Auto enrolment for one or two director companies

Auto enrolment for one or two director companies

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As the previous question on AE became very long winded and drifted somewhat, I would like to pose two specific questions, to which I have seen conflicting answers.

I can see that a one man company is free of the AE burden, one question remains.  Do they have to do anything at all to show compliance?

Secondly, a two Director company with no other employees, or indeed a company with 3 or 4 directors but no employees.  These seem to be caught by AE, however as they would not be classified as workers rather as office holders, the same question applies, what would they need to do to show compliance?

Replies (32)

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By johnrichardson
07th Oct 2014 08:17

Yes

From my understanding and a pension advisors' advice.. Two directors or more need to comply with AE

They can both opt out of the scheme once enrolled and they will need to every 3 years. A paper exercise and a few tick boxes online. It does take an hour or two though to set a scheme up and tell the regulator.

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blue sheep
By NH
07th Oct 2014 08:51

according to the guidance

A worker is someone who

" Work under a contract of employment

(an employee) OR have a contract to perform work or services personally and are not undertaking the work as part of their own business." Surely therefore a company with Directors not working under a contract of employment have no "workers", and are therefore not caught by AE?

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Replying to lionofludesch:
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By onicholson
07th Oct 2014 12:58

Workers

NH wrote:

A worker is someone who

" Work under a contract of employment

(an employee) OR have a contract to perform work or services personally and are not undertaking the work as part of their own business." Surely therefore a company with Directors not working under a contract of employment have no "workers", and are therefore not caught by AE?

 

Workers are caught by a contract of service too, even without a contract of employment, which appears to be a minefield of interpretation in itself.

A company doesn't need to have a scheme in place if there is nobody joining a scheme by enrolment, opt in or join. However, as soon as an employee needs to join, you have 6 weeks to gain active membership, which is why it's not recommended in any case where enrolment is a possibility. If you have workers you still need to complete the declaration of compliance, which will indicate you don't have anyone enrolled.

Apparently, companies can notify the regulator that they have no workers by email. They'll update their records and will need notifying if the company does take on any workers. If no one in a company with multiple directors is taking earnings to qualify for enrolment, it may be easier to just complete the declaration of compliance and move on. You'll need to do it again every 3 years when the reassessment deadline arrives.

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By Kazmc
07th Oct 2014 09:06

We were advised....

We were advised that even a one director company would need to have a scheme set up ready by their staging date and then we would have to advise TPR that they were opting out. Does anyone know if we were given the correct advice? AE is becoming a bigger headache than RTI, Why can there not just be one point of reference with clear answers to all these questions?

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By onicholson
07th Oct 2014 09:58

Workers
The first section of the Regulator's detailed guidance covers some of this:
http://www.thepensionsregulator.gov.uk/docs/detailed-guidance-1.pdf

Paragraphs 8-37 are about identifying workers. A few quotes:

29: If an individual is a director of a company and the company has no other employees, that individual is not a worker by virtue of any office that they hold or contract of employment under which they work. The company is therefore not subject to the employer duties in relation to that individual.

30: However, if the company takes on a second worker, and both the director and the new employee work under a contract of employment, then both the director and the new employee will be workers for the purposes of the employer duties and the company will have responsibilities in relation to both of them.

33: An office-holder is not normally a worker.

36: It is very important to consider the specific circumstances of the individual. Sometimes a person who appears to be an office-holder may also have a contract of service for part of their duties and will therefore be a worker in respect of those duties.

1 director companies are excluded, 2+ director companies may be excluded. The definition of a worker for auto enrolment can be different to others used by HMRC - see paragraphs 15-19.

If a company has no workers, they don't need to complete the declaration of compliance (paragraph 51). I've not seen anything obvious about how you might tell the Regulator that your company is exempt from the declaration so they don't chase you for it, or even if you have to do that.

As with all things auto enrolment, if in doubt, ask the Regulator, an IFA and/or a lawyer, then hope for the best.

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By Maslins
07th Oct 2014 10:04

On the basis of onicholson's post I can imagine a lot of spouses will be "promoted" to director soon.

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Teignmouth
By Paul Scholes
07th Oct 2014 12:14

Roll on retirement!

