HMRC publish policy paper relating to the Employment Allowance: excluded persons regulations 2020
29 January 2020
It is now widely recognised that, from 6 April 2020, employers who have incurred a secondary Class 1 National Insurance contributions liability of £100,00 or more in the tax year immediately prior to the year of the claim can no longer utilise the Employment Allowance, which currently stands at £3,000.
HMRC has published a policy paper which discusses the measures and also looks at the potential impact of the new rules. The document discusses how employers who are connected to other companies will be required to collate all of the secondary Class 1 National Insurance contributions liabilities incurred by all connected companies in the year prior to the claim, and if that amount exceeds or sits at £100,000, then none of those employers are eligible to claim the Employment Allowance for the following tax year.
As a direct result of the new restriction, the Employment Allowance automatically becomes reclassified as de minimis State aid. Those seeking to claim the Employment Allowance will need to ensure that they have sufficient space in their relevant de minimis State aid limit(s) to accommodate the full annual amount of the Employment Allowance (£3,000). It is important to note, at this stage, that different sectors must observe different caps to de minimis State aid, e.g. the agricultural sector is capped at €20,000 over three consecutive fiscal years but for fisheries and the aquaculture sector, it is capped at €30,000 over three consecutive fiscal years. Companies must be able to claim the full annual employment allowance within their de minimis State aid limit(s) and cannot receive a partial amount of the allowance.
The objective of the amendments to the allocation of Employment Allowance is to aim it at its originally intended beneficiaries – smaller companies. Therefore, the Employment Allowance is no longer available to employers who incur employer secondary Class 1 National Insurance contributions liabilities of £100,000 or more in the previous tax year.
The reform was announced at Budget 2018, but the Employment Allowance was initially introduced back in the National Insurance Contributions Act 2014 and originally offered relief of up to £2,000. This was amended from April 2016 to increase the value of that relief to £3,000 and made it so that it was no longer available to single director companies.
If employers become connected during a tax year, but prior to that they were all eligible for the Employment Allowance, they will continue to be eligible for the remainder of that tax year but will need to have their eligibility reassessed as a collective for future claim years. If an employer becomes connected to a company or group of companies who have exceeded the limit for the Employment Allowance due to their Class 1 NICs liability totalling £100,000 or more in the previous tax year, the employer joining that group would no longer be eligible for the Employment Allowance in the tax year in which they become connected.
Employers will now have to explicitly claim the Employment Allowance at the start of each tax year via their Employment Payment Summary (EPS) as it will no longer carry forward automatically from one year to the next. There will be an additional requirement to confirm that the previous year’s employer secondary Class 1 National Insurance contributions liabilities were less than £100,000 and to confirm which State aid sector the employer operates in.
At Budget 2018, it was expected that the exchequer would receive £225 million in additional income from 2020-21 due to the reforms, £260 million in the tax year 2021-22, £290 million in the tax year 2022-23 and £320 million in the tax year 2023-24.
There are no expected significant macroeconomic impacts of the new measure, or any expected effects on individuals, households and families, nor is there any anticipated impacts to groups sharing protected characteristics.
It is estimated that there will be a significant impact on almost 1.2 million businesses by introducing the new restrictions to the Employment Allowance. They will need to familiarise themselves with the amendments and determine whether they will be eligible for the allowance each tax year. An expected one-off burden surrounds understanding the changes to legislation and identifying whether the claimant’s business is still eligible to receive the allowance. Updates to internal systems may also be required.
There will be costs for businesses, associated with checking the previous tax year’s total secondary Class 1 National Insurance contribution’s liability and determining how much State aid has been received or has been allocated.
Negligible costs will be incurred by HMRC when implementing the change. Customer-facing guidance has already been updated and only slight increased contact is expected from businesses in relation to the changes to the entitlement to the Employment Allowance. Companies currently claiming the allowance will receive correspondence which updates them in relation to the changes and explains what they will need to do. This will be circulated prior to the end of the current tax year.
The changes will be assessed and monitored through information collected from tax returns.
If there are any questions about the change, the advice is to contact Victoria Bedford on 03000 562088 or email at [email protected].
CIPP comment
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