body to give de minimis support, which are:
- Is the support (which can include services as well as cash) being ‘granted by the state’?
- Does the assistance give advantage over an undertaking or group of undertakings? (an undertaking is any organisation engaged in economic activity)
- Does the assistance distort or have the potential to distort competition?
- Does the assistance affect trade between EU member states?
The employment allowance (excluded persons) regulations 2019
Regulations have been laid by HM Treasury and are now open to scrutiny and technical consultation, which will close on 23 August 2019.
Excluded person – exceeding £100,000 secondary Class 1 liability
The regulations make clear that where a ‘person’, who may be a company, a charity or connected with another company or charity, has a secondary Class 1 liability of £100,000 or more in the previous tax year, they cannot qualify for employment allowance.
For the purpose of clarity, I will refer to a ‘person’ as an employer going forward.
From April 2020, the employer will need to ensure that any carried forward element within their payroll software, which indicates that they will be claiming the employment allowance, is deselected. If using an external payroll service, the employer will need to ensure that they communicate this change.
In addition, the employer will become excluded if, during the tax year, they become connected with a company or group of companies that have previously been excluded because their secondary Class 1 liability exceeded £100,000.
Excluded person – de minimis ceiling could be breached
In addition to the exclusion based on secondary Class 1 liabilities, an employer could also become ineligible where they are or have been in receipt of de minimis state aid and by claiming the £3,000 they will breach their ceiling of €200,000.
This is an all or nothing situation, where an employer may breach the ceiling if they were to claim the full £3,000 then they cannot claim – even if in reality they wouldn’t claim the entire amount and indeed the amount that they would claim would not result in a breach.
Record keeping is key to the success of this policy. The employer must be able to keep an accurate record of de minimis funding received for three years.
Top of Form
Bottom of Form
Employer declaration to HMRC
As the public body providing state aid by way of the employment allowance, HMRC will need to be able to demonstrate that they have taken measures to ensure that the ceiling has not been breached. They will need to keep records for ten years.
If the employer is in receipt of de minimis state aid they must provide the following information to HMRC. The method that HM Treasury and HMRC have chosen for this is by way of the RTI system and specifically the Employer Payment Summary (EPS).
In addition to declaring they have checked their secondary class 1 liability for the previous tax year, the following information and declaration must be provided where the employer is or has been in the previous two years allocated de minimis state aid:
- The amount of de minimis aid from the previous two years, as well as any allocation or receipts for the current year. The value is to be expressed in Euros, using an exchange rate published by HMRC on 1st April.
- The trade sector that the employer operates ie
- agriculture
- aquaculture and fisheries
- road transport
- industry or transport
- where the employer is part of a group they must provide a total amount received collectively across all connected companies for the same period and declare that ‘to the best of their knowledge’ they:
- will not exceed the relevant de minimis ceiling for State aid for the sector(s) in which they operate by claiming the full annual amount of an Employment Allowance
- are the only connected company making one claim for an Employment Allowance across the whole connected group, as per the requirements at Section 3 & Schedule 1 of NICA 2014
- are not aware of any other reason why they would be excluded from claiming an Employment Allowance for any other (eligibility) reason.
Could there be a chink of light?
If you are wondering (indeed hoping) that the UK’s impending exit from the European Union could impact on this, be assured that by virtue of the UK State Aid Regulations this policy isn’t going away any time soon.
An online service could have been built, or adapted, such as the business tax dashboard rather than once again add burden to the employer with their already challenging payroll obligations.
However, alternative proposals are unlikely to happen due to the cost of their development. Already comments have been made that question whether claiming the employment allowance is worth the effort, but we know that for many small employers it is a lifeline.
Summary
The employment allowance is a valuable relief for small businesses so it was perhaps inevitable that complexity would be added over time. It is also costly to get it wrong, so care is needed, particularly over the connected company rules, to ensure that all employers claiming are still entitled to the allowance.