Press release: Government must rethink crackdown on people claiming national insurance reductions, warn taxation experts

The Chartered Institute of Taxation has warned that a bid to exclude one-person businesses from claiming the national insurance Employment Allowance will be too easy to dodge.

HMRC want to exclude limited companies1 where the director is the sole employee from claiming the Employment Allowance that reduces a company’s national insurance bill, from April 2016.

But the CIOT has told a consultation that the planned curbs are easily avoided, either by appointing another director, such as a spouse, civil partner, other family member or friend, and paying that person a token wage; or by arranging payments of earnings so that the worker is not a director when at least one of the payments is made.

John Cullinane, CIOT Tax Policy Director, said:

“The Government may find its plan to be ineffective in significantly reducing Employment Allowance claims because it is open to abuse. It will simply have the effect of penalising those single director-employee limited companies that are unable to, or do not know that they could, appoint another person as director or employee in order to claim Employment Allowance.

“We strongly suggest that the legislation should include a connected persons test to prevent any limited company where there are two directors who are connected persons, and no other employees, from benefiting from Employment Allowance.”

There is another possible problem with the Government’s proposal, which relates to how payments are made. The CIOT believes the exclusion is also open to abuse in that making a single payment after the director has resigned would seem to enable the company to escape the exclusion and hence qualify for Employment Allowance. That former director could then even go as far as getting themselves re-appointed as director of the same company.‎

Employment Allowance is available to qualifying employers that pay Class 1 national insurance contributions on their employees’ and directors’ earnings. Currently, employers can reduce the amount of secondary national insurance contributions they pay for their employees by up to £2,000 under the Employment Allowance (this will rise to £3,000 from April 2016). The Government claims that up to 1.25 million businesses and charities should be benefitting from the scheme.

Notes for editors

  1. A limited company is a private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.
  2. The CIOT’s submission to HMRC can be viewed here.
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