Regional Employer NICs Holiday – Guidance and ProceduresMonday, September 13th, 2010
Starting 6 September, new businesses can offset up to £5,000 against their NICs liabilities for each of up to 10 new employees…
The Coalition government’s June 2010 Budget announced preliminary details of a NICs Holiday for new businesses in targeted areas of the UK. During the three years that the scheme will operate, new businesses which start up in these areas will enjoy a substantial reduction in their secondary (employer) NICs.
The NICs Holiday is a voluntary scheme. But, by applying to use it, a qualifying new business may reduce the amount of secondary NICs that are due for payment to HMRC
- in respect of the first ten employees hired during the first 12 months following the business start date,
- by up to £5,000 in respect of the earnings paid to each of those employees during their first 12 months of employment.
The maximum reduction in secondary NICs is therefore £50,000.
The correct name of the scheme is the “Regional Employer National Insurance Contributions Holiday for New Businesses” but it will undoubtedly be shortened in use to the “NICs Holiday”. (The draft legislation and HMRC’s guidance often refers to the scheme simply as “the Holiday”. As that could be potentially confusing out of context, we have used “NICs Holiday” consistently in this article.)
The full title, however, identifies three key features of the scheme:
- it applies only to employers in certain regions of the UK,
- it provides a “holiday” from the employer’s secondary Class 1 NICs liabilities for a defined period of time, and
- it applies only to new businesses.
There are three sources of guidance and information about the scheme; a number of dedicated pages on HMRC’s website, a section on the Business Link website, and an HMRC technical document that provides more detailed information, draft legislation and draft explanatory notes on the legislation. Links to these information sources are provided at the end of this article.
As may be noted from the contents of the technical document, there is no legislation in place currently to authorise the scheme. The NICs Holiday will be introduced in a National Insurance Bill in autumn 2010, which is expected to receive Royal Assent and become law in January 2011. Until that time, businesses eligible for the NICs Holiday will, due to HMRC Commissioners’ collection and management powers, be able to receive the benefit of the NICs Holiday from 6 September 2010.
This creates a potential problem for new businesses that choose to participate in the scheme in advance of it becoming law. If the legislation is not passed or there are substantial changes to the draft legislation when it is enacted, these employers will be required to pay over to HMRC by 19 April 2011 any secondary NICs that they have withheld but which, in the event, remain due. New businesses may, if they prefer, wait until the legislation is passed before they apply to use the scheme and make a retrospective claim for repayment of NICs.
A “new” business is one that starts up in the period 22 June 2010, i.e. when the scheme was announced in the Budget, to 5 September 2013. However, only the secondary NICs paid by the employer on earnings paid on or after 6 September 2010, the starting date for the scheme, are included in the NICs Holiday.
Qualifying new businesses may use the scheme during the 12 months from their business start date. This 12-month period is called “the employer’s qualifying period” in this article. For this purpose, the “business start date” is the earlier of:
- the date the business started, and
- the date when the first employee was hired.
If the start date was after 22 June 2010 but the first employee was hired before that date, the business start date is treated as being 22 June 2010.
If the start date is less than 12 months before 5 September 2013 (the date the scheme closes), the employer’s qualifying period will be for less than 12 months, ending on 5 September 2013.
However, a business is not considered “new” if
- another business was carried on at any time in the six months leading up to the business start date of the new business, and all or most of the activities of the new business were undertaken in that other business
- the new business results from the transfer of another business, and all or most of the activities of the new business were previously carried out in that other business
- the new business, before it starts, enters into an arrangement to take on all or part of another existing business at some point during the NICs Holiday
- all or most of the business activities of a new subsidiary business are not significantly different from those of the parent business
- it is a business in association with another business, and the two businesses are required to aggregate earnings for NICs purposes
- the main purpose, or one of the main purposes, of the new business entering into an avoidance arrangement is to ensure that the activities which might have been carried on as part of another business are carried on as part of the new business in order to obtain, or increase, NICS Holiday deductions or refunds.
