A "tax on a tax"- VAT on auto-enrolment fees

The Government is encouraging us to think of auto-enrolment for micros as an extension of the success story it has been for larger employers. But things are very different for smaller employers - especially when it comes to tax.

Many small employers (including domestic employers about which I wrote last week) have no wish to sell services on which they charge VAT and so have no way of reclaiming back the VAT they spend on employing people. From 1 April 2016, the VAT registration threshold has increased from £82,000 to £83,000.

That means that parents employing nannies, the incapacitated employing carers and a plethora of other "micro-employers" will not only have to fork out to pay for auto-enrolment but will have to pay 20% non recoverable VAT in doing so. The phrase "a tax on a tax", rather neatly sums it up.

Unfair and unintended

In my view, this is unacceptable. For two years I've been moaning about this on this blog. In December I approached the DWP's head of pension strategy on this matter at a Friends of Auto-Enrolment meeting. I was promised an answer, we are still waiting. From my conversations' with Government, I don't think that anyone has thought much about VAT on auto-enrolment so I'm not implying anything skullduggerous!

But let's be clear- this a problem, a new problem - a micro-business problem. With the exemption of charities and a few other VAT exempt organisations, all the employers who have staged till the end of 2015 would have been able to reclaim VAT spent setting up and managing auto-enrolment costs. But many new employers cannot (because they are not VAT registered and don't collect VAT).

These micros are critical to the success of auto-enrolment going into 2016. Isn't it time that the DWP and the Treasury (whose HQ's are yards apart) got talking about why non-registered employers pay VAT to do the work of an earnings related pension. I phrased that last sentence properly. At a recent meeting organised by Team Spirit and TPAS, Ros Altmann talked of Auto-Enrolment as the replacement for the State second Pension (formerly SERPS).

I don't know how much the Government will save from not having to do S2P administration going forward but it would offset some if not all of the costs of giving auto-enrolment a VAT exemption.

Regressive VAT?

Pension auto-enrolment is different from other duties placed on employers in that there is no obvious benefit to the employer in compliantly performing duties (only the negative benefit of not being fined). Were employers to simply administer a compulsory pension system, as happens in Australia, the cost of enrolment would be considerably less and might be borne by members.

The reason given by Steve Webb for not allowing employers to defray the expense of auto-enrolment onto members was that "you wouldn't expect employees to pay for the fire extinguishers you must have at work". The only benefit of auto-enrolment to an employer is that it reduces pension bills by the odd opt-out, but this can hardly be sold as a benefit when the employer could be fined for promoting the opt-out at work!

So the expense of auto-enrolment is a political expense, a tax on employers that enables Government to implement a policy that radically increases pension coverage without it either being seen as a tax (it is called an employer duty) nor occasions the Government in any work.

If we follow the logic of Ros Altmann's statement, we have to conclude that auto-enrolment is S2P outsourced and that it has been imposed on employers as an additional expense that can really best be regarded as a tax (even if it is called an employer duty). We are used in this country to applying taxation on a progressive not regressive basis.

That means taxing those can afford to pay higher and giving those with limited means a break. By not giving micros a VAT exemption on VAT, HMRC are taxing micros more harshly than large employers, surely that isn't right.

How I'd grant the exemption

The danger of a blanket exemption to micros is "exemption spread". Payroll software companies would be tempted into moving other payroll costs into the price of auto-enrolment modules, exempting more and more of their services.

Similar wheezes would appear on the pension side of things. So instead of making auto-enrolment VAT free, I would like to see a grant for all employers with less than five eligible jobholders, of £250 payable on their declaration of compliance following staging of auto-enrolment. This practical suggestion has four advantages

1. It makes VAT paid on auto-enrolment service recoverable (with an imputed upfront cost of compliance at £1000)
2. It makes completion of the compliance certificate a desirable for employers (as it triggers a grant of £250 - tax exempt please).
3. It is politically acceptable and can be paid retrospectively to all employers that have staged compliantly with less than 5 "eligibles".
4. It will encourage timely completion of the compliance certificate, currently many employers are simply not bother to tell tPR at great cost to its enforcement unit.

As with all good ideas, this one's got simplicity on its side. I'm sure there is much that could be said about a grant pro and against -it is only a suggestion - but don't you think it's a good one? But at a time when we are having to move literally millions of micros, this measure is simple and easy and could form a welcome addendum to the Chancellor's autumn statement.

See previous blog; tax on a tax