Employment Allowance (again!) ....

2 directors, for business reasons one paid £32,000 pa, one not paid + 1 employee

Didn't find your answer?

Will attempt to keep the situation straightforward and any help or guidance greatly appreciated thanks:

We have a client with 2 directors, one of whom is paid an annual salary of £32,000 and effectively 'runs' the company, one who has business interests elsewhere and so isn't paid under PAYE.  They also have a genuine part time employee who earns on average £500 pcm (and so is under the secondary threshold).

As this isn't a lone director company even though only one is paid PAYE do they qualify for Employment Allowance?  If the salaries were reversed and the employee was on £32k pa and the director £500 pcm then they would.  If this was a lone director on £32k and an employee earning below the secondary threshold then they wouldn't.  

But from what we can see the legislation is very keen on single director companies and often refers to 'the' director rather than 'a' director - does the addition of a non-remunerated director for business reasons mean that they effectively lose out on employment allowance in this scenario?

 

Replies (16)

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Euan's picture
By Euan MacLennan
03rd Apr 2017 16:46

The existence of an unpaid director is irrelevant.

If in doubt, refer to the legislation in s.2(4A) NICA 2014 (as amended):

"Excluded companies

(4A) A body corporate (“C”) cannot qualify for an employment allowance for a tax year if—

(a) all the payments of earnings in relation to which C is the secondary contributor in that year are paid to, or for the benefit of, the same employed earner, and

(b) when each of those payments is made, that employed earner is a director of C."

Two paid employees means that the employer can claim the EA.
Or do you think that it is necessary under s.2(4A)(a) for contributions actually to be paid for more than one employee? Again, refer to the legislation in s.7 SSCBA 1992 for the definition of a secondary contributor:

"7 “Secondary contributor”

(1) For the purposes of this Act, the “secondary contributor” in relation to any payment of earnings to or for the benefit of an employed earner, is—

(a) in the case of an earner employed under a contract of service, his employer;
..."

There is no requirement for contributions to be paid - just the payment of earnings (of any amount) to an employee - to meet the definition of a secondary contributor.
Yet another case of HMRC's guidance reflecting their wishful thinking, rather than the law.

Thanks (3)
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By IainJennions
03rd Apr 2017 16:59

Hi Euan, many thanks for the comprehensive reply and apologies if I am missing something but I take it you are inferring that once a company has 2 employees then they qualify?

"Two paid employees means that the employer can claim the EA".

However the second example here in 14.1:

https://www.gov.uk/government/publications/employment-allowance-more-det...

seems to suggest that employee numbers are irrelevant if all bar the director/one employee earn beneath the secondary threshold?

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Replying to IainJennions:
Stepurhan
By stepurhan
03rd Apr 2017 17:08

IainJennions wrote:

However the second example here in 14.1:

https://www.gov.uk/government/publications/employment-allowance-more-det...

seems to suggest that employee numbers are irrelevant if all bar the director/one employee earn beneath the secondary threshold?

Read the last sentence of Euan's response again. The one about HMRC guidance (such as in the link you have given) reflecting their wishful thinking rather than the law.
Thanks (1)
Replying to stepurhan:
RLI
By lionofludesch
03rd Apr 2017 19:30

This might be precisely the tax case we've been waiting for to decide the matter one way or the other.

There'll be a fair wedge at stake on £32000.

Of course, it's open to HMRC to change the law to "what everyone* originally thought to be the case."

Could be a Pyrrhic victory.

* HMRC that is.

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By Matrix
03rd Apr 2017 19:48

Have you claimed the allowance this tax year? If you pay an additional employee above the secondary threshold for any part of the tax year then you are entitled to the allowance for the whole tax year. So, to avoid the ambiguity between the legislation and the guidance manual, maybe pay the £500 a month employee more than the secondary threshold for one week a year.

Thanks (4)
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By IainJennions
04th Apr 2017 08:40

Once again thanks for the replies, and then we also have the (tongue in cheek!) solution of resigning and reappointing the £32k pa director either side of the end and beginning of each new tax year to simply leave us with two employees for part of the year!

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By aburt01
05th Apr 2017 14:20

Hi Euan
I have a question for you...
If you don't pay any secondary contributions, i.e. Employer's NIC, because of the employee's earnings, but only because of the director's earnings then how can you be a secondary contributor for anyone other than the director?
The legislation says the employer is the nominated secondary contributor, yes, but surely the caveat is that this is true only when they contribute. If the employee earns less than the NIC lowest earning threshold (LEL) no contribution has been made by the employer, does this not indicate that NO ONE was a secondary contributor for the employee in this case?
Thanks in advance for your clarification...

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Replying to aburt01:
Euan's picture
By Euan MacLennan
05th Apr 2017 16:02

aburt01 wrote:

The legislation says the employer is the nominated secondary contributor, yes, but surely the caveat is that this is true only when they contribute.

Caveat? There is no mention in s.7 SSCBA 1992 that the definition of a secondary contributor is subject to any other clause which might contain a caveat. Can you find any other clause in any Act which states that the definition of a secondary contributor in s.7 SSCBA 1992 is subject to qualification for any reason in connection with the Employment Allowance? I can find none in NICA 2014.