Qualifying types of businesses
The different types of business that may apply to use the scheme are:
- sole traders, companies or partnerships that start to carry on a trade, profession or vocation
- property businesses, investment businesses
- new trading charities, whether or not they carry out profit-making activities
- employers falling within the IR35 intermediaries legislation, in respect of any salary or wage payments they make, but not in respect of deemed payments under the IR35 rules. (Managed Service Companies do not qualify as the primary purpose of such intermediaries is tax avoidance.)
Not all businesses qualify for the NICs Holiday on the basis of these definitions. For example, the scheme does not apply to public sector employers that do not trade or employers of personal or domestic employees such as nannies, gardeners, cooks and carers.
Non-qualifying business sectors
In principle, EU Member States may not support businesses by the provision of State Aid if this gives the businesses an unfair advantage over their competitors. However, the NICs Holiday is a form of State Aid that is permitted under European Union “de minimis” rules that restrict State Aid to a minimum defined limit – in most cases €200,000 over a three-year period. Certain businesses have a lower defined limit and other sectors are not permitted to receive any State Aid at all.
A business that has already received State Aid (whether or not under the “de minimis” rules) within the past three years does not qualify for the NICs Holiday if the £50,000 maximum benefit would take the amount of State Aid it has received to more than €200,000. In the context of hiring new employees, the “de minimis” rules do not permit the payment of an amount of State Aid under one employment scheme which, if added to the maximum payable under another scheme, would take the business over the limit defined for the business’s particular business sector.
New businesses in the following sectors cannot use the scheme:
- businesses in the coal sector
- businesses in the road freight transport sector, where the aid is to be used to acquire road freight transport vehicles
- businesses involved in export-related activities
- agriculture sector, where the business is active in
- the primary production of agricultural products, or
- the processing and marketing of specified agricultural products in specified circumstances
New businesses in the road freight transport sector (where the State Aid limit is €100,000) but that are not excluded for the reason above may qualify for the NICs Holiday but are required to apply using a special paper form. See Applying to use the scheme, below.
New businesses in
- the agriculture sector (where the State Aid limit is €7,500) but that are not excluded for any of the reasons above, and
- the fisheries and aquaculture sectors (where the State Aid limit is €30,00)
cannot participate in the scheme if they have already received any form of State Aid in the previous three years. Otherwise, they can apply using a special paper form. See Applying to use the scheme, below.
The regions of the UK that are included in the scheme are Wales, Scotland and Northern Ireland, and six of England’s regions, namely:
- East Midlands
- North East
- North West
- South West
- West Midlands
- Yorkshire and the Humber.
Therefore, the three regions that are not included are:
- Greater London
- The East of England Region, i.e.
- the counties of Central Bedfordshire, Hertfordshire, Cambridgeshire, Norfolk, Suffolk and Essex, and
- the non-metropolitan districts of Luton, Peterborough, Southend-on-Sea and Thurrock.
- The South East Region, i.e.
- Hampshire, the Isle of Wight, Oxfordshire, Buckinghamshire, Surrey, West Sussex, East Sussex and Kent, and
- the non-metropolitan districts of Bracknell Forest, Brighton and Hove, Medway, Milton Keynes, Portsmouth, Reading, Slough, Southampton, West Berkshire, Windsor and Maidenhead and Wokingham.
Employers in any doubt about which region they fall into can use the “region finder” at www.gos.gov.uk/regionFinder.
Principal place of business
A business falls into a certain region if its principal place of business is in that region. Each business using the scheme must be able to show that most its activities are carried out in one of the specified regions.
- If a business has no obvious place of business, e.g. because it is Internet-based or involves driving from one job to another, the principal place of business is where the equipment is kept, or business records retained, or where the administration of the business is carried out.
- If a business has more than one place of business, the principal place of business is the one where the greater part of the business is carried out.
- If the business is split equally between locations, some of which qualify and some that do not, the principal place of business is the administration centre or head office.