But in the meantime, if none of the office holders hit the trigger salary threshold then, presumably you just fill out the compliance declaration saying so without the need to actually set up a pension arrangement...or am I missing something?

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Replying to BlueNose1812:
By Matthew Walne
08th Oct 2014 12:47

You're missing something I'm afraid...

The company still has to meet their Employer Duties therefore they would still have to meet all the regulations. See my post above.

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Replying to Wanderer:
blue sheep
By NH
08th Oct 2014 13:35

the point was

Matthew Walne wrote:

The company still has to meet their Employer Duties therefore they would still have to meet all the regulations. See my post above.

But if both Directors do not work under a contract of employment as will be the case for most clients, they do not qualify as workers anyway from the guidance we have so far.

And if therefore the company has no workers, no need for AE.

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Replying to Accountant A:
By Matthew Walne
08th Oct 2014 13:58

From what I understand is that a 1 Director company is exempt but a 2 Director company isn't.

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By JimH
07th Oct 2014 13:35

Auto enrolment - offspring
Timely discussion, as I've just got in from a meeting where new client has taken on board the implications and appointed the working spouse as second director (to avoid NMR).

One adult adult offspring has the skill set come and work in the company in a couple of years and they contemplate immediate appointment as director to avoid future AE. A stretch of #maslin's earlier comment!

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By thomas34
07th Oct 2014 13:53

Thanks Folks

for the advice and I think the consensus is that two director companies can opt out.

This means that 14 of my 16 payroll clients can/will opt out and I've got a year or two to find work-arounds for the other two.

 

 

 

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By J_G_W
07th Oct 2014 15:58

A director could still be a worker. They would need to be equal partners, for example, there will be thousands of clients (think of farms) who operate a partnership with mother/father and also son/daughter. But is the son/daughter a director in the real scope of the term or simply a worker.

The test of course can be used to identify this i.e. 

Mutual obligation - To work for other director(s) and for other director(s) to provide work.

Control - Other partners can decide what work is done, when and where?

Nature of services provided - Can they send someone else to do the job(s)?

Renumeration - Waged?

Etc

Its much more complicated than a yes or no answer. And The Pensions Regulator will simply say, 'If in doubt seek legal advice'. It really should be, if in doubt, just automatically enrol them.

On the comment about wives, the best solution would be to make the wife a company secretary i.e. Office holder so there is no obligations.

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By Arnold Ayton
07th Oct 2014 19:48

Single Director Scheme

 

I have previously taken this question of 'what to do on a Declaration of Compliance for Single Director schemes' to senior members of the Regulator.

Their response was somewhat comforting, or not, depending how you look at it.

They said that at present this subject is still academic and will be clarified closer to the time.

However, if I happen to have a Single Director scheme today (which of course I won't), I should call the Pension Regulator prior to the schemes staging date informing them of the position and the PAYE Schemes exempt status.

My own personal concern for many Single Director PAYE Schemes, is that advisors or employers may fail to consider whether or not this scheme maybe related to a larger employing entity, with more than one employee on other PAYE Schemes. This would therefore bring them into Auto Enrolment... and even their Staging Date forward to the present...

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Replying to Wilson Philips:
blue sheep
By NH
08th Oct 2014 06:44

comforting?

Arnold Ayton wrote:

 

I have previously taken this question of 'what to do on a Declaration of Compliance for Single Director schemes' to senior members of the Regulator.

Their response was somewhat comforting, or not, depending how you look at it.

They said that at present this subject is still academic and will be clarified closer to the time.

Personally, I fail to find any comfort in this.

Clearly the legislators have not considered the effect this will have on thousands of small companies and those that have to advise them.

I just hope that they will be light handed when it comes to penalties 

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By Matthew Walne
08th Oct 2014 12:44

Even though the company may only be 2 Directors, opting out doesn't absolve them from their Employer Duties.

They still have to have a qualifying workplace pension scheme in place before their Staging Date  to which to opt out of, if they are an eligible jobholder. They still need to be assessed every pay reference period, they still have to be communicated to in the same way and they still need to keep records for 6 years. They still need to complete online declaration of compliance every 3 years as well.

