The NICs employment allowance explained
The Chancellor announced the creation of an NICs Employment Allowance in the 2013 Budget. From 6 April 2014 this new initiative will enable eligible companies to reduce their employer/secondary class 1 NICs bill by up to £2,000 a year, explains Diana Bruce.
The NICs Bill was introduced to Parliament last October to start the legal process to bring the regulations into force for April and even though it is only a few weeks before the Employment Allowance comes into effect, it is still awaiting parliamentary approval.
In the meantime the long awaited guidance and key facts to assist employers has at last been published. Does it answer all the questions from those of us having to administer the new scheme? To follow is a look at how the new scheme is going to work and some of the areas that have so far been queried.
You can claim the Employment Allowance if you are a business or charity (including Community Amateur Sports Clubs) that pays employer Class 1 NICs on your employees’ or directors’ earnings. If your company belongs to a group of companies or your charity is part of a charities structure, only one company or charity can claim the allowance. It is up to you to decide which company or charity will claim the allowance. You can only claim the £2,000 Employment Allowance against one PAYE scheme - even if your business runs multiple schemes.
Not all businesses can claim the Employment Allowance; there are some that are excluded such as those who employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener or care support worker.
The CIPP asked HMRC to reconsider their decision on this - surely if they are employers and have to pay employer’s NI then they should be eligible and not excluded. It seems to go against the government’s perpetual claims to be helping businesses of all size.
Public authorities cannot claim and includes local, district, town and parish councils. Also those businesses who carry out functions either wholly or mainly of a public nature (unless you have charitable status), cannot claim, i.e. NHS, GP and prison services. If you are responsible for the payroll in a school you will need to ascertain what type of school it is. If run by public funding then the school will not be permitted to claim the allowance, but if it is an academy, which has charitable status, it can claim. If it is an independent school which is a trading business it can also claim.
Employers can use their own payroll software to give notice to HMRC that they are going to claim the Employment Allowance, using a field on the Employer Payment Summary (EPS). However not all software providers supply an EPS facility and if this is the case, HMRC's Basic PAYE Tools (BPT) can be used to make the claim. Bear in mind that if you only use the BPT to claim the Employment Allowance and continue to use your own software to operate your payroll, you will need to keep a record.
Any records that relate to your claim must be kept for a minimum period of three years after the end of the tax year in which you claimed the Employment Allowance. Your records must show why you were entitled to claim the allowance, how much allowance was used or in some circumstances repaid and what liabilities the allowance covered.
If you change your payroll software, you won’t need to make the claim for Employment Allowance again as HMRC will automatically carry your claim forward each tax year. You may however, need to submit a new EPS if your new software needs this, to enable your claim. You need only claim once and the notice will apply for that tax year and subsequent tax years. This does not apply to paper filers as they will need to claim each year.
When making a claim you must reduce your employer Class 1 NICs payment by an amount of Employment Allowance equal to your employer Class 1 NICs due, but not more than £2,000 per year. Deductions must be made from qualifying payments as they occur in the tax year. For example, if your employer Class 1 NICs is £3,000 each month then in April your full annual allowance would be used and you would have to pay the excess £1,000 to HMRC and continue to pay your employer NICs liability as normal for the rest of the tax year. However if your monthly employer Class 1 NICs is £200 each month, then in each month from April to January you would reduce your bill by £200 (equalling the £2,000 allowance by the tenth month) and then pay the remaining NICs as normal for the last two months of the tax year.
Guidance states that you will be able to see how much of the Employment Allowance you have used in ‘View PAYE Liabilities and Payments’ in HMRCs Online Service, however; we can only hope that the reconciliation issues currently being experienced by some employers are rectified by April.
If for whatever reason you don’t claim the Employment Allowance you are entitled to at the beginning of the tax year, you can claim it at any point through the year. You can also claim the allowance for a previous tax year (from 2014/15 only) after the end of the tax year that the allowance relates to and this can be done up to four years later.
