How to Stay Safe from HMRC
13 October 17 | By: Jas Jhooty
One of the major current risks for employers is to ensure that the complex requirements of National Living and Minimum Wage Regulations (NLW/NMW) are met.
Active policing of employer NLW/NMW obligations is undertaken by HMRC, and we are aware that the department has recently increased its resources dedicated to this task, by a substantial number.
The current ‘adult’ or ‘NLW’ rate is £7.50 per hour, with lower NMW rates permitted for employees aged under 25. In truth very few employers set out with the intention to pay below Minimum Wage. However the rules can be very complicated, with much of the official guidance being patchy to say the least. Furthermore HMRC permits very little discretion and seeks to apply the rules rigidly.
The result of an HMRC review of NLW/NMW will often be notification that the employer has made an unintentional technical error and, if so, will be obliged to pay any Minimum Wage arrears to workers and employees.
Whereas most tax investigations (including Employer Compliance Reviews) are settled on a ‘handshake’ and are kept confidential, HM government is permitted to name publicly any employer who has underpaid Minimum Wage by more than £100 in total. Without doubt this is the secret of HMRC’s current ‘success’ in this area. Results are published in a ‘league table’ (highest overall underpayments first), which does not distinguish between technical and intentional failures.
Of course this process works disproportionately against larger employers or those with significant numbers of workers paid close to the lower levels (e.g. those in the retail or catering sectors). For example a major high street retailer was reported at the top of one recent published list, despite its average underpayment only being around £11 per employee.
Some of the most common errors made are as follows:
Has the type of work been identified and paid properly, for NLW/NMW purposes?
There are four types of work; salaried work, time based work, piece work, and unmeasured work. Often the employer will think they are doing the employee a favour paying them on a regular monthly salaried basis, but if the strict NMW definition of salaried work is not met and followed, HMRC will argue that a different payment and calculation basis is more appropriate e.g. ‘time based’ work.
Often the result of this technical distinction is an NMW underpayment in one pay period with a corresponding ‘overpayment’ in another pay period. Unfortunately the rules rarely allow one to be offset against the other, and the NMW underpayment therefore remains.
Another major high street retailer recently admitted publicly that it had made a provision of over £30m for NMW arrears, apparently arising from this type of technical failure.
Has the employer identified and paid all working time?
Any NMW investigation will seek to identify any unpaid working time, such as forcing employees to hang around before clocking in, keeping them late after their shift has finished, or not paying them for travelling time.
The employer may have failed to recognise properly which payments are and aren’t counted for NLW/NMW purposes.
An example is shift premia such as overtime, which is usually disregarded.
Items which should be treated as deductions for NLW/NMW purposes may not be recognised.
A good example is staff clothing where, if the worker is required wear a particular type of clothing (e.g. black trousers and shoes), the personal cost to the employee of such items is treated as an NMW deduction. It is interesting to note that the HMRC version of a ‘uniform’ for this purpose is drawn much more widely than the equivalent tax definitions (for NLW/NMW purposes the clothing does not need to have a conspicuous logo or be protective in nature).
There are specific rules which apply to accommodation provided, which need to be recognised.
Payroll deductions, if retained by the employer, may reduce pay for NLW/NMW purposes.
This is even if the employee accepts the deduction voluntarily. Employer changes for processing say employee Attachment of Earnings orders may fall into this category.
The employer may fail on basic principles of identifying who is and isn’t a ‘worker’
This is especially so in the charity sector where numbers of volunteers may be utilised, or may not recognise the different rates which apply to different age bands, apprentices etc., fully.
Unlike an Employer Compliance Review, any arrears identified (covering up to the last 6 years) are payable to the employee rather than HMRC. However HMRC also regularly issues penalty notices to employers, usually at the conclusion of a review. These penalties are set at up to 200% of the arrears currently, so the actual risk may in effect be three times any underpayment.
Whilst we cannot prevent HMRC from coming to visit you, a little advance preparation can go a very long way. Often small changes to contracts or staff policies can have a fundamental effect on any future potential issue. Whilst we have noted HMRC’s enforcement processes to be somewhat ‘determined’, it is important to recognise that many statements made by the department reflect a ‘view’ of legislation rather than the point having been established firmly by case law.If you think we may be able to assist either in dealing with a current review by HMRC or in seeking to prevent issues from arising in the future, please do not hesitate to contact us