Whether they have 1 worker or 1000 the same rules apply.

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Replying to Mr Winston:
By xtraman88
09th Oct 2014 18:21

Even though the company may

Matthew Walne wrote:

Even though the company may only be 2 Directors, opting out doesn't absolve them from their Employer Duties.

They still have to have a qualifying workplace pension scheme in place before their Staging Date  to which to opt out of, if they are an eligible jobholder. They still need to be assessed every pay reference period, they still have to be communicated to in the same way and they still need to keep records for 6 years. They still need to complete online declaration of compliance every 3 years as well.

Whether they have 1 worker or 1000 the same rules apply.

Well said Matthew I would like to add they have to be in scheme to opt out and as most directors are paid a minimum salary and take dividends they never hit the trigger to go in.

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By Matthew Walne
08th Oct 2014 14:08

The Pensions Regulator guidance doesn't really help and could be interpreted in different ways http://www.thepensionsregulator.gov.uk/docs/detailed-guidance-1.pdf

One-person companies

29. If an individual is a director of a company and the company has no other employees, that individual is not a worker by virtue of any office that they hold or contract of employment under which they work. The company is therefore not subject to the employer duties in relation to that individual. 

30. However, if the company takes on a second worker, and both the director and the new employee work under a contract of employment, then both the director and the new employee will be workers for the purposes of the employer duties and the company will have responsibilities in relation to both of them. 

This extract from http://www.portusconsulting.co.uk/publications/is-a-partner-a-worker-for-auto-enrolment.html might help as Partners within a LLP potentially are classed as workers.

1. Definition of Worker for auto-enrolment
Under auto-enrolment legislation, a worker is defined as any individual who:

Works under a contract of employment, orHas a contract to perform work or services personally and is not undertaking work as part of their own business

So, similar to the Supreme Court ruling, an individual’s status as a “worker” should not be determined by the existence or non-existence of an employment contract but rather their wider working relationship with the firm and the intention and extent of the member’s agreement.

 

2. Definition of Worker under the Employment Rights Act (ERA)
It is firstly important to point out that there are separate definitions for “Employee” and “Worker”; in essence an employee enjoys more rights than a worker. In the Supreme Court case, Ms Bates van Winkelhof was ruled to be a “worker” and not an “employee”.

Similar to the definition of a worker under auto-enrolment legislation, a worker under the ERA is an individual who has entered into or works under:

A contract of employment, orany other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual;

The difference in the second point is that unlike the auto-enrolment definition, there is no exclusion if services are performed as part of their own business.

 

3. HMRC definition of an employee rather than a partner
A partner is determined as an “employee” if all of the following 3 conditions are met. If they are all met then a partner should be treated as an employee for tax purposes and subject to PAYE and tax on any benefits in kind:

Condition 1 – Disguised Salary

A person is to perform services for the LLP: andIt is reasonable to expect that the amounts payable by the LLP in respect of these services will be wholly, or substantially wholly, “disguised salary” (80%)

Disguised salary is an amount that meets any of the following requirements:

It is fixed; orIt is variable, but varied without reference to the overall amounts of the profits or losses of the LLP; orIt is not, in practice, affected by the overall profits or losses of the LLP.

Condition 2 – Significant Influence

A person does not have significant influence over the affairs of the partnership

Condition 3 – Capital Contribution

A person’s contribution to the LLP is less than 25% of the disguised salary.

Again, we would point out that the HMRC definition of “employee” does not necessarily translate to the definition of “worker” for auto-enrolment purposes.

 

 

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By Tristan Mander
08th Oct 2014 14:25

Industry Liaison Team (ILT) Briefing Note 14-002
The Pensions Regulator recently circulated the Industry Liaison Team (ILT) Briefing Note 14-002 (I got it on Monday 6th Oct) with its mailing entitled AE INDUSTRY LIAISON TEAM - ACCOUNTANTS SECTOR UPDATE – October 2014. It provides very helpful commentary on this subject and a handy table. I don't think it'll format well if I post it here, but I'd by happy to forward it on if you email me: [email protected].

