employment allowance sole employee director

employment allowance sole employee director resigns mid year

Didn't find your answer?

does anyone know if company has only one employee and that employee is a director at start of tax year but resigns as director half the way through the tax year - are they eligible to claim employers allowance for full year - or ref payments after directorship ceases or not at all?

the section i have detailed below seems to sugest that they may be ok as theer are payments amde when they are not a director - my confidence level is always low to nil when it comes to EA i must admit. would seem odd if one could resign director late on in year and that would allow a  years claim to be made.

Note this is not a contrived situation here there are at least 4 shareholders in this business and there were genuine otehr reasons why this person resigned - ie they havent just made their spouse a director or anything like that

 

 

https://www.legislation.gov.uk/ukpga/2014/7/crossheading/employment-allo...

 

(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.]

 

Replies (33)

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By Paul Crowley
17th May 2024 11:38

Not had one like that yet, as in just one employee. Just claim the allowance and the allowance SHOULD only operate for ERNIC after the claim.
BUT HMRC Might well mess it up and effectively back date it. They did that during version 1 of the furlough Covid support.
At the time there was lots of postings, because claiming the EA early meant less support.
Those who waited out to make the claim got a better deal.

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Replying to Paul Crowley:
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By rmillaree
17th May 2024 15:26

could it perhaps be the case that backdating for year is correct though ?

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Replying to rmillaree:
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By lionofludesch
17th May 2024 23:48

rmillaree wrote:

could it perhaps be the case that backdating for year is correct though ?

The legislation quoted in the OP seems pretty adamant that the company can indeed claim for the whole year.

It says when the company can't claim and the circumstances don't fit those of the company so it's not barred from claiming.

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Replying to lionofludesch:
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By rmillaree
19th May 2024 10:55

the problem here is i have only quoted a section of the legislation - the ea guidance i find sketchy at the best of times . heck i asked croner and they go the wrong answer fisrt time and gave me a skecthy reponse when i pointed out the link.

So whilst being hopuful claim can be made for full year i am not presuming that i might not have missed something else where in the rule book.

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By Tax Dragon
17th May 2024 15:19

Ianal. But I reckon tax law may be silent on what to do if there is no director, as a company has to have one.

So... can a sole director resign?

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Replying to Tax Dragon:
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By rmillaree
17th May 2024 15:23

sorry i made not have made it clear - another director turned up when the director resigned - that new director does not draw a salary though so wasnt relevant to the point at issue here.

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By More unearned luck
17th May 2024 16:10

Turned up like Uncle Albert did after granddad died?

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Replying to More unearned luck:
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By Yossarian
17th May 2024 17:47

More unearned luck wrote:

Turned up like Uncle Albert did after granddad died?

"During the war, the 1946 National Insurance Act hadn't come into force yet. .."

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Replying to Tax Dragon:
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By Rgab1947
22nd May 2024 09:30

Yes a sole director can resign but then the company fails in compliance and it will be struck off. Debts incurred by the company whilst he was a director can then be recovered from the erstwhile director.

But this is such a legal question that I can be 100% wrong.

I had a client where both directors had to resign as they were declared bankrupt. Accepted but caused no end of legal problems.

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By Barbara G
17th May 2024 16:17

I had a case similar to that of the OP many years ago. I can't quite remember the circumstances, but we were able to claim a whole year's employment allowance even though the director, who was also paid through the payroll, ceased directorship part way through the year. Those were the days though when we were able to phone HMRC for clarification and receive a knowledgeable answer.

Don't know if the undernoted link might help? See point 4. Not the same circumstances, but perhaps suggest a whole year's employment allowance can be claimed even if circumstances only apply to part of the year.

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

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By FactChecker
17th May 2024 19:21

"if company has only one employee and that employee is a director at start of tax year" ... confuses me a little (*before* we get on to the resignation).
If there is only one employee and that person is also a director .. then an EA claim wasn't valid in the first place (even if that director/employee was being paid above the ST). [see section 2 4(A) of the legislation referenced by OP].

