Employment Allowance – big changes from April 2020

Question.

I am a small company employing 15 workers and I have been claiming the Employment Allowance every year since 2014. What are the new changes coming next April?

Answer.

The Employment Allowance (EA) has since April 2014 entitled employers to a maximum of £3,000 off their annual secondary Class 1 NIC bill. As announced at Budget 2018, a new restriction on the EA will be introduced next year. 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.

A number of administrative changes are being introduced at the same time as the restriction, which all employers must consider. A key change is that the EA will have to be claimed every year in order to receive it – relief will no longer be carried forward from one tax year to the next as it has been to date.

Another result of restricting the EA to smaller employers is that, from April 2020, the EA will be classed as “state aid”.

The EU state aid rules are designed to prevent member states from introducing measures which may otherwise distort competition within the single market. State aid rules can apply to direct grants or loans, but also to tax breaks.

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). As a result, if an employer receives any other form of de minimis state aid, their ability to claim EA may be restricted.

HMRC’s draft documents require 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.

There are concerns that the new rules could be unduly onerous and difficult to comply with, and could ultimately result in smaller employers deciding that it is not cost effective 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.

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

And finally, as the state aid rules are EU legislation, some may wonder whether this issue will resolve itself before April 2020. The Government stated in August 2018 that, in the event of a no deal Brexit, UK competition rules will mirror the EU state aid rules, with only technical modifications to ensure they operate effectively in a domestic context. It therefore appears likely that some form of compliance burden will apply to claiming EA from April 2020, regardless of whether we leave the EU and on what terms.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.