From 1 April 2020, nearly three million workers are set to benefit from increases to the National Living Wage (NLW) and minimum wage rates for younger workers, according to estimates from the independent Low Pay Commission.
From 1 April 2020, the NLW will rise from £8.21 per hour to £8.72 per hour.
The new rates should mean a pay rise of some £930 over the course of the year for a full-time worker on the NLW. Younger workers who receive the National Minimum Wage (NMW) will also see their pay boosted with increases of between 4.6% and 6.5%, dependant on their age, with 21-24 year olds seeing a 6.5% increase from £7.70 to £8.20 an hour.
Employers need to make sure they are ready for the new rates.
The compulsory NLW is the national rate set for people aged 25 and over. The NLW is enforced by HMRC alongside the national minimum wage which they have enforced since its introduction in 1999.
Generally, all those who are covered by the NMW, and are 25 years old and over, will be covered by the NLW. These include:
The NMW is the minimum pay per hour that most workers are entitled to receive by law. The rate to which they are entitled depends on a worker's age and whether they are an apprentice.
The rates from 1 April 2020, the NMW will rise across all age groups, including increases:
Payments that must be included when calculating the NMW are:
Some payments must not be included when the NMW is calculated.
There are a number of people who are not entitled to the NMW, including:
All other workers including pieceworkers, home workers, agency workers, commission workers, part-time workers and casual workers must receive at least the NMW.
Businesses should make regular checks to ensure compliance with NLW/NMW obligations including:
The penalty for non-payment of the NLW can be up to 200% of the amount owed, unless the arrears are paid within 14 days. The maximum fine for non-payment is £20,000 per worker.
The government is currently committed to raising the NLW to £10.50 per hour by 2024 on current forecasts.
Employers need to take action over the coming weeks to ensure that they are ready for the increase in rates on 1 April 2020 and beyond.
Partner note: SI 2015/621; BEIS guidance Calculating the minimum wage https://www.gov.uk/government/publications/calculating-the-minimum-wage/calculating-the-minimum-wage
To prevent manipulation of the NIC earnings period rules to reduce contributions, directors liable to Class 1 contributions will have an annual earnings period, however often they are paid.
The non-cumulative nature for calculating employee Class 1 NICs makes it possible to manipulate earnings to reduce the overall amount payable by taking advantage of the lower rate of primary Class 1 contributions payable once the upper earnings limit has been reached. For example, an employee who is paid £3,000 for each month of the tax year will pay considerably more in primary contributions than someone who is paid £600 for 11 months and £29,400 for one month, even though their total earnings for the year are the same.
Since company directors often have greater scope to influence the time and amount of payments they receive as earnings, special rules exist which provide that a director’s earnings period is a tax year. As the end of the tax year approaches, it is worthwhile checking to make sure that all company director NICs have been calculated correctly.
There is an exception to the above rule where a director is first appointed during the course of a tax year. Where this happens, the earnings period will be the period from the date of appointment to the end of the tax year, measured in weeks. The calculation of the earnings period includes the tax week of appointment, plus all remaining complete weeks in the tax year (i.e. week 53 is ignored for this purpose). This is known as the pro rata earnings period.
Mr Green is appointed to the board of directors of A Ltd in week 44 of the tax year. The primary threshold and upper earnings limit are calculated by multiplying the weekly values by 9, because the earnings period starts with the week of appointment. This means that in 2019–20, Mr Green will pay NIC at the main rate of 12% on his director’s earnings between £1,494 (9 × £166) (the primary threshold) and £8,658 (9 × £962) (the upper earnings limit) and at the additional 2% rate on all earnings above £8,658 paid up to 5 April 2020.
Leaving the company
It is also worth checking as to whether any directors have left during the year. Again, to prevent manipulation of the rules, directors ceasing mid-year retain an annual earnings period for the remainder of that year and the next year in relation to earnings from the same employer.
Who does the annual earnings basis affect?
Towards the end of the tax year, a check should be made to ensure that the annual earnings basis is being used for the correct people. There may be people within the organisation who are called directors, but for whom that is just an honorary title.
The definition of ‘director’ is wide and extends beyond someone registered as a director with Companies House. For these purposes a director means:
However, a person giving advice in a professional capacity is not treated as a director.
