CIPP response to consultation on The Employment Allowance (Excluded persons) Regulations
26 August 2019
We recently held a think tank roundtable where CIPP members and representatives met with HMRC officials to discuss the impact of the Employment Allowance (Excluded Persons) Regulations from April 2020.
Thank you to Armstrong Watson for hosting the event and thank you to all those who took the time to attend and provide your important opinions, views and experiences. This evidence has helped form the CIPP’s response to the technical consultation which can be found, in full, within the My CIPP/Policy hub on our website.
A summary of our response is below which highlights the key concerns and recommendations expressed within the policy think tank.
Impact of Employment Allowance becoming de minimis State Aid
By restricting the Employment Allowance (EA) to employers with secondary Class 1 NIC contributions of less than £100,000, HMRC consider that Employment Allowance is now classified as de minimis state aid, and as such requires an extended level of record-keeping for HMRC to ensure that eligible employers do not breach limits that exist under the rules of state aid.
The CIPP is disappointed that government considers that payroll processes using the Real Time Information (RTI) system and specifically the EPS (Employer Payment Summary) are the most cost-effective method for HMRC to ensure such accurate accounting records are maintained to evidence the employer’s right to claim EA.
Accounting for state aid is not a payroll process and as such raises the following concerns:
- Although the EA indicator is already on the EPS the current requirement is to send this only once unless the circumstances change. From April 2020 it will be required to be sent each new tax year. This requirement will add to the employer administrative burden
- The requirement to calculate the amount received in Euros and not UK sterling will also add to the administrative burden of the employer. We understand that the entry field on the EPS will be a numeric field only and you will not require payroll software to allow for Euros to be reported
- We must ask if it would be possible for the employer to report the figure in Sterling and HMRC then perform the currency conversion using the rate in force on 1 April. This would reduce the risk of error or omission by the employer significantly. It would also reduce the administrative burden that the government is placing on the employer
- HMRC will need to ensure that the exchange rate to use as at 1 April is explicitly and obviously advertised. Payroll software will have deployed their new year tax updates before this is available so the employer will need to enter this manually
- Not all businesses will be equipped now to make their EA claim in April. We understand that making the declaration will continue to be acceptable practice at any point throughout the year however HMRC systems will accrue a ‘debt’ each time the EA is offset until an accepted declaration is made. HMRC will need to adapt their processes to ensure that unnecessary and stressful challenge is not made to employers who simply haven’t yet made the declaration – maybe because they are experiencing difficulties in establishing whether they have received de minimis state aid and if so, how much
- We are concerned that many employers may be prevented from accessing EA for fear of erring in what is an extremely complex requirement – this would be contra to the policy aim to encourage and enable growth in SME
- Of an even greater concern is the risk that employers will make incorrect declarations and/or report incorrect amounts or indeed, report in sterling rather than Euros – all would be incorrect – what are the compliance and enforcement penalties of such error?
- The impact of our impending exit of the European Union (EU) needs to be made clear. We understand that where we exit with an agreement in place the UK State Aid Regulations will ensure that this obligation will continue but what if no agreement is in place? HMRC will need to ensure that they communicate that reporting in Euros will still be required as this will appear to be nonsensical once we exit the EU.
- As mentioned above, this is not a payroll process and so employers will face increased costs from their service provider, if the payroll provider agrees to support the employer in reporting this information – not all software has included an EPS in the past. In this situation, the employer makes use of HMRC Basic PAYE Tools (BPT).
- We foresee a possible increase in the employer having to report, independently, by using the EPS on BPT functionality. HMRC guidance will need to make clear which EPS would take priority in the event that for the same tax period two EPS were submitted, one by the employer with the EA declaration and state aid amounts and one by their payroll provider due to a reclaim of statutory payments (assuming a priority existed).
- We understand that the employer will only have to account for any other de minimis state aid they have / or expect to receive in the previous two years and current year, as HMRC will account for the full £3,000 EA – even where the employer may not claim the full amount – this needs to be made clear in guidance as there is a risk that it could be double accounted for i.e. by the employer and then again by HMRC.