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By xtraman88
09th Oct 2014 18:18

Answer

Email [email protected] with your question give them the PAYE Ref and save responses for audit trail.

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By Laurence Sanderson
09th Oct 2014 21:39

Pension Regulators response
I raised this issue with the Regulator last week. This is the response I received:

Automatic Enrolment duties apply to all employers with at least one worker in the UK. A worker is defined as any individual who works under a contract of employment (an employee), or has a contract to perform work or services personally and is not undertaking the work as part of their own business. Exceptions to the worker status as are as follows;

· One person companies

· Member of Armed Forces

· Office Holders

Where an entity has two directors, the employer needs to determine whether they have an equal working relationship. If they establish that one is not employed by the other, there will be no automatic enrolment duties unless they take on a worker in the future.

It is an employer duty to determine whether an individual is a worker or not as defined above. More information about defining the work force can be found in our detailed guidance employer duties and defining the workforce, page 11. The Pensions Regulator cannot provide a definitive answer on whether or not you are deemed to be worker as each circumstance will vary. If you are ensure, you may wish to seek appropriate advice from an employment law expert.

When chatting with the Pension Regulator they mentioned that it was "up to the employer to decide" whether a second Director is a worker or not. Sadly they didn't make the same comment in the email! Still largely unclear and it seems to suggest that there could be a difference between a company with an 80/20 split as opposed to 50/50. Maybe the regulator could pay for the expert legal advice so they could pass the information on...

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blue sheep
By NH
10th Oct 2014 07:00

Just to clarify

For those that have not had the AE INDUSTRY LIAISON TEAM - ACCOUNTANTS SECTOR UPDATE – October 2014.

I quote "So, a director who is not working under an employment contract is never classed as a worker"

This issue is now very clear, happily for me this means that of my 50 payroll clients only 15 are caught by AE and I imagine there wil be many small practices out there with similar numbers. 

 

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Replying to RedFive:
By xtraman88
10th Oct 2014 08:31

Small practices

NH wrote:

For those that have not had the AE INDUSTRY LIAISON TEAM - ACCOUNTANTS SECTOR UPDATE – October 2014.

I quote "So, a director who is not working under an employment contract is never classed as a worker"

This issue is now very clear, happily for me this means that of my 50 payroll clients only 15 are caught by AE and I imagine there wil be many small practices out there with similar numbers. 

 

After following this thread I have complied some figures from the client base's of the accountants that we deal with across the country.

Limited Companies

Two or more employees 29%

Two director companies 37%

Single director companies 34% of these 44% the director is also company secretary the remaining 46% the accountant is the company secretary 

Partnerships

Two or more employees 13%

Two partners only 87%

Sole Traders

Two or more employees 9%

Sole trader 91%

This was complied from 4794 clients and the average per accountant is 68 clients

 

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By Kazmc
10th Oct 2014 08:36

But?

I have just checked a few of our 1 director payrolls and they are all showing a staging date so doesn't that mean TPR are expecting some work for these companies, even if it means just at the very least opting them out every 3 years?

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Replying to Duggimon:
blue sheep
By NH
10th Oct 2014 08:43

no

No, the staging date is based solely on the PAYE ref, and data as at April 2012. TPR have no way of knowing whether under that PAYE ref there are qualifying workers or not, that is for the employer (or adviser) to decide and is an ongoing process.

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By Marina Longden
21st Oct 2014 15:22

Linkedin response from Alex Rowson

Alex Rowson

Technical Director at Qtac Solutions Ltd

Here is the answer that I received from tPR regarding this

Directors who are not employed by the company are exempt from auto-enrolment. So in answer to your question, a 5 director only company, where the directors do not have employment contracts, will be exempt from automatic enrolment. The employer needs to give careful consideration to the contractual relationship when making the judgement about whether to tick the excluded worker box.

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Replying to JCresswellTax:
By Matthew Walne
21st Oct 2014 15:32

Implied contracts

Marina Longden wrote:

Alex Rowson

Technical Director at Qtac Solutions Ltd

Here is the answer that I received from tPR regarding this

Directors who are not employed by the company are exempt from auto-enrolment. So in answer to your question, a 5 director only company, where the directors do not have employment contracts, will be exempt from automatic enrolment. The employer needs to give careful consideration to the contractual relationship when making the judgement about whether to tick the excluded worker box.