- New businesses with their principal place of business in an EU Member State that have employees to whom the UK National Insurance scheme applies may also apply to use the NICs Holiday. They should contact HMRC’s New Employer Helpline (08456 070143) for guidance.
The employer may withhold the secondary NICs due on the earnings of the first ten employees taken on in the employer’s qualifying period. See New businesses, above.
The level of each employee’s earnings is not relevant in deciding which are the first ten employees. Any of the following employees are employees for the purpose of the NICs Holiday:
- employees whose earnings are below the secondary earnings threshold, for whom no primary or secondary NICs are due
- employees over State Pension age, for whom secondary NICs are due but not primary NICs
- part-time employees, e.g. two employees job-sharing a full-time job count as two employees
- an employee with more than one job counts only as one employee
- employees who are family members
- directors, even if they are voted amounts periodically instead of being paid a salary, as long as at least one payment is made in the first 12 months of employment
- where the employer applies to join the scheme retrospectively because the business start date fell between 22 June and 5 September 2010, employees who joined during that period but left before the scheme started on 6 September 2010 (even though no secondary NICs may be claimed).
If more than ten employees are recruited at the same time, the employer may choose which ten to include in the NICs Holiday.
If fewer than ten employees are recruited in the employer’s qualifying period, no further employees may be included.
If one of the ten employees leaves and is subsequently re-employed, the employee only counts once towards the ten-employee limit.
Applying to use the scheme
Before applying to use the NICs Holiday, a new business must already have registered as a new employer with HMRC and received the assigned PAYE and Accounts Office references. From 6 September, all new employers are being issued with a PAYE scheme Starter Pack, which include information about the NICs Holiday. Most employers can then complete the online form available here. The form must be completed by the sole owner, a partner, company secretary or director, but not by an agent acting on behalf of the business.
The form asks for basic information about the employer, confirmation that the business operates in one of the permitted regions and confirmation that
- the employer has read all of the guidance provided on the HMRC and Business Link websites
- the business is not within one of the sectors to which special State Aid restrictions apply and has not received State Aid within the last three years
- the employer accepts that, if the NICs Holiday legislation is not passed or the scheme is substantially changed, any secondary NICs that have not been paid to HMRC will have to be paid by 19 April 2011
- all of the information provided is correct.
Some new businesses are required to complete a more detailed paper form that is only available from HMRC’s New Employer Helpline (08456 070143). These are:
- businesses with their principal place of business outside of the UK
- businesses that have already received some form of “de minimis” State Aid from another source
- businesses in the Agriculture, Fisheries/Aquaculture, Road Transport or Forestry sectors
- businesses that are uncertain whether or not they should complete a paper form.
Applications may be made retrospectively where, for example, the business start date was between 22 June and 5 September 2010, or the business is waiting for the legislation to be confirmed.
HMRC confirms approval to use the NICs Holiday by email or letter and the information provided includes the maximum amount of “de minimis” State Aid the business is permitted to receive. Businesses in any of the special sectors mentioned above will also be given guidance on complying with the record-keeping requirements under the State Aid rules.
If HMRC declines to authorise use of the NICs Holiday, the employer has the right to appeal that decision.
Calculating and recording the secondary NICs to be withheld
The key rules that must be applied when calculating the secondary NICs that may be withheld are:
- only the first ten employees recruited in the employer’s qualifying period may be included
- only the secondary NICs that the employer would otherwise have paid on the earnings of each of the ten employees in the first 12 months of each employee’s employment (“the employee’s qualifying period”) may be included
- no more than £5,000 of secondary NICs may be withheld in respect of each employee
- no earnings paid to any of the ten employees after 5 September 2012 may be included.
The first 12 months of each qualifying employee’s employment is called “the employee’s qualifying period” in this article.
In most cases, the “employee’s qualifying period” starts on the employment start date. The period will be less than 12 months for employees who start after 6 September 2012 as the NICs Holiday ends for all employees on 5 September 2013.