So have I missed something important here?
"but resigns as director half the way through the tax year" ... therefore appears to be irrelevant - assuming that person didn't continue to earn any salary after the resignation.

However IF (for reasons that have escaped me) the EA claim was valid at any time in the tax year, then it remains valid for the whole of that tax year (whether validity only occurred part-way through the year or indeed ceased part-way through the year).

There's no good reason for this other than HMRC designed it from the get-go as an 'annual scheme' (hence the mess during Covid to which Paul refers).
That does of course leave a gaping hole in its defences which many people have spotted - but which I'm not going to explain as I strongly disapprove of it.

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By lionofludesch
17th May 2024 23:51

Why do you disapprove?

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By FactChecker
18th May 2024 01:20

Hard to explain without giving the exact details of how the 'plan' (that I've seen being operated) works ... which as I said I don't intend to do (i.e. publicise it).

But my moral indignity stems from the fact that it is flagrantly abusing the intent of the EA (which whether it is effective or not was intended to encourage additional employment) - whilst, unfortunately, staying within the letter of the law (because that was so poorly thought out).

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By lionofludesch
18th May 2024 10:29

FactChecker wrote:

Hard to explain without giving the exact details of how the 'plan' (that I've seen being operated) works ... which as I said I don't intend to do (i.e. publicise it).

But my moral indignity stems from the fact that it is flagrantly abusing the intent of the EA (which whether it is effective or not was intended to encourage additional employment) - whilst, unfortunately, staying within the letter of the law (because that was so poorly thought out).

If you recall, the Government have changed the plan once already. They could easily have said that directors' secondary NI would never count under any circumstances. Or any other plan they cared to inflict.

But they didn't. They decided on a rule and we're stuck with it. Personally, I think there are bigger abuses going on. Particularly in the circumventing of employment law. But that's just my view. There's little I can do about it.

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Replying to FactChecker:
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By rmillaree
19th May 2024 10:31

thanks for your comments fact checker

So have I missed something important here?
"but resigns as director half the way through the tax year" ... therefore appears to be irrelevant - assuming that person didn't continue to earn any salary after the resignation.

the person did continue as an employee and was paid the same as before (they were not taking low salary that many company directors take)

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By lionofludesch
19th May 2024 10:50

rmillaree wrote:

thanks for your comments fact checker

So have I missed something important here?
"but resigns as director half the way through the tax year" ... therefore appears to be irrelevant - assuming that person didn't continue to earn any salary after the resignation.

the person did continue as an employee and was paid the same as before (they were not taking low salary that many company directors take)

This is part of your OP.

(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.

If you read (b), it's clear that all the payments must be made whilst the earner is a director if EA is to be denied.

In this case, they aren't.

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Replying to lionofludesch:
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By Tax Dragon
19th May 2024 10:55

So it's important to understand the applicable definition of "director" - and, potentially, what organisational/operational changes resulted from the resignation.

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By taxdigital
18th May 2024 07:44

The question isn’t too clear to me so I make some assumptions:

Tax year 06 April 2024 to 05 April 2025: Company’s sole employee is the director who leaves the company let’s say in May 2024 (or any month for that matter). Employer’s NI was due on the salary drawn by the director. In May 2024 another director joins the company who draws no salary. However, after the first director left the company:

Scenario 1: new employees join in and consequently employer’s NI is due to HMRC on the wages paid to them.
Scenario 2: no wages are paid either to the direct or to an employee.

Your question is, can the company claim employment allowance?

Now the law:

(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.

And the answer:

Scenario 1:
For the tax year 2024-25, ALL the payments of earnings to which employer’s NI is in point IN TAX YEAR 2024-25 were NOT MADE to a sole director alone, there were other employees as well. Further when EACH OF THOSE payments WAS NOT to the director alone but to other employees as well. So, employment allowance can be claimed.

Scenario 2:
No employment allowance can be claimed as all the conditions stated in the law above are met.
(emphasis all added)

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Replying to taxdigital:
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By Matrix
18th May 2024 07:57

Neither - the Director has resigned as a Director but is still an employee. So the employer is eligible for the EA for that tax year.

