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Employment Allowance Changes from April 2020

6th January 2020

The Employment Allowance (EA), introduced in April 2014, entitles employers to deduct a maximum of £3,000 off their annual secondary Class 1 National Insurance Contributions (NIC) bill. This is expected to rise to £4,000 in the Spring 2020 Budget.

This is not overly complex and the only issue we’ve really come across is when the connected companies rule hasn’t been taken into consideration. If you’re part of a group, only one company in the group can claim the allowance.

From April 2020, employers will only be eligible for the EA if their total secondary Class 1 liability in the previous tax year was under £100,000.

State Aid

EA from April 2020 will additionally be classed as state aid during the Brexit transitional provisions which are expected to expire in December 2020, though may last much longer.

What are the consequences of the EA being classed as state aid?

State aid rules can apply to direct grants or loans, but also to tax breaks.

In principle, state aid is not allowed in the EU. However, where a member state believes that a form of state aid would deliver growth or other important objectives, they can request approval from the EU.

From April 2020, EA will fall under the de minimis state aid rules, which exempt the Government from the approval process if a scheme only gives small amounts of aid.  However, there is a ceiling on how much aid any organisation can receive under the de minimis rules.  For most businesses this ceiling will be €200,000 over a three year rolling period (different levels apply for the agriculture, fisheries and road transport sectors).

As a result of the EA being classified in this way, employers will have to make sure they have space to accommodate the full £3,000 within their relevant three-year ceiling (regardless of how much EA they actually claim each year).  If an employer receives any other form of de minimis state aid, their ability to claim EA may be restricted.

Compliance obligations

UPDATE 29 January 2020. HMRC issued the following update:

"The government has addressed the comments in the responses by amending the statuary notice to reflect a change to the data being requested: employers will no longer have to provide information about other de minimis state aid they have received or been allocated."

HMRC’s original draft documents indicated that, in order to monitor compliance with the state aid rules and eligibility for EA, they will introduce a number of new compliance obligations for those who claim it.

This includes requiring employers to supply the following information each year when they claim the EA:

  • The trade sector in which they operate.
  • The total amount of de minimis state aid they have received or been allocated in the year of the claim and the previous two tax years.

HMRC also propose that employers will have to make a declaration that:

  • they have checked that their secondary Class 1 NICs liability for the previous tax year was less than £100k;
  • they have undertaken relevant checks with any connected companies to ensure they are eligible for relief; and
  • to the best of their knowledge they:
  • --- will not exceed the relevant de minimis ceiling for state aid for their sector by claiming the full EA;
  • --- are the only connected company claiming the EA; and
  • --- are not aware of any other reason why they may be excluded from claiming the EA.

We feel that these requirements could be unduly onerous and difficult to comply with, and could ultimately result in smaller employers deciding that it is not cost effective (or too much hassle!) for them to claim the EA.

In particular, the requirement to quantify amounts of state aid received could be difficult to achieve in practice, as where state aid arises in the form of a tax relief it may not be as simple as identifying a gross figure in accounting records or tax returns.

We also note that it is likely that payroll staff (either internal or external) will be responsible for submitting claims for EA, and they are unlikely to be familiar with the state aid rules.

Clear and practical HMRC guidance will therefore be important to assist employers in whatever requirements are imposed from April 2020.

Reporting

Employers will need to report the following details through RTI on the Employer Payment Summary (EPS):

  • Employment Allowance Indicator (already present on the EPS)
  • The State Aid sector in which they operate> •The amount of State Aid allocated in the current tax year, plus the amount of State Aid claimed in the previous two tax years. The value is to be expressed in Euros, using an exchange rate published by HMRC on 1 April.

The declaration will no longer be able to be carried over – by virtue of the £100k secondary NICs exclusion level – this question will need to be considered and declared, each tax year.

Whether Brexit will affect this remains to be seen!

 

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