Where the business start date is before 6 September 2010 and any of the first ten employees were recruited before that date, their employee’s qualifying period begins on 6 September 2010, not on their employment start date. The scheme rules do not permit an employer to hold back earnings in this situation in order to increase the amount of secondary NICs due within the employee’s qualifying period.
A new business (sole trader) commenced trading on 6 August 2010. The principal place at which the new business is carried out when it starts up is not in an excluded region. Because the first employee is engaged after 6 August, the business start date is 6 August. The first ten employees engaged between 6 August 2010 and 5 August 2011 (the employer’s qualifying period) will qualify for the NICs Holiday.
The first employee is engaged on 28 August 2010. Earnings paid to that employee between 6 September 2010 and 5 September 2011 (the employee’s qualifying period) will be eligible for the NICs Holiday.
The second employee is engaged on 30 September 2010. Earnings paid to that employee between 30 September 2010 and 29 September 2011 (the employee’s qualifying period) will be eligible for the NICs Holiday.
The third employee is engaged on 10 September 2011. As the employee’s start date is outside the first year of business (the employer’s qualifying period) the new business is not eligible to claim the NICs Holiday for this employee.
The second employee leaves the new business in January 2011 and rejoins in July 2011. The new business can resume the NICs Holiday for this qualifying employee until the end of the employee’s original qualifying period which ends on 29 September 2011.
The £5,000 limit per employee applies to the employee’s qualifying period. In most cases the period will fall into successive tax years, but that is not relevant in the context of not exceeding the limit. (It is significant, however, in the context of the reporting requirements. See Recording the secondary NICs, below.)
If a qualifying employee is a member of the employer’s contracted-out pension scheme, under which secondary NICs are calculated at a lower rate than for not-contracted-out employees (9.1% for salary-related schemes or 11.4% for money purchase schemes), the employer may nevertheless calculate the NICs to be withheld at the not contracted-out rate (12.8%).
As soon as £5,000 of secondary NICs have been withheld for a particular employee, the employer must resume paying secondary NICs as normal to HMRC. If that threshold is reached, and it is only likely to be reached for employees with cumulative gross earnings of £44,777 (i.e. 12.8% of earnings above the secondary threshold), the employer will be able to claim some of the secondary NICs due for that pay period but will have to pay the rest to HMRC.
The scheme rules do not permit an employer to pay earnings before the end of the employee’s qualifying period that would otherwise have been paid later in order to maximise the earnings for which secondary NICs may be claimed.
Withholding the secondary NICs
As soon as an employer has received approval from HMRC to operate the NICs Holiday, the secondary NICs due in respect of the first ten employees may simply be claimed by reducing the monthly payments to the HMRC Accounts Office by the appropriate amount during each employee’s qualifying period.
If it is not possible to reduce the monthly payments to HMRC because the amount to be withheld is more than the total NICs due, a refund can be claimed from HMRC. An explanatory letter should contain,
- the business name, address and telephone number
- the HMRC Accounts Office reference
- confirmation that the relevant NICs Holiday application has been approved by HMRC
- the amount of secondary NICs that could have been deducted
- confirmation that it will not be possible to deduct this amount paid over from future payments for that tax year
- the number of employees to whom the refund application relates.
Recording the secondary NICs
For each pay period in the employee’s qualifying period, the employer must record the amount of secondary NICs due on the employee’s earnings at the not contracted-out rate (even if the employee is in contracted-out employment). The information that must be recorded for each employee includes:
(a) the employee’s name
(b) the employee’s National Insurance number
(c) the date the employee started employment
(d) the date the employee’s qualifying period ends – this may be less than one year if the £5,000 limit is reached in less than 12 months
(e) the amount of secondary NICs withheld in the current tax year
(f) the amount of secondary NICs withheld in the previous tax year
(g) the date deductions began, if this is earlier than the date the business started
(h) a running total across two tax years, where appropriate, to ensure the £5,000 limit is not exceeded (i.e. the sum of (e) and (f) above).
