Employment Allowance Claim confusion persists…

In our blog posts we try really hard to keep things simple, and to offer solutions. Sadly, this one may not hit either of those goals! There is a lot of confusion around claiming the Employment Allowance for this tax year, and HMRC’s own system is ignoring some of those claims if they are made.

So what’s the problem?

The rules around claiming the Employment Allowance were changed from 6th April 2020. Two new conditions for claims were added:

1. The employer’s class 1 NIC liability for the previous tax year must be less than £100,000
2. The business must not receive state aid in excess of its trade sector threshold, as the EA now counts as state aid.

To make the claim, the employer has to complete new fields to confirm the above. HMRC will then send a letter to the employer to confirm the claim, and that the Employment Allowance counts as State Aid.

When should the claim go in?

A key part of the regulations is clarified in advice from HMRC in response to a question by AccountingWeb, that states ‘It is allowable for employers to claim the EA (late) for liabilities which are under £4,000, however, they will need to take additional care to ensure that they do not receive relief for the same liabilities twice.’

I’ve made the final section of that bold because it is the key area of confusion.

The key issue is that both the Employment Allowance and the Furlough scheme gave employers relief on National Insurance contributions at the same time.

If an employer claimed the Employment Allowance whilst they were claiming under the Furlough Scheme, there is a chance that HMRC will reject one or other claim.

From 1st August 2020, the Furlough Scheme doesn’t cover employers Class 1 National Insurance contributions, so it would be sensible to only claim the Employment Allowance at this point. You’d need to make sure that there was at least £4,000 of employer’s National Insurance to be paid, and that the Allowance won’t be offset against the employers NIC that has already been claimed under the Furlough Scheme.

The final complication is that ordinarily, if the Employment Allowance is claimed late in the tax year, when most of the employer’s NIC for the year has already been paid over to HMRC, the unused Employment Allowance can be set against other taxes payable by the employer such as PAYE or Corporation Tax.

It is not acceptable to allocate unused EA for 2020/21 against other taxes for the year, when the furlough scheme claim has already covered employer’s NIC.

Software Issues

HMRC’s own Basic PAYE tool is compounding the problem. It only allows employers to claim the Employment Allowance on the first RTI return of the year, or not at all.

HMRC’s own guidance suggests that backdating a claim to the start of the tax year is perfectly correct, which is what other software will automatically do. This obviously contradicts the paragraph  provided to AccountingWeb, above.

Debt Management Involvement

HMRC’s debt management team have become involved where employers have received letters and calls that suggest they have purposely underpaid the PAYE and NIC for April to June by the employers NIC amounts for the same period.

HMRC’s National Insurance and PAYE System has not picked up the employers’ claims for Employment Allowance made in the first quarter of this tax year. HMRC have promised that this aspect of the problem will be fixed by 19th August, but as yet we have not heard that this is the case.

So where does that leave employers?

Sadly, there is no easy answer!

The combination of issues means that it’s very likely that employers will be questioned about their claims around National Insurance. We would suggest that you check with your payroll provider that they are aware of these issues, and ask them to confirm that they are keeping a watchful eye on progress and your situation.

Realistically, there is little they can do beyond submitting your claims in line with guidance, and then waiting to see it they are paid, questioned or accepted. If they are questioned, that will be the point at which they will need to liaise on your behalf with HMRC.

Although we don’t process payroll, if you have any problems, or would like to discuss this unusual situation in more detail, please get in touch.