Business News
Companies tricked out of employment allowance
The employment allowance is designed to reduce the cost of class 1 NIC payable by the employer in respect of salaries of staff and directors. As the allowance relates to NIC the law is contained in the National Insurance Act 2014, ss 1-8.
The employment allowance was increased on 6 April 2016 from £2,000 to £3,000 per year by SI 2016/63. This is good news for all qualifying employers.
However, a separate regulation (SI 2016/ 344) applies from 6 April 2016 to exclude a company (C) from claiming the allowance where:
“(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.”
To translate from the legalese: Where the only person employed by the company is also a director of the company, that company can’t claim the employment allowance. That is the only condition stated in the regulation.
If the company employees two people (or more) – at any point in the tax year - the condition in SI 2016/ 344 is broken and the company can claim the employment allowance. Similarly if the company employs only one person, but that person is not a director of the company the employment allowance can be claimed for 2016/17.
There is no mention in regulation 2016/344 of conditions relating to a second or subsequent earner employed by the company, but that is not how HMRC read it.
The HMRC guidance for “single-director companies” (a misleading title), specifies an additional employee test, which is not in the regulations. According to HMRC the second employee of the company must earn above the secondary threshold for NIC – ie: at least £156 per week for 2016/17.
I have searched for new regulations which include this condition for a minimum level of earnings for a second employee, but I can’t find them. I can only conclude that HMRC have made up this minimum wage condition to discourage micro-companies from employing a member of the family for a few hours to break the “one employee” condition in SI 2016/ 344.
In case you are wondering whether the definition of "secondary contributor" hides a condition to pay a positive amount of secondary NICs (ie on wages above the secondary threshold) – it doesn’t. The Secondary contributor is defined in SSCBA 1992 s 7 as: in relation to any payment of earnings to or for the benefit of an employed earner under a contact or service – his employer. An employed earner is a person gainfully employed in Great Britain under a contract of service, or in an office, with earnings (SSCBA 1992, s 2).
Thus the employer is the secondary contributor in relation to any payment of earnings - however small.
It appears that HMRC have read far more into the regulations than is in the letter of the law, and as a result they are imposing conditions by guidance rather than by regulation. I understand that HMRC have been asked to correct their guidance to accurately reflect the regulations as passed by Parliament.
In the meantime if a single–person company wants to continue to qualify for the employment allowance in 2016/17 the only requirement it has to meet is that it must employ two or more earners for at least one period in the year (which may be as short as a day or week).
