Employees who are permitted to sleep while working must be paid the national minimum wage (NMW) for all working hours, including time on “sleep-in” shifts.
Social care workers may undertake sleep-in shifts while carrying out their duties. Social care providers had understood from the NMW guidance pre-2015 that a flat rate could be paid for sleep-ins, as the employee was not working.
A re-interpretation of the NMW regulations has led HMRC compliance teams to revisit the social care sector, and require that all sleep-in hours are paid at NMW rates as the individual cannot leave the premises and as such is ‘working’.
Many care providers moved to remunerate sleep-ins at the NMW rates from April 2017, and received local authority/personal funding to accommodate this.
However, six years of NMW arrears for sleep-ins were not funded by local authorities at the NMW rates, and the care providers now have to pay these amounts to their employees, and cannot recover the costs.
The charity Mencap is one of the large care providers who have mounted a legal challenge to the funding of arrears. Their pay arrears bill alone is £20m, with the care sector due to pay £400m in total – an amount which is expected to lead to many organisations becoming insolvent.
The Mencap appeal against the decision that arrears must be funded by them was heard at the Court of Appeal in March 2018, but the decision has not yet been published. Despite this uncertainty about the legality of the pay arrears, HMRC has started to write to employers about the implementation of their Social Care Compliance Scheme (SCCS).
On 1 November 2017, HMRC launched the SCCS whereby employers who had not paid for sleep-in shifts at the appropriate NMW hourly rate could opt-in to the scheme and limit non-payment penalties plus avoid naming and shaming.
Those who don’t join the SCCS will face penalties for any non-payment periods from 26 July 2017 and will be named and shamed if those penalties exceed £100. HMRC‘s policy on NMW compliance covers the SCCS at section 3.10.
The SCCS covers all social care employers from individuals employing their own carer to large social care businesses. It is understood around 650 employers have joined the scheme, which gives them a year to work with HMRC to identify any pay arrears, then agree to make the payments within a three-month period once agreement is reached on the arrears due.
However, all pay arrears must be paid by 31 March 2019 regardless of when an employer joins the SCCS. The contact from HMRC will explain to employers who have registered for the SCCS how the arrears are to be reported for tax and NI purposes, and crucially the impact on pension contributions.
Different tax and NI treatment
The pay arrears are treated differently for income tax and NIC:
For tax the liability on a payment of arrears arises in the tax year that the employee was originally entitled to be paid.
For NICs the liability will depend entirely upon the period when earnings are paid rather than earned.
Alternative PAYE Arrangement
To simplify the tax calculations and reporting of the tax on pay arrears HMRC has established an Alternative PAYE Arrangement (APA).
The APA for SCCS participants, allows employers to calculate tax at 20% on the arrears, for 2017/18 and any earlier years. This is done without reference to the employee’s allowances or tax code for the years concerned. The employer should report this on a spreadsheet, rather than accurately reporting (or attempting to report!) the arrears via an earlier year update (EYU) under RTI.
Given the unpredictability of the EYU process and coupled with the fact that many payroll software products don’t support it so has to be accessed via Basic PAYE tools, it makes absolute sense for SCCS participants to use the APA.
Employers who choose not to use the APA should understand that the submission of any EYU will lead to the charging of interest on the underpayment of PAYE.
How to pay the tax
HMRC will issue employers who participate in the SCCS with a specific reference number for payment purposes. That number should be attached to the payment of the PAYE on pay arrears made to HMRC, so the amount can be matched to the appropriate spreadsheet submitted by the employer.
Adjustments to NIC’able pay (but not taxable pay) and the ensuing employer and employee NI contributions must be reported on a full payment submission (FPS) at the point that the arrears are paid.
As this is pay subject to employer’s NI, it also attracts the apprenticeship levy, which must be reported on Employer Payment Summary (EPS) in the same month. Student loan deductions will also be triggered.
Ex-employees who are being set up on the payroll system simply for the purpose of reporting NIC’able pay should be allocated the NI table letter that is appropriate to their current personal circumstances. Those individuals should be allocated tax code NT even though this is regarded as a payment after leaving that would normally trigger tax code 0T/1.
The information pack issued by HMRC includes a template letter explaining to employees about the payment of pay arrears and guidance from the Pension Regulator.
This is the first time that a large pay arrears exercise has taken place since auto-enrolment started to be introduced from 2012. This requires employers to consider if the employee would have been an eligible jobholder if the NMW arrears had been paid at the appropriate time.
For those employees who were pension scheme members anyway, what adjustments to the employer and employee pension contributions might need to be made for every pay period for the last six years! For individual care and support employers this could even mean establishing a pension scheme for the first time.
It’s fair to say that the auto-enrolment implications of these NMW arrears are incredibly complex. This is particularly the case as the arrears are payable to ex-employees and to current employees who are no longer pension scheme members.
The Pensions Regulator has made one concession, that pension contributions on any sleep-in arrears can be paid at the rates in place at the time the monies should have been paid, not at the current contribution rates. There won’t be pension tax relief available for contributions for ex-employees, unless they happen to be with the same pension provider at their new employer, as they were at when working for the employer who is paying them the sleep-in pay arrears.
About Kate Upcraft
Kate is a technical writer, editor and lecturer on all aspects of employing people - primarily payroll and HR matters.