National Minimum Wage: taxpayer success

Scott McFarlane

Scott McFarlane

Employer Services Senior Manager

An employer has won a recent decision in respect of an HMRC notification of underpayment of the National Minimum Wage (NMW), which could be of interest to other employers. 

Lees of Scotland Ltd (Lees) had operated a voluntary holiday savings scheme for around 30 years to support its employees, but had to close this down in 2020 when HMRC advised it was not complying with its NMW obligations. 

Many employers operate such arrangements, and these are usually voluntary agreements with employees who will sign up for a deduction to be taken from net pay, which will be retained by the employer until the employee requests repayment at a specific date e.g., summer holiday, Christmas etc. These do not generally carry any charges for use and are a useful HR tool for employers which also benefit the employees.

HMRC’s view has been that where an employer makes a deduction directly from payroll and retains the funds in its own bank account, from which it can then draw down and use as it pleases, that this is treated as a deduction from pay for its own use and benefit. There is a specific section of the legislation that causes NMW pay to be reduced where this happens. Had the employees received the pay first and then paid it back to the employer for safekeeping, a deduction would not arise for NMW purposes. This is a specific nuance in the legislation and one which a number of large employers have fallen foul of.

The key issues considered by the Fist Tier Tribunal (FTT) were:

  • whether the deductions made by the employer and itemised on payslips as “Holiday Fund” were “for the employer’s own use and benefit”; and
  • if the sums were not for the employer’s own use and benefit, whether the payments made to the employees in respect of the funds deducted amount to “additional remuneration” and could be regarded as payments of national minimum wage arrears.

The FTT held that the deductions did not reduce pay for NMW purposes on the basis that they were not made for the use and benefit of Lees but for the benefit of the employee. Any benefit the employer did receive was a result of the arrangement rather than the intended outcome of the scheme e.g., interest payments and access to the available funds. The FTT stated that the intention of the arrangements is an important factor, and the intention of the Lees arrangements was to support its employees to help them save. 

In our experience, the intention of the employer in nearly all similar cases to this will be to provide employee support rather than to otherwise obtain a benefit from the use of the funds and, whilst a decision of the FTT is not legally binding, HMRC have not yet commented on how this will affect any future reviews of NMW. It is a welcome win for employers and for common sense in the application and intention of how the NMW rules are to be applied.

If you have any similar arrangements set up with your employees or you need to discuss the wider complexities of the NMW regime to ensure you are not falling foul of a technical breach, please do get in touch with your local JC contact or our Employer Services team who will be happy to assist.

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