So, re-read s.7 SCCBA 1992:

... the “secondary contributor” in relation to any payment of earnings to ... an earner employed under a contract of service [is] his employer"

That is any payment of earnings, not just a payment of earnings in excess of the LEL (or, more to the point, the secondary threshold as Er's NIC is "payable" at 0% between the LEL and ST). Only the unpaid director in the OP's question has no secondary contributor because he is not paid any earnings.

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Replying to Euan MacLennan:
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By aburt01
05th Apr 2017 18:14

Yes, I quite agree with your statements.

Considering the original question, employee is on £500 per month, Director on much more.

In general, if the employee pay is < LEL,
I still have a slight concern with words in NICA 2014 - 1st section, 1st paragraph, caveat (b), that may suggest that entitlement depends on payment of such contributions. Since no contributions arose as a consequence of earnings to an employee, are you entitled?
i.e. is "person incurs liabilities to pay" in caveat (b) satisfied just because you are liable, or is caveat (b) only satisfied when you actually pay a contribution "for benefit of" in caveat (a)?

For benefit of clarity... this is what I am reading...
http://www.legislation.gov.uk/ukpga/2014/7/section/1/enacted

"(1) A person qualifies for an employment allowance for a tax year if, in the tax year—

(a)the person is the secondary contributor in relation to payments of earnings to, or for the benefit of, one or more employed earners, and

(b)in consequence, the person incurs liabilities to pay secondary Class 1 contributions"

Thanks for your kind consideration of my weakness here :)

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Replying to aburt01:
Euan's picture
By Euan MacLennan
06th Apr 2017 11:25

OFHS

I assume that you understand that a "person" is a generic term covering both individual and corporate employers.

Do you not realise that if the person does not pay any secondary Class 1 contributions, the person does not qualify for any employment allowance? This is why s.1(1)(b) is required - to prevent any notion that all employers are entitled to a handout of £3,000 from the state. It is not a caveat - it is a condition of qualification for the EA.

S.1(1)(b) needs to be read in conjunction with s.1(2) which says that the amount of the EA is the lower of £3,000 and the amount of secondary contributions paid by the person.

All that s.1 says is that an employer qualifies for the EA if they pay employer's NIC. I have already covered the exclusion in s.2(4A) where the employer has only the one paid employee who is a director.

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Replying to Euan MacLennan:
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By aburt01
06th Apr 2017 15:33

Indeed I have understood all of that, my concern was that s.1 actually imposes a greater restriction than you are anticipating.

Euan MacLennan wrote:

All that s.1 says is that an employer qualifies for the EA if they pay employer's NIC. I have already covered the exclusion in s.2(4A) where the employer has only the one paid employee who is a director.

i.e. I can read s. 1 (1) (a) and (b) such that it stipulates that an employer qualifies for the EA based on contributions, yes, sure, but I can also read into it such that those contributions only qualify you for EA if they were contributions based on "non-director" earnings.

Thanks for your efforts to explain. I have tried your patience enough.

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Replying to aburt01:
Euan's picture
By Euan MacLennan
06th Apr 2017 11:34

Duplicate removed.
I only posted it once (honest), but AWeb had a timeout, during which they managed to post it twice!

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By David Heaton
07th Apr 2017 00:02

Euan is right, HMRC's guidance is wrong. You are a secondary contributor in respect to a payment of £1 to an employee if it is a payment of earnings. That is logical, because otherwise a 'secondary contributor' would have no duty to do anything in RTI terms about employees paid below the LEL. They do have such duties (assuming at least one employee is paid above the LEL so that they are in RTI) precisely because they are the secondary contributor.

HMRC thinks (incorrectly) that s1 stops the EA claim, but it only disqualifies the claim if there is nobody else apart from the sole director paid any earnings, not if there are no other NICs due. You never get to s1 if you meet the test in s2 of having paid somebody else any amount of earnings.

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Replying to David Heaton:
RLI
By lionofludesch
07th Apr 2017 09:33

I agree.

Who's going to test this at the FTT ?

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Replying to lionofludesch:
Euan's picture
By Euan MacLennan
07th Apr 2017 10:49

Obviously, only HMRC would test this at the FTT if they think they have discovered a suitable case. In the meantime, we should continue to advise clients to claim the EA if they have more than one paid employee, even if all the Class 2 NIC is payable on a director's earnings.

As to whether we should encourage sole director clients to pay £100 a month to their spouse for (say) admin work, I leave to you. The question is that even if the spouse's pay should be disallowed for CT purposes as not being a business expense, is it still a payment of earnings which would qualify for the EA?

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Replying to Euan MacLennan:
RLI
By lionofludesch
07th Apr 2017 11:01

Euan MacLennan wrote:

Obviously, only HMRC would test this at the FTT if they think they have discovered a suitable case. In the meantime, we should continue to advise clients to claim the EA if they have more than one paid employee, even if all the Class 2 NIC is payable on a director's earnings.

And, obviously, we would have to advise the client that HMRC have a different opinion and that they may be charged a penalty, which they may challenge at FTT.

It's not an attractive option for a small business, is it ?

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