Employment Allowance: something simple suddenly becomes very complex!
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
21 August 2019
HMRC published a consultation on proposed restrictions to the Employment Allowance on 25 June 2019, following the Government’s Budget 2018 announcement that it intended to restrict the allowance to employers with a secondary (employer’s) NICs liability of £100,000 or less from 6 April 2020.
Justine Riccomini explains what is happening and why some employers may find the new regime too complex to continue claiming it.
Background
The Employment Allowance was first introduced as a result of Budget 2013. At that time, it entitled businesses, charities, and amateur sports clubs to deduct £2,000 per annum from their secondary NICs bills, as an incentive to small businesses, in particular, to help them recruit their first employee, or expand their existing workforces.
Two years later, as part of the Summer Budget 2015 measures, the Employment Allowance was increased to £3,000 per annum from 6 April 2016, with a specific exclusion for companies with one sole director.
The draft legislation proposed as a result of Budget 2018 will now reform the Employment Allowance once again to restrict it to those employers with an employer’s NICs bill of less than £100,000. The new regulations will be known as the Employment Allowance (Excluded Persons) Regulations 2019.
Twist in the tale
By restricting the Employment Allowance to employers with a less than £100,000 secondary NIC’s bill, the allowance is now to be classified as State Aid. As such, additional data requirements will be demanded from employers by way of a statutory notice. In addition, according to HMRC …”Those engaging in economic activity will also have to confirm to HMRC every year that their previous year’s employer secondary Class 1 NICs liabilities were under £100,000, inform HMRC of the State Aid sector in which they operate, and notify of any other state aid received.”
HMRC considers that 93% of all businesses will still be eligible to claim the Employment Allowance – but will they wish to, given the added complications they potentially face, just to get a £3,000 reduction in their NICs bill?
State Aid
From April 2020, Employment Allowance will be operated under the “de minimis State Aid” provisions. This means that where the £3,000 Employment Allowance is claimed, it counts towards the total amount of State Aid being claimed by that entity, up to the available de minimis limit, or ceiling, for that sector.
State Aid is considered over a rolling three-year fiscal period, in Euros. For the purposes of the Employment Allowance only, HMRC will publish a conversion rate on 1 April every year, whereas with other types of State Aid funding, the conversion is calculated using the Commission exchange rate applicable on the date of offer.
Note that where there are connected employers, the cumulative secondary Class 1 NICs liabilities for all those businesses must be less than £100,000.
Common items which count as State Aid
Some of the more common items which count towards the State Aid ceiling are:
- Regional investment incentives
- Loans offered at preferential interest rates
- Guarantees or indemnities arranged on favourable terms
- Disposal of land or buildings at less than full market value
- Debt write-offs
- Some qualifying grants and subsidies such as Heritage Aid and Housing Gap Funding
- Tax or social security exemptions such as R&D, Air Departure Tax in Scotland and EMI share options
- Some qualifying profit waivers
- Assistance with exports
If businesses are already participating in some of these areas, it would be prudent to ensure that they have not collectively reached the ceiling and that there is still room for the Employment Allowance from April 2020.
Layers and Confusion
The State Aid rules add an extra layer of complication for those employers who are eligible, characterised by administrative and reporting challenges. From 6 April 2020, the claims process will require the employer, together with the payroll department or outsourced payroll function acting for the entity concerned, to become involved in the following actions, to a greater or lesser extent:
- Determine whether the entity has an annual NICs bill of less than £100,000 and consider the amended ‘excluded and connected employers’ rules as set out at sections 2 and 3 of the National Insurance Contributions Act 2014 as proposed by SI 2019/1234;
- Remember to apply annually for the allowance based on the previous year’s NICs bill of the entity;
- Determine which State Aid sector the business is in and what its de minimis State Aid level is (According to the 2011 BIS guide, the State Aid sectors are Agriculture, Fisheries and Aquaculture; Broadband; Road Haulage; Sensitive Sectors; Cinema Film and TV Programme production and “Other” (industry);
- Report on the RTI Employer Payment Summary the State Aid sector they operate in;
- Calculate the amount of State Aid, if any, which has been claimed by the business in the previous tax year and determine whether the entire Employment Allowance fits into the sector-based de minimis limit (if only part of the Employment Allowance fits, it is excluded completely and cannot be claimed);
- Report the amount of State Aid which the entity has claimed in the previous two tax years plus that which has been accounted for in respect of the current tax year in line with the three-year fiscal period rule above;
- Enter the values on the EPS under Real Time Information in Euros, using an exchange rate to be published by HMRC on 1 April each year.
Negative Effect?
Those with limited State Aid provisions (e.g. Agriculture has a ceiling of 20,000 Euros over three years and Fisheries 30,000 Euros over three years) are likely to suffer the most from this proposal.
The Continuing Burden on Large Business
Whilst small business will shoulder the burden of claiming State Aid, we should not forget about large businesses, whose administrative and cost burdens have risen significantly over recent years. Now, larger businesses will no longer benefit from the Employment Allowance, meaning that each one will have an additional NICs burden of £3,000 p.a. in addition to other liabilities such as increased pension costs, IR35 related NICs costs where they pay workers through intermediaries, and Apprenticeship Levy in qualifying cases, which collectively amounts to a significant rise for large business.
Leaving the EU
EU State aid rules and over-arching EU control will apply to the UK until the UK exits the EU. Although no concrete detailed information is forthcoming on this issue, it is thought that there is a likelihood that State Aid rules might continue under the terms of a Brexit deal in order to ensure that trade agreements continue to apply. If Britain leaves the EU without a deal, then it is possible the whole issue of State Aid will have to be reworked in line with any proposed tariffs regime. This may or may not affect the transition to State Aid status of the Employment Allowance.
Further information
The draft statutory notice issued under section 4(4) NICA details the revised information requirements for employers wishing to claim the Employment Allowance from April 2020. A draft tax information and impact note has been published alongside it. Find out more about the consultation.
The regulations are made using the power conferred by section 5(1)(b) of the National Insurance Contributions Act 2014, and the draft instrument was laid before Parliament in accordance with section 5(5) of the National Insurance Contributions Act 2014.
A final version of the regulations and guidance is expected to be published in October 2019.
Conclusion
Employers and payrollers may just consider that the work involved in claiming the Employment Allowance through State Aid is one step too far. There is no point in requesting historical data from HMRC on State Aid payments - HMRC has stated that it currently maintains no record or database of who has historically claimed State Aid and that it does not intend to maintain one – however this does not tally with the requirement being imposed on employers by HMRC to make a three-year declaration that they are not breaching State Aid ceilings in their sector.
Possible unintended consequences of this could be that employers find the whole issue of obtaining a £3,000 rebate from their NICs bills so complicated that they simply give up – which means that the Employment Allowance will not be claimed and it may eventually be withdrawn altogether by HMRC on this basis.
The consultation closed on 20 August 2019.