Employment allowance reforms will add complexity to payroll submissions

‘It was all so simple then, has time rewritten every line’ those lyrics from the Way we were couldn’t be more apt when describing the restriction in the Employment Allowance (EA) that will take effect in April 2020. Back at Budget 2018, it was announced that restricting the £3,000 credit against employer NICs to those PAYE schemes (or connected schemes) with a Class 1 secondary liability of less than £100K in 2019/20 would save the government a significant amount of money annually. What wasn’t clear until the TIIN (Tax Information and Impact Note) and accompanying draft regulations were published on 25th June 2019 was the cost to business of making this saving for government.

What appears not to have been considered in framing this policy was that once a financial measure is used to target support to one group of employers only, this is classed as state aid. State aid, for example payments to farmers under the common agricultural policy (CAP), is restricted to a de minimis total that varies by industry sector so that governments can’t give an inappropriate level of competitive advantage to certain businesses or sectors. Therefore, we now have the requirement for every PAYE scheme who still wants to claim EA to prove that in so doing, they haven’t breached their State aid de minimis limit.

State aid – why do we care?

You’ll immediately be shouting at your screen ‘but if State aid is an EU construct why is this a problem as we (may) have left the EU before April 2020?”, the answer it appears is that we’re going to continue to be bound by the State aid rules at least for 2020/21. Whether that changes in the event of a no deal scenario who knows, it’s probably not at the top of the negotiators ‘no deal to do’ list! Your next question is almost certainly ‘but doesn’t the government already have central records of who has been given State aid that HMRC can access to police the appropriateness of any EA claim?’. Unbelievably – well I find it unbelievable – no such register exists, so payroll teams will have to source and report this.

The EU State aid rules require that for any State aid to be granted the claimant must not have exceeded these sector specific de minimis values when measured over three consecutive tax years:

  • Road freight €100,000
  • Agriculture €20,000
  • Fisheries €30,000
  • All other sectors €200,000

Furthermore, there must be £3,000 headroom (converted into euros on a set date that HMRC will confirm) ie the business must be at least £3,000 below their State aid limit in order for the EA claim to be accepted, even if the business wouldn’t in fact claim all the allowance, as their annual secondary NICs bill is less than £3,000.

Not the EPS again….

Yes, step forward the government’s preferred ‘dumping ground’ when it wants data from a business even when it has nothing to do with payroll – the Employer Payment Summary (EPS). Back in 2015 the EPS began to be used to report the apprenticeship levy, a training tax that HMRC ended up owning as again it was tied to a definition of NICs. Now the EPS will have another set of new fields added to facilitate EA compliance. This is not made clear in the TIIN or regulations, but we spent a mind-blowing two hours discussing it with HMRC two weeks ago. When I say we I’m referring to the payroll specialist group of the British Computer Society, the body that many of your payroll software suppliers belong to and of which I’m a committee member. It’s worth asking if your software supplier is a BCS member and attended the recent meeting so is up to speed with the complexities of this change.

We believe (no specification has been written yet by HMRC even though the protocol is that these should be signed off by the end of July each year!) the new EPS fields will be:

  • The total cumulative amount of State aid in Euros received by all connected companies/charities for the year of the claim and in the two tax years immediately prior to the current year, and therefore
  • A declaration that the de minimis limits have not been exceeded for the sector
  • An indication of the sector(s) the business/connected business or charity belongs to
  • A declaration that confirms Class 1 secondary NICs in the previous tax year were less than £100K*
  • A declaration that confirms that the connected company/charities rules do not apply that would strike out the claim, and
  • A declaration that they are the only company/charity in a connected group making the claim

*the £100K threshold ignores any secondary NICs paid on behalf of ‘deemed employees’ (off-payroll workers) in the private sector, and the EA can’t be claimed against secondary NICs paid in respect of deemed employees either

From April 2020 the EA declarations will have to be completed each year they will not carry forward.

The agent angle

It is highly unlikely that any payroll team will have State aid information to hand, and then when we consider payroll agents it’s a whole new ball game, unless you’re doing the accounts for the business too.  Sadly, HMRC has little understanding of the role of payroll agents as has been demonstrated in the discussions we’ve had about the IR35/off-payroll implementation, they only see SA agents and accountants handling VAT and CT as their agent customer base.

For a payroll agent to have to source all this State aid data to support an EA claim will be very burdensome for payroll only clients. Even though it may be unlikely that clients will have used up their de minims limit so will not be able to claim, the amount that they have received will have to be captured and reported. What is reported  for the current year is still a mystery to me – how does the business/charity know in April what it is likely to claim for the year ahead? so is an estimate given based on the prior year that has to be adjusted and could then lead to a claim being struck out and a consequent reworking of the NICs due to HMRC?

There was even a suggestion at the meeting that the EPS would become a two-way file so that claims could be rejected that way – in fact the indication was that the policy team at HMRC thought it already worked this way – oops!

Next steps?

  1. All in-house payroll teams with a Class 1 secondary NICs liability for 2019/20 of less than £100k who would still qualify for EA should find out from their finance team/group finance team if they are State aid recipients and now much was received for 2017/18 and 2018/19 plus the estimate for 2019/20
  2. All agents should request details from clients who are likely still to be EA claimants in 2020/21 if they, or their group are State aid recipients and the values for 2017/18 and 2018/19 plus the estimate for 2019/20
  3. Alert finance/clients that without such data their claim cannot proceed so they should understand that their secondary NCs bill will increase by £3,000 for 2020/21 – the business may decide that the reporting burden is such that it is not worth claiming anyway
  4. Check with your payroll software provider that they are aware of the significant changes to the EPS for 2020/21
  5. Read, and if you’re impacted, respond to the consultation. We will be as the Employment Tax committee at ICAEW of which I’m Deputy Chair
  6. Watch out for guidance from HMRC – maybe this time we’ll get it before the day it comes into effect as that’s what happened with guidance on Post employment Notice Pay!

Further guidance

State aid manual: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/607691/bis-15-148-state-aid-manual-update.pdf