Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

NIC exemption for start-up businesses

by
22nd Jun 2010
Save content
Have you found this content useful? Use the button above to save it to your profile.

Rebecca Benneyworth outlines how the new NIC exemption scheme will impact small businesses.

It has been announced that new businesses outside London and the South East will be exempt from National Insurance for their first 10 employees. The tax break, which is worth up to £50,000 for 400,000 businesses, is expected to last three years and will allow businesses to avoid NI for 12 months.

The new employer relief for regional businesses was trailed in the general election campaign, and although the plans have not yet been set out in any detail, we now have enough information to understand the scheme as it may impact start-up businesses. Here are the key points:

The scheme will apply to "new businesses", meaning:

  • The business must start after the new scheme commences
  • It must meet certain (presently unspecified) criteria to join the scheme
  • There will be a test to ensure that the new business represents new (not recycled) economic activity, but most types of business including investment businesses will be able to take part, although early indications are that the coal, agriculture and fisheries sectors will have some restrictions
  • Businesses which set up now but meet the criteria once published when the scheme goes live will have to pay NIC as normal for the present, but will receive a "holiday" when the scheme commences. This will sensibly remove barriers to start up between now and September when the scheme is set to launch

The scheme is intended to stimulate the private sector in areas where there is significant reliance on public sector jobs. This will inevitably cover old "unemployment blackspot" areas, and these are set out in the information now available: Scotland; Wales, Northern Ireland, the North East, Yorkshire and the Humber, the North West, the East Midlands, the West Midlands and the South West.

The holiday will relate to the first 52 weeks of NICs for each employee within the holiday period of three years. In other words, taking on employees successively through the three years of operation of the scheme will allow holiday in relation to each employee as they are taken on, allowing new businesses to expand and recruit staff gradually.

Up to 10 employees can be employed through the holiday – after that NIC will apply in full to subsequent employees. There will be some restrictions on the types of employees that can be engaged under the scheme, and these are likely to exclude:

  • Individuals engaged under IR35, and
  • Individuals engaged under Managed Service company rules, although normally these individuals would not be regarded as "employees" in any event.

The maximum amount by which an employer can benefit is £5,000 per employee – this would mean that the employee would be paid around £46,000 per annum before the holiday ceased to be of any further benefit, allowing start-up employers to recruit both junior and senior staff.

Replies (6)

Please login or register to join the discussion.

avatar
By Briar
22nd Jun 2010 18:21

Make it wider
If the objective of the measure is to create employment outside of London and the South East, then it should be an easy job to allow existing businesses (with less than 10 employees), as well as new start-ups, to take advantage of the relief. It should also be possible to devise anti-avoidance rules to prevent abuse of the relief (e.g. phoenix start-ups). After all, it is more likely that existing small businesses will seek to expand their operations (and hence the number of employees) than brand new start-ups (which by experience take longer to get going). If the major reason for the relief is to create employment why exclude existing businesses? Also, on a cynical note, is the relief merely targeted at those civil servants who might lose their jobs and create new businesses which will then take over the activities which they have previously carried out? That is, new companies will be formed to sell their services to government/local government. They will receive the NIC relief (worth £50,000 over 5 years). It is likely that public spending will go up as result!!! For example, there is an announcement in the Budget that HMRC will begin to employ debt collection agencies to collect unpaid tax. If I was a tax collector, I would leave HMRC (or get made redundant with the added benefits), set up a debt collection agency, and sell my services to HMRC. I would receive up to £50,000 in NIC relief and be doing the same job as I was doing before - a net negative effect on the economy. 

Thanks (0)
Wild Billy Hickok
By Wild Billy
23rd Jun 2010 06:49

12 months or 36 months?

I think the holiday only apllies to employees taken on during the first 12 months rather than the 36 months suggested in the article. Isn't the 36 months the period in which new businesses could be set up?

That would be more consistent with the manifesto commitment.

Thanks (0)
avatar
By chrischapman5
23rd Jun 2010 07:29

Wider issue

I agree, I dont see why this is a black and white geographic benefit that you only are entitled to if youre outside the South East.

Small businesses across the whole of the UK need support at times like this as its them that are going to see us out of the recession over the next year or two and become stronger. How many small businesses fall into the trap of being based in London or the South East and what is that as a proportion fo the total SME's in the UK? quite significant I'd think.

However, its good news for small businesses so we should applaud it. many of my clients www.mybusinessfd.com will certainly welcome it.

Chris

www.mybusinessFD.com

 

Thanks (0)
avatar
By michaelpenn
23rd Jun 2010 11:25

New Nic exemption and what counts as "new"

 Are there any indications at all as to what will constitute a "new business"? Anything in the trial they did? Since they are obviously looking for these new businesses to start straight away one assume normal commercial criteria could apply, ie something the business was not already engaged in and definitely not a Phoenix.

The potential here is in fact very good and correctly structured the savings could be a lot more than just up to £5,000 per employee.

Michael S Penn

 

Thanks (0)
Rebecca Benneyworth profile image
By Rebecca Benneyworth
23rd Jun 2010 11:14

12 or 36 months

Yes, I didn't make it clear in my article - and indeed this would seem to be a minor flaw in the scheme. From the document "Regional Employer NIC's Holiday for new businesses" I had at first understood that the holiday applied to the first three years of the business, and the first 12 months of each employment. This would make sense as it would allow businesses to expand over the three year period. On re-reading following your comment, it is clear from Question 9 that the holiday only applies to the first 12 months of the business, so unless you recruit all of your staff in the first year, the holiday will not relate to any expansion.

I guess this keeps the cost modest and will allow very small start up a holiday in respect of one or two staff - confining the benefit financially to the first year of business only seems to me to be a little short sighted, but of course money's tight and this is better than nothing.

Thanks (0)
avatar
By mikewhit
24th Jun 2010 10:30

Many startups start with self-employment, then grow

But I guess there is nothing here that would help a one-person-band ...

Thanks (0)