HMRC publishes more details about the scheme
In the June 2010 Budget, the Government announced a holiday from employer’s National Insurance contributions (NICs) for new businesses. HMRC published more details about this on 27 August in the form of a Technical Note: Regional Employer NICs Holiday for New Businesses.
In particular, HMRC confirms that the scheme will indeed commence on 6 September – next Monday.
Below we summarise the terms of the NIC holiday and explain what’s in the latest Technical Note.
HMRC will publish guidance for new businesses, including an application form, before the scheme starts on 6 September 2010 – so presumably it can be expected imminently.
Readers may also be interested in the August 2010 TAXline editorial Waking the Dead, in which Tax Faculty deputy chairman and NIC expert David Heaton discusses whether the NIC holiday is likely to achieve the desired effect.
The NIC holiday – a summary
This will be a three-year scheme available to qualifying new businesses set up on or after 22 June 2010 outside London, the South East and East England.
It provides exemption from up to £5,000 of Class 1 employer NIC for each of the first 10 employees hired in the first year of business. Each holiday will last for the first 52 weeks of each employee’s employment, providing these fall within the three-year holiday scheme period.
Most kinds of business activity (including investment and property businesses) will be eligible for the holiday provided they employ staff and meet other criteria, but some will be excluded.
Most staff will be included but there will be some specific exclusions, for example employees operating under companies caught by the IR35 rules and employees engaged through managed service companies.
Businesses which meet the criteria and which start up between 22 June and the time the holiday scheme starts will have to pay employer’s NIC in the period before the start of the scheme but will receive a holiday of equal duration once the scheme starts.
What’s in the Technical Note?
The Technical Note: Regional Employer NICs Holiday for New Businesses sets out how the scheme will operate. It includes draft clauses and draft Explanatory Notes.
The Tax Faculty is most grateful to NIC expert and Faculty volunteer Peter Arrowsmith for providing the following list of key points. These bring out the information in the Technical Note which add to the basics that we were told in June.
1. The legislation is not expected to receive Royal Assent until early 2011 so if for any reason the NIC holiday is never, in the event, enacted, any relief already obtained will be repayable as extra Class 1 NICs by 19 April 2011.
2. There are anti-avoidance rules as to the meaning of a new business. And a business already claiming the holiday which is then taken over or sold will cease to be eligible immediately.
3. The geographical areas have been confirmed. Peter Arrowsmith says: For example the 'Eastern Region' does not include my own Northamptonshire, but does include Bedfordshire (about two miles down the road as I sit here now). It still surprises me that the remoter parts of Norfolk – to take just one example – are considered to be beneficiaries of government employment and so excluded and considered to be less deserving than, say, Cheshire and Gloucestershire which include some very successful areas even in these difficult times.
4. Geographical eligibility will depend on where the principal place of business is. Where there is more than one such place, you look at where the greater part of the business is carried on. If not in an excluded region then all employees – including those working wholly in an excluded region – potentially qualify. But this seemingly generous treatment works to disadvantage in reverse.
5. Businesses that commenced on and after 22 June 2010 can take a NIC holiday for up to 12 months’ contributions from 6 September 2010, in respect of the first 10 employees taken on in the first year, beginning from the actual day that trading commenced.
6. In the case of companies, directors count towards the maximum of 10.
7. Only trading, professional, vocational, etc organisations (including charities carrying on a trade) qualify. So, for example, householders taking on domestic staff for the first time will not qualify. And public bodies will not qualify.
8. The holiday is to be administered as 'de minimis' State Aid and so some businesses will have their entitlement reduced. The coal industry is completely excluded. And there will be a reduction on the NIC holiday relief available where a business has already received some other form of EC de minimis State Aid – this would be difficult to achieve (though not impossible), however, since only new businesses can qualify in the first place. There are financial limits for the agriculture, fisheries, aquaculture and road transport sectors.
9. In addition, managed service companies cannot benefit – nor can IR35 companies as regards 'deemed payments'. Any regular salary paid month by month by an IR35 company would however be eligible for relief.
10. If an employee leaves, his or her replacement does not qualify if 10 employees are already in place. If the employee is re-employed (whether or not the full 10 employees are in place by then) the holiday for that employee continues up to the original end-date or until the £5,000 maximum relief is obtained for that employee.
11. Where – perhaps unusually for a new business – NICs are due at the contracted-out rate, the NIC holiday entitlement is to a reduction of the full, not contracted-out contributions that would have been due on the same earnings.
12. The relief applies only to Class 1 contributions – not to Class 1A nor Class 1B.
13. New businesses in the EU can potentially qualify where they send workers to the UK (and outside the excluded areas) in circumstances where liability to UK contributions exists.
14. Relief is not compulsory and businesses will need to apply.
15. In addition, records of the employees concerned, their earnings and contributions – among other details – will need to be retained.
16. There will be a separate NIC holiday end-of-year return as at each 5 April. This should enable HMRC to avoid picking up the NIC holiday relief obtained as what would otherwise appear to be an underpayment on the P35.