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Replying to Matrix:
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By taxdigital
18th May 2024 08:16

If that’s the case, yes the allowance can be claimed.

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By lionofludesch
18th May 2024 10:34

taxdigital wrote:

If that’s the case, yes the allowance can be claimed.

Correct.

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By rmillaree
19th May 2024 10:59

that is the case (ongoing employment )thanks for confirmation

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Replying to Matrix:
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By FactChecker
18th May 2024 13:38

Still not clear - especially since I thought rmillaree was OP?

Are you saying that the person who was a Director/employee and getting paid a salary above the ST but then resigned directorship ... *continued* to receive a salary above the ST as an employee (although no longer a director)?

If so, then the EA claim *became* valid from that point onwards - and hence (as per all the other comments about it being an 'annual scheme') it will be valid for the whole tax year.

But (unless there is other missing info) the claim was NOT valid upto the date of resignation ... IF until then there was only one employee and that person was also a director [as per section 2 4(A) of the legislation].

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Replying to FactChecker:
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By Matrix
18th May 2024 13:50

You are correct I am not the OP but to me the facts are clear in the post.

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By lionofludesch
18th May 2024 14:17

FactChecker wrote:

Still not clear - especially since I thought rmillaree was OP?

Are you saying that the person who was a Director/employee and getting paid a salary above the ST but then resigned directorship ... *continued* to receive a salary above the ST as an employee (although no longer a director)?

If so, then the EA claim *became* valid from that point onwards - and hence (as per all the other comments about it being an 'annual scheme') it will be valid for the whole tax year.

But (unless there is other missing info) the claim was NOT valid upto the date of resignation ... IF until then there was only one employee and that person was also a director [as per section 2 4(A) of the legislation].

OP quotes the right legislation but I'm wondering whether he doubts the evidence of his own eyes.

I thought it was pretty clear cut, myself.

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Replying to lionofludesch:
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By Tax Dragon
18th May 2024 20:15

Rereading with the benefit of Matrix's explanation, I agree. Until Matrix explained, I hadn't understood the situation.

One point I would add to the discussion is that the definition of 'director' for tax purposes includes people who are not recognised as directors at Companies House. The formal resignation of a director may not of itself change the tax (or NIC) position.

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Replying to Tax Dragon:
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By FactChecker
18th May 2024 20:59

Good point (the 2nd one) ... per CA44:

"Who is a company director?
For NI purposes, Regulation 1 of the Social Security (Contributions) Regulations 2001 defines a company director as:
• a member of a board or similar body where the company is managed by a board or similar body
• a single person where the company is managed by an individual
Or, if a director as defined in either of the above is accustomed to acting under the instructions of another person, that person will be a director.
This additional rule will not apply if the other person’s instructions are limited to
professional advice, for example, the advice given by a solicitor.
Directors of building societies which have not demutualised are not normally company directors for NICs purposes."

But still not convinced by Matrix's interpretation of OP's actual posting ... maybe rmillaree will explain.
[I don't think anyone's disputing the concept that IF an EA claim is valid for even one pay period in a tax year, then it becomes/remains valid for the whole tax year - you're in or you're out as HMRC put it. But the details of the specific scenario are too fuzzy with assumptions for my liking.]

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By rmillaree
19th May 2024 11:09

But still not convinced by Matrix's interpretation of OP's actual posting ... maybe rmillaree will explain.

Matrix has is correct same person continuing salary they resigned as director (and stepped back from those duties to carry on as bog standard empoloyee)- my doubts here stemmed from the EA guidance which i find poorly written and confusing at times - my reluctance to presume i might not have missed another part of the legislation blocking some or all of the claim and having been lead up the garden path by croner who told me the wrong answer when i rang them - my knowledge of the ea rules are also not as stong as other here so its nice to see that everyone seems fully confident full years claim can be made without any issues ?