HMRC has provided a clever interactive form that creates individual employee recording sheets for use in meeting the record-keeping requirement. When initially downloaded, the employer enters the employer name and PAYE reference number, the business start date and the tax year to which the recording sheets relate. When confirmed, the first employee recording sheet appears, onto which are entered the employee’s name, NI number and start date. The NICs Holiday end date for the employee is generated automatically. The employer NICs figures can be recorded for either weekly or monthly pay periods and, when the latest figure is entered, a running total is generated. A warning appears when the amount entered for a particular pay period will take the total over the £5,000 threshold. Additional employees, up to ten, can be added to the same document and all of the pages can be saved for ongoing use.
Example, using HMRC recording sheets
At the end of each tax year, the employer
- must report the details of the total amount of secondary NICs withheld for the tax year on a special NICs Holiday Return and file it at the same time as the P14 and P35 PAYE Returns.
- may download the recording tool for the new tax year, create new recording sheets for the employees (including any for whom no secondary NICs have been withheld or who have left) and transfer to the new sheets the relevant details from the previous year’s sheets.
The employer’s year-end P14 and P35 PAYE Returns are completed as if the NICs Holiday did not exist. The NICs figures reported should not include any amount deducted as a result of the NICs Holiday. As a result, the P35 will indicate that insufficient monies have been sent to HMRC over the tax year and, to explain the discrepancy, HMRC will provide a special online form that the employer can use to provide the following information:
For the employer:
(a) name of company/business
(b) trading Address/Address of principal place of business
(c) PAYE reference
(d) Company Registration Number (CRN)
(e) total amount of secondary NICs claimed for the tax year (the sum of the figures at item (j) for all qualifying employees)
For each employee (including directors) for whom the employer has claimed the NICs Holiday:
(f) name of qualifying employee/director
(g) National Insurance number
(h) date employee engaged
(i) end date of the employee’s/director’s qualifying period
(j) amount of secondary NICs claimed in tax year
(k) amount of secondary NICs claimed in the previous tax year.
The sum of the figures in (j) and (k) for each employee should not exceed £5,000 and the overall NICs Holiday amount at (e) should not exceed £50,000.
The guidance provided so far does not explain how the discrepancy between the deficit reported on form P35 and the figure reported at (e) will be explained in circumstances where the employer has claimed secondary NICs calculated at 12.8% of earnings but the actual secondary NICs were calculated at 9.1% or 11.4%.
In addition to the employee records detailed above, the employer must retain the email from HMRC authorising the use of the NICs Holiday and stating how much “de minimis” State Aid has been granted. All of these records may be inspected by HMRC at any time.
Changes of circumstances
A business’s entitlement to use the NICs Holiday may be affected if
- the business relocates
- from one included region to another – entitlement to use the scheme is not affected
- from an included region to an excluded region – no secondary NICs may be claimed for any earnings paid on or after the relocation date
- from an excluded region to an included region – the relocation does not provide entitlement to use the NICs Holiday as the principal place of business was in an excluded region on the business start date.
- the business is bought, sold or merged – entitlement to use the scheme ceases from the point of transfer or sale.
- one of the ten qualifying employees leaves and is later re-employed – the employee is still one of the first ten employees and, if re-employed within a year of the employee’s original start date, the employer can continue to withhold secondary NICs for the remainder of the employee’s qualifying period.
- the business ceases to be an employer – use of the NICs Holiday lapses by default as earnings are no longer being paid. HMRC should be informed, all of the scheme records retained, and the year-end Returns completed.
- the business is offered State Aid from another source – that source must be given the maximum figure of State Aid shown on HMRC’s confirmation email or letter, not the amount of the benefit obtained from the NICs Holiday. The Sterling-Euro conversion rate on the date of HMRC’s confirmation email or letter should be used.
- the business realises that it has already received State Aid after applying for the NICs Holiday – if that State Aid added to the maximum aid available through the NICs Holiday (£50,000) would exceed the limit for the business sector (see Non-qualifying business sectors, above), all of the secondary NICs already withheld must be repaid, not just the amount that exceeds the limit.