If you had a 5 director only company what are the chances that none of them have an active role within the company? I would suggest that is highly unlikely. The contract of employment can be implied. It doesn't have to be written down.

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By Marina Longden
23rd Oct 2014 14:32

Linkedin response from Nigel Chambers

Nigel Chambers

Managing Director at PPAE Ltd. Payroll and automatic enrolment administrator for small to medium businesses

I asked Neil Esslemont at tPR this very question! (Well, something very similar anyway). Below is his response, I hope it helps; 
"The Regulator can identify single employee companies, where the employee is a director, in the PAYE data received from HMRC, so we can treat the company appropriately. 

However, if any company receives communications from the Regulator which assumes the automatic enrolment duties do apply and they are sure they are excluded or do not employ any workers, then they should put this in writing to customer support via email stating this. 

The email address to send this to is [email protected] 

Regards, 
Neil Esslemont"

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By JimH
23rd Oct 2014 19:07

And Now pensions ...
... talking to the ICAEW tax faculty via webinar, say the Pensions Regulator has reviewed and decided there is not an exemption arising from directors having no service contract/ employment contract.

They directed us to latest news on Regulator's site. But I can't find this stated anywhere on the Regulator's site. This is Now briefing ICAEW members. Are they totally wrong?

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Replying to Matrix:
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By Arnold Ayton
24th Oct 2014 16:12

Auto Enrolment... Friendly Pensions

JimH wrote:
... talking to the ICAEW tax faculty via webinar, say the Pensions Regulator has reviewed and decided there is not an exemption arising from directors having no service contract/ employment contract. They directed us to latest news on Regulator's site. But I can't find this stated anywhere on the Regulator's site. This is Now briefing ICAEW members. Are they totally wrong?

There seems to be some confusion:

To be clear the ONLY exemption is for Single Director schemes, (i.e. a PAYE Scheme / Employer with a Single worker, where that worker has Director Status).

It is true that there is not, and never has been an exemption for Directors in general.

However, it is entirely possible for a director (or any other type individual) to fall outside the criteria of being a WORKER, and therefore outside the regulations under Auto Enrolment. Examples of these individuals could included Non Executive Directors, LLP partners, or even contractors.

A very similar concepts lie around an individual inclusion for both taxation via PAYE and contributions for Class 1 National Insurance.

Auto Enrolment simly classifies workers, yet PAYE/Class1 NIC relies on whether or not the situation constitutes employment.

As Employment tax/NIC regulations are mature and extensive they have very detailing guidance on what is a very subjective situation such as IR35 etc...

For Auto Enrolment, as there is an absence of such detailed guidance and experience, we must refer to a variety of different measures (including the existence of an Employment Contract, or even Contracts OF vs FOR Service) to constitute a reasonable decision.

My personal opinion is that this problem will remain as a result of the very nature of applying rules to a real, and therefore complex commercial environment.

Despite my somewhat non-conclusive answer, I do look forward to guidance on the duties of Single Director Schemes with regard to communicating their exemption to the regulator (i.e. around their declaration of Compliance etc...) or at least official confirmation that no action is required as a result of the information feed from HMRC...

 

 

 

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By Wijay_WIS
22nd Jun 2015 16:59

Director exemption

I attended the presentation by pension regulator at CIMA MIP conference on Friday. Representative of regulator confirmed where there is no employment contract - they do not come under auto enrolment rules.(http://www.thepensionsregulator.gov.uk/employers/What-if-I-dont-have-any...)

If any of your client had received a letter they need to go to below link and declare them self as "NOT AN EMPLOYER" for Pensions. This does not mean company is not an employer for HMRC.

Https://automation.thepensionsregulator.gov.uk/notanemployer

 

Thank you

 

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By Eric T
28th Aug 2015 11:02

What constitutes an "Employment Contract"?

 

Does not the receipt of any sort of salary imply that a contract exist between the director and the company - even if a written contract was never created or signed?

 

On what basis is the director being paid a salary?

 

 

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