If you have a business with more than one PAYE scheme and you don't use the full £2,000 allowance during the year on your nominated PAYE scheme then you can apply to HMRC at the end of the tax year for a refund of any unused balance. You can only do this if you have employer Class 1 NICs liability on other PAYE schemes, and your PAYE payments are all up to date. If you do not apply for a refund, and have an unused balance you should apply to HMRC to use this against any forthcoming PAYE debt.
If you have not used your Employment Allowance award in full (e.g. because you claimed the Employment Allowance late and did not have enough employer Class 1 NICs liability for the remaining part of the year), HMRC will offset the balance against other current or future PAYE liabilities, so the allowance is not lost.
Where you make a claim after the end of the tax year, this will be offset against any outstanding PAYE liabilities or current/future liability, or you can ask HMRC for a payment of any balance, again provided your PAYE payments are all up to date.
What a business cannot do is move their Employment Allowance to another PAYE scheme during the tax year. However they can stop their claim at the end of the tax year, nominate another PAYE scheme in the new tax year, before making any NICs or PAYE payments, and make a new claim against that scheme.
If a business changes ownership before the full £2,000 allowance is used, guidance states that any claim stops when a business changes ownership and the new owner will be able to make a claim in their own right. Under these circumstances you cannot transfer any balance of unused allowance between the businesses.
The CIPP has asked HMRC exactly how the process of refunds and reallocation will work and as yet we have not received a response. Concerns have also been raised as to how the liabilities viewer will handle payments being allocated to other PAYE liabilities, given the reconciliation issues currently being experienced by some employers.
Guidance states that if a company has control of another company, or both companies are under the control of the same person or persons, for example; companies linked in a group, then these companies are connected so can only claim one Employment Allowance.
If the same person or connected persons control two or more charities and the charities share the same (or substantially similar) purpose and activities, or both charities belong to a group of charities, the charities for the purpose of the Employment Allowance are connected.
If a charity controls a trading business, they are also considered connected for the purposes of the Employment Allowance. Where this is the case, you will only be entitled to one Employment Allowance to use against one PAYE scheme regardless of how many PAYE schemes you operate. (If your business controls a charity, they are not connected and you can claim the Employment Allowance for both the company and the charity).
It is up to you to nominate which PAYE scheme to claim the allowance against but common sense dictates that it will be one with at least £2,000 of employer NICs liability (or the highest) to ensure you claim the maximum amount. You may want to check at the start of the tax year whether the PAYE scheme you elected is still the right one e.g. maybe another scheme can attract the full allowance value so may be worth changing at this point.
One question that has been raised is what if you run a client’s payroll and they do not agree that they are a connected company and request that you claim for each business? They could argue for example, that a chain of shops all run independently with their own VAT and company registration, so each should be eligible in their own right for the Employment Allowance. This is where very carefully worded service level agreements would be advisable to ensure that it is clear under whose instruction the allowance is claimed and that overall liability falls with the client.
There is more detail within the guidance but you may have already come to the conclusion that there are areas in the guidance that are not totally clear for employers. A prime example being the unused allowance and the ability to transfer to other PAYE liabilities under certain conditions - but isn’t this allowance just on employer Class 1 NICs liability? Although discussions with various stakeholders took place when draft guidance was published, there has not yet been a realistic amount of time for misinterpretations to be clarified and additional questions to be answered.
Many new initiatives seem to be up and running before issues are ever fully resolved; RTI being a major one and that is still ironing out issues despite pilots running beforehand. (Although the short implementation timeline was driven by the Department for Work and Pensions and their requirement to have real time information for the Universal Credit system – a whole different discussion for another day).
The forthcoming Employment Allowance may well be a conversation starter for AccountingWEB readers and the CIPP will be happy to share any answers and updates received from HMRC.
Diana Bruce is the senior policy liaison officer for the Chartered Institute of Payroll Professionals (CIPP).