- There appears also to be confusion between the three year period to be assessed to be used, therefore we seek clarification as to whether HMRC will be using a three tax year assessment period (two preceding plus sufficient remaining to claim EA in the current year) or on a true rolling three-year basis?
- As Employment Allowance is claimed throughout the tax year – using tax years as a basis would be the most accurate. Rolling years risk an otherwise eligible employer becoming ineligible due to there exceeding the limits at a fixed point in time i.e. 6 April.
- Guidance needs to be crystal clear for all stakeholders.
Our comments assume also that the amount of de minimis state aid can be easily quantified and accounted for. This may not be an accurate assumption as we understand that in addition to grant payments that will be recorded within the accounts of the employer, other less tangible support may be provided to the employer. How will this be quantified by the providing public body? A significant bank of examples of such aid must be provided by HMRC in guidance to alert employers of how they could be impacted by such aid.
Impact of the £100,000 liability
The Employment Allowance has been in place for several years and employers will have a familiarity of what works for them. However, other policy reforms have been delivered, and continue to be delivered, since its introduction, such as off-payroll working rules.
Guidance must include clear examples of when a Class 1 secondary contribution must be discounted, either in the calculation of the ‘less than £100,000 in the previous tax year’ or in the claiming of the £3,000 EA. Guidance must also provide clear explanations about all the circumstances in which a payment may be considered as deemed – and thus excluded either from the £100,000 liability and/or £3,000 EA claim.
Accounting for such exceptions through the payroll process will increase the administrative burden significantly – there should be no exceptions where a liability for Class 1 secondary NICs is accruing.
We are concerned that there is a growing inconsistency of applying policy in relation to Class 1 NICs. For example, the apprenticeship levy is calculated on all Class 1 liabilities, but the EA rules don’t follow this principle.
Is the £100,000 threshold inclusive or exclusive of the allowance? For example, if the secondary NIC in the relevant year amount to £101,000 but the employer only actually pays over £98,000 because of the £3,000 EA they claim, are they under or over the £100,000 threshold for next year's claim? This will be a commonly asked question and guidance should make clear the HMRC response that it is the amount before accounting for EA offset.
Acceptance and rejection communications
Once the employer has made their declaration HMRC will issue a letter by post informing them that they are granting de minimis state aid of £3,000 (we presume this will be stated in euros). This will ensure that HMRC is fulfilling its obligations under the EU rules for state aid provision. This assumes that HMRC agrees that the employer qualifies and guidance will need to ensure that employers are made aware of this checking process by HMRC.
Where HMRC disagrees with the employer claim because information is missing or that the limits available to that employer appear to be in breach, we understand that HMRC will notify the employer by an electronic GNS message – this will not be an instant rejection message which raises further questions and further time needed to process the EA claim:
Where the employer processes their own payroll they will need to have access to clear guidance to prevent errors occurring which would result in an inaccurate rejection.
Payroll service providers will need to check each GNS for each client if a rejection is served. Will the GNS clearly identify which client it refers to?
Payroll software providers can choose not to support this as the EPS facility is available to the employer through HMRC Basic PAYE Tools service.
To conclude, we remain of the belief that the Employment Allowance (Excluded Persons) Regulations should not be passed in their current format. They place on the employer payroll processes unacceptable levels of administrative burden – not least because the data required within the declaration is not data that is available to the payroll function and so will require significant manual intervention.
Other reporting options are available to HMRC and could have been selected – we are extremely disappointed that they weren’t previously considered in public consultation and are concerned at this latest direction of travel as it relates to Government use of the RTI system.
However, if it is not possible to change this policy direction and we do have slight optimism that this could be possible given the new Chancellor’s commitment to simplifying the tax system, we believe that employers, together with their service providers, which include payroll bureaux, accountants and bookkeepers, and software developers should be provided with appropriately timely, accurate and detailed information by HMRC that will enable them to fulfil this latest unpalatable policy proposal.
Our consultation response can be read in full, within the My CIPP/Policy hub on our website.