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By FactChecker
19th May 2024 14:16

Kudos to Matrix ... I keep re-reading the original post and can't work out how that (correct) interpretation was arrived at (which obviously says more about me and my literalist view of life).

And I probably confused things further by pointing out that EA was not available to claim *prior* to the resignation IF (as I believe is correct) there had been no other directors or employees being paid above ST up to that date.
If so, apologies ... my statement was correct but, by the sound of it, you weren't (as I thought) claiming it at start of year.

My interpretation was that you'd been claiming it all along and were concerned as to whether the resignation somehow changed things ... whereas the reality appears to be that you (correctly) weren't claiming it initially, but wanted to know what would happen after the resignation if you then claimed it.
In which case the answer is that making a claim became valid from that point AND (as everyone seems to agree) a valid claim is valid for a full tax year.

FWIW the same applies in reverse ... as in if you have been validly claiming EA for 11 months and then (for whatever reason) submit the 12th month EPS with the 'EA Indicator' set to No - then the claim is treated as withdrawn for the whole year and you have to repay whatever amounts you've 'offset' so far in the year.

Why Croner would be unaware that EA is incapable of being pro-rated (the cause of confusion and angst during CJRS) is beyond comprehension ... I'd expect at least 99% of people who are 'payrollers' (as opposed to just running a payroll) to know that fact.

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By rmillaree
20th May 2024 08:52

Kudos to Matrix ... I keep re-reading the original post and can't work out how that (correct) interpretation was arrived at (which obviously says more about me and my literalist view of life).

no worries - its really up to the op to make the facts clear if they want sensible responses - probably didnt help that i posted then went partying for 48 hours woop.

"Why Croner would be unaware that EA is incapable of being pro-rated (the cause of confusion and angst during CJRS) is beyond comprehension ... I'd expect at least 99% of people who are 'payrollers' (as opposed to just running a payroll) to know that fact."
the bit they got wrong was more basic than that - they initially said no claim could be made till teh start of teh next year - it is a phone hlep service and the reality with that helpline is everyone is put on the spot so i use more of a sounding board rather than an expectation that when you ring they will get it right all the time - they did go away and check and emailed back later (cant respond to that email) accepting that claim could be made from the point they became an employee only - that is probably technically correct although not exactly helpful in that i neded to know if claim was possible for entire year - which seems to be the case.

thanks everyone fopr help here

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Replying to rmillaree:
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By FactChecker
20th May 2024 12:48

Wow .. parting for 48 hours .. I remember them days (and not just in b&w).

Croner's (initial) response is not just mind-blowingly bad/wrong, but an example of the dangers for those who 'learn' solely via GOV.UK guidance pages - in that during the early days of the pandemic that was the wrong answer being given by HMRC on pages associated with CJRS!
[Too convoluted to explain fully here - but it was a deliberate lie as they sought to unravel the mess of an annual scheme inter-acting with CJRS, and chose to lie to people in order to make their (HMRC's) life easier.]

Croner's later email response is broadly true - although the pedant in me would say you could've made the claim earlier (although it would have been an invalid claim until the only employee ceased also being a director).
And the point (your only real interest) that they've avoided ... as I said the reality is that for each tax year you're either in it or not (no halfway houses or pro-rating option); and if the claim is valid for even one week (and you don't subsequently withdraw the claim) then it remains in place for that whole year.

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Replying to Tax Dragon:
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By Paul Crowley
18th May 2024 22:43

I always considered the shadow director thing was intended to bring wrong uns to account and get punished for companies that do bad things.
It is not a thing I consider for compliant companies.

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By Tax Dragon
19th May 2024 07:15

I don't understand what you mean. There's a tax definition of 'director' [actually the term is defined in several places, so, unless the definitions are identical, there may be more than one definition for tax purposes].

Definitions define words. Almost by definition. Those definitions serve to reduce ambiguity and are to enable you to apply tax law correctly.

Where words aren't defined in context (eg "substantial" is for some contexts and not others), it can lead to great uncertainty - until the courts clarify the meanings.

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