HMRC has announced that there are to