Companies often find it easier to calculate directors’ NIC in a similar way to other employees, spreading contributions throughout the year. A recalculation on an annual basis should be performed when the last payment of the year is made and any outstanding National Insurance due can be paid at that time.
Partner note: SI 2001/1004, reg Part 2(2) and (8); HMRC guidance CA44: National Insurance for company directors (https://www.gov.uk/government/publications/ca44-national-insurance-for-company-directors)
The subject of allowable mileage rates for tax purposes often causes confusion as different rules apply depending on whether a car is employee or company owned.
Broadly, employees can only claim mileage allowance tax relief where their own vehicle is used for business purposes. If the employee is provided with a company car, a mileage claim can be made for business travel to cover the cost of fuel where this is paid for by the employee. There are different rules if the company pays for the fuel.
Approved mileage allowance payments (AMAPs)
An employee using their own car for work can claim a mileage allowance from their employer, which is designed to cover the costs of fuel and wear and tear for business trips. The mileage allowance will be tax-free if it does not exceed HMRC’s Approved Mileage Allowance Payment (AMAP) rates, which are currently as follows:
Actual costs of business journeys made in the employee’s private car cannot be claimed as a deduction by the employee as the legislation specifically prevents this where mileage allowance payments are made to that employee.
AMAPs are designed to cover any general or mileage-related expenses in relation to the car itself (such as fuel, servicing, tyres, road fund licence, insurance and depreciation), plus interest on any loan to buy the vehicle. The employee cannot claim any additional relief for expenses of that type.
AMAPs do not cover other expenses specific to the particular journey (such as parking charges, road tolls or accommodation) and the normal rules for deductions apply to expenses of this type.
Unless the employer reimburses employees at a higher rate than the AMAP rate, the payments do not need to be reported on annual forms P11D as a benefit-in-kind.
If an employer pays less than the approved rates, the employee can claim income tax relief from HMRC for the shortfall. This can be done via a self-assessment tax return or by completing form P87.
The AMAP scheme does not apply for company cars. However, employees can still claim fuel expenses for all business mileage where they pay for the fuel. The rates are lower than the AMAP rates and are updated quarterly. Current and previous rates can be found on the Gov.uk website at https://www.gov.uk/government/publications/advisory-fuel-rates.
Amounts paid in excess of HMRC’s advisory rates will be taxable.
If the company pays for all fuel (business and private), the fuel benefit will be charged, which is based on the cash equivalent of the benefit each tax year. The fuel benefit is fixed each year (for 2019/20 it is £24,100). This figure is multiplied by the CO2 percentage figure applicable to the company car.
It is the employee’s responsibility to claim tax relief due on mileage allowances. Form P87 can be used where an employee is not within self-assessment but has allowable employment expenses of less than £2,500 for a tax year. Current year claims are usually made via the employee’s PAYE tax code. However, employees have four years from the end of the tax year to make a claim for earlier years.
Partner note: ITEPA 2003, ss 229(3), 230, 359
It is only permissible for a company to deduct expenditure in computing its taxable profits if incurred wholly and exclusively for the purposes of the trade. Since a company is a separate legal entity that stands apart from its directors and shareholders, it will not incur personal expenses. However, many companies, particularly 'close' companies (broadly a company under the control of 5 or fewer participants) pay for personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense. In such circumstances it may be appropriate for these items to be set against the director's loan account. Establishing whether a payment forms part of a director's remuneration package can be complex and good record keeping is essential to back up such claims.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid, where relevant. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director's loan account.
Cash transactions between the company and a director may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.
Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or misposted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors' loan account balances may be incorrect resulting in the company being liable for a s 455 charge if the loan account is overdrawn, or corporation tax relief not being claimed on allowable expenses by the company at the appropriate time.
A review of particular accounts headings may identify directors' personal expenditure that has not yet been allocated appropriately. Transactions should normally be recorded as they occur and a detailed transaction history maintained, so that it is possible to identify the director's loan account balance on any given date.
Partner note: CTA 2009, s 54; CTA 2010, ss 455 and 458
HMRC’s application of the IR35 rules remains ambiguous after an IT contractor successfully appealed to the First Tier Tribunal (FTT) against a tax charge arising under the intermediaries' legislation.
In RALC Consulting Ltd v HMRC  TC 07474, the FTT allowed an appeal against HMRC's determination that IR35 applied because the ‘hypothetical contract’ between various parties making up the service provider chain lacked the requisite mutuality of obligation.
