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Are you aware that the Employment Allowance has been revoked from sole Director limited companies?
Following the 2015 Summer Budget where the Chancellor of the Exchequer indicated that the Employment Allowance would no longer be available to companies where the Director is the sole employee from April 2016. HMRC subsequently set up a consultation on the matter.
As of today, HMRC is stating “We are analysing your feedback” on this consultation. Nonetheless, from 6th April 2016, a limited company where the Director is the only employee paid above the Secondary Threshold for Class 1 National Insurance contributions of £156.00 a week is now excluded from the Employment Allowance.
This is set to impact the estimated 150,000 sole Director limited companies where the Director is paid a salary subject to PAYE and NI.
Notwithstanding the appalling lack of communication of this change from HMRC, it has been made apparent that any company that erroneously claims the Employment Allowance will be subject to a penalty.
However, to re-qualify for the Employment Allowance, the company would simply need to pass the ‘additional employee test’ which explicitly includes companies where:
Moreover, if the company circumstances change at any point during 2016-17 tax year and there is an additional employee earning above the Secondary Threshold, the company would be eligible for Employment Allowance for the whole tax year.
The decisive factor is that an additional employee must be paid at least £156.00 a week or an additional Director must be paid a minimum annual salary of £8,112.00, subject to pro-rata if the Directorship began after the start of the tax year.
Given that the Employment Allowance is up to £3,000.00 this year whilst the Chancellor’s stated aim is “to ensure that the NICs Employment Allowance is focussed on businesses and charities that support employment…”, this seems totally ill-conceived.
Extraordinarily, there is no connected person test to prevent the Director either appointing their spouse or civil partner, a relative or a friend as a Director. There would be no need even to pay this person, as the original Director could resign and, thereby, become the qualifying ‘additional employee’.
To make the legislation more ludicrous, it is permissible for the original Director to be reappointed as a Director after one pay cycle as an employee. The HMRC states that if “….circumstances change during the tax year and the Director becomes the only employee paid above the Secondary Threshold, you can still claim the Employment Allowance for the tax year.”
Alternatively, a friend or relative could be employed on a temporary or zero-hour contract basis. As long as that person earns over £156.00 for just one week in the tax year, again the company would be eligible for the Employment Allowance.
Given the current crackdown on tax avoidance and evasion, it is astonishing that the Treasury has implemented a change that can be so easily circumvented. Indeed, the guidance on HMRC website is not far short of an instruction manual.
Seemingly, the only companies that will be affected will either be those where the Director is unable to appoint another Director or employee or is unaware that this is an option.
If you are concerned over any aspect of your business or personal tax affairs, please contact us at email@example.com for an initial free and confidential consultation.
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