Employment allowance: The unexpected consequences
From April 2020, the employment allowance is to be restricted to those with only secondary class 1 National Insurance Contributions of less than £100,000.
Samantha Mann, senior policy and research officer at the CIPP, explores the unexpected consequence this proposal will have on affected employers.
Brought in from April 2014 and available to business and charities, regardless of their size and current National Insurance Contributions (NIC) liability, the employment allowance aspired to stimulate growth in employment.
From April 2020, the employment allowance is to be restricted to employers with a secondary NICs bill in the preceding tax year of less than £100,000.
As a result of this restriction of eligibility for employment allowance, from April 2020 the employment allowance is to be reclassified as de minimis state aid.
State aid is provided by a public body falls into one of three categories:
- De minimis
- Block grant
- Aid requiring prior notification and approval
We interest ourselves only with de minimis state aid.
De minimis state aid
De minimis aid can be given for many different purposes. The amounts are generally small and are subject to an overall ceiling of €200,000 over a three-year financial period.
The sterling equivalent amount is calculated by reference to the rate applicable on the written date of offer, which for the employment allowance will be 1 April.
Requirements must be met for a public body to give de minimis support, which are:
- Is the support (which can include services as well as cash) being ‘granted by the state’?
- Does the assistance give advantage over an undertaking or group of undertakings? (an undertaking is any organisation engaged in economic activity)
- Does the assistance distort or have the potential to distort competition?
- Does the assistance affect trade between EU member states?
The employment allowance (excluded persons) regulations 2019
Regulations have been laid by HM Treasury and are now open to scrutiny and technical consultation, which will close on 23 August 2019.
Excluded person – exceeding £100,000 secondary Class 1 liability
The regulations make clear that where a ‘person’, who may be a company, a charity or connected with another company or charity, has a secondary Class 1 liability of £100,000 or more in the previous tax year, they cannot qualify for employment allowance.
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For the purpose of clarity, I will refer to a ‘person’ as an employer going forward.
From April 2020, the employer will need to ensure that any carried forward element within their payroll software, which indicates that they will be claiming the employment allowance, is deselected. If using an external payroll service, the employer will need to ensure that they communicate this change.
In addition, the employer will become excluded if, during the tax year, they become connected with a company or group of companies that have previously been excluded because their secondary Class 1 liability exceeded £100,000.
Excluded person – de minimis ceiling could be breached
In addition to the exclusion based on secondary Class 1 liabilities, an employer could also become ineligible where they are or have been in receipt of de minimis state aid and by claiming the £3,000 they will breach their ceiling of €200,000.
This is an all or nothing situation, where an employer may breach the ceiling if they were to claim the full £3,000 then they cannot claim – even if in reality they wouldn’t claim the entire amount and indeed the amount that they would claim would not result in a breach.
Record keeping is key to the success of this policy. The employer must be able to keep an accurate record of de minimis funding received for three years.
Employer declaration to HMRC
As the public body providing state aid by way of the employment allowance, HMRC will need to be able to demonstrate that they have taken measures to ensure that the ceiling has not been breached. They will need to keep records for ten years.
If the employer is in receipt of de minimis state aid they must provide the following information to HMRC. The method that HM Treasury and HMRC have chosen for this is by way of the RTI system and specifically the Employer Payment Summary (EPS).
In addition to declaring they have checked their secondary class 1 liability for the previous tax year, the following information and declaration must be provided where the employer is or has been in the previous two years allocated de minimis state aid:
- The amount of de minimis aid from the previous two years, as well as any allocation or receipts for the current year. The value is to be expressed in Euros, using an exchange rate published by HMRC on 1st April.
- The trade sector that the employer operates ie
- aquaculture and fisheries
- road transport
- industry or transport
- where the employer is part of a group they must provide a total amount received collectively across all connected companies for the same period and declare that ‘to the best of their knowledge’ they:
- will not exceed the relevant de minimis ceiling for State aid for the sector(s) in which they operate by claiming the full annual amount of an Employment Allowance
- are the only connected company making one claim for an Employment Allowance across the whole connected group, as per the requirements at Section 3 & Schedule 1 of NICA 2014
- are not aware of any other reason why they would be excluded from claiming an Employment Allowance for any other (eligibility) reason.
Could there a chink of light?
If you are wondering (indeed hoping) that the UK’s impending exit from the European Union could impact on this, be assured that by virtue of the UK State Aid Regulations this policy isn’t going away any time soon.
An online service could have been built, or adapted, such as the business tax dashboard rather than once again add burden to the employer with their already challenging payroll obligations.
However, alternative proposals are unlikely to happen due to the cost of their development. Already comments have been made that question whether claiming the employment allowance is worth the effort, but we know that for many small employers it is a lifeline.
The CIPP, together with a wide range of stakeholders, particularly experts from the software sector, continues to work with HMRC to address the challenges that this latest proposal presents, not least the timetable.