In this case, RALC Consulting Ltd (RALC) (the appellant), was the personal service company (PSC) of IT consultant Richard Alcock, who was the company’s sole director and shareholder.
During the tax years in question, RALC Consulting Ltd contracted with Mr Alcock’s former employer Accenture UK Ltd (Accenture) and with the Department for Work and Pensions (DWP), a client whose projects Mr Alcock had previously worked on, to provide Mr Alcock’s services working on a large IT project.
The contractual arrangements entered into by the appellant with Accenture and DWP were four-party chains, namely Mr Alcock, RALC, an agency, and the end clients. HMRC contended that as Mr Alcock had carried on working for his previous employer an ‘expectation of continued work existed’. The FTT, however, did not agree with HMRC’s submission that the long history of Mr Alcock’s previous engagement and operation of the contract in practice led to an expectation that Mr Alcock would be provided with work every day during the course of an assignment, such that it amounted to a legal obligation.
The FTT looked not only at the terms of the contract, but also at their application in practice and concluded that it was not satisfied on balance that sufficient ‘mutuality of obligations’ existed between Mr Alcock and the end clients in the hypothetical contracts to establish an employment relationship. Since there was no minimum obligation to provide work and no ability to charge for just making himself available, the FTT found that the key elements of mutuality, in the work, or wage bargain sense, were missing, and therefore Mr Alcock could not be considered an employee.
The Tribunal was satisfied that Mr Alcock had substantial control over his contracts and control over how he performed his services. The FTT also accepted that Mr Alcock’s engagements permitted him to provide a substitute but the end clients had the right to refuse to authorise any substitute proposed if they were deemed unsuitable. Therefore, while it was a genuine right of substitution, it was a fettered right subject to the approval of his clients.
The FTT concluded that the intermediaries legislation did not apply as the hypothetical contracts with the end clients indicated ‘contract for services’, meaning Mr Alcock would have been self-employed. HMRC’s determinations, decisions and notices were cancelled. The appellant was not liable to pay income tax and NICs assessed by HMRC. The appeal was allowed in full.
The outcome of the decision in this case rested largely on the FTT’s interpretation of mutuality of obligation. HMRC’s interpretation that where one party agrees to work for the other in return for payment satisfies mutuality of obligation between the two parties, was dismissed by the Tribunal. The appellant’s circumstances were such that they were not caught by the IR35 legislation, and in turn, this outcome now throws further uncertainty into the IR35 framework.
HMRC have recently updated their online Check Employment Status for Tax (CEST) tool. Whilst the tool does have flaws, it is generally held that if CEST gives the required answer then it can be relied upon, at least until circumstances change or it is challenged by HMRC. But if CEST does not give the required answer then an employment contract review is recommended.
Partner note: ITEPA 2003, Pt 2, Ch 8; RALC Consulting Ltd  TC 07474 (http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11432/TC07474.pdf); Check employment status for tax (CEST) tool: https://www.gov.uk/guidance/check-employment-status-for-tax
It is important to know whether a worker is employed or self-employed as there are many differences in the way in which they will be taxed. Broadly, employees are taxed under the PAYE system with income tax and Class 1 national insurance contributions (NICs) being deducted from payments made to them. Class 1 NICs are also payable by employers. In contrast, the self-employed pay income tax and Class 4 NICs direct to HMRC, and are also currently liable to Class 2 NICs.
Some important differences are that:
The term ‘employment’ is broad in scope but is not exhaustively defined. The legislation lists three types of arrangement which indicate the central meaning of the term:
Firstly, the terms and conditions of the engagement need to be established – normally established from the contract between the worker and client/employer, whether written, oral or implied or a mixture of all three. Then any surrounding facts that may be relevant need to be considered – for example, whether the worker has other clients and a business organisation.
Factors indicating employment include:
If a worker is classed as an employee, there will automatically be entitled to certain employment rights, including the National Minimum Wage, statutory minimum levels of rest breaks and paid holiday, and protection against unlawful discrimination
Employment status is not determined by any one single factor. In more complicated circumstances it will be necessary to build up a picture, taking into factors such as substitution, mutuality of obligation, control, pay structure and benefits, and the wording of any contracts in place.
Partner note: ITEPA 2003, s 4; Check employment status for tax: https://www.gov.uk/guidance/check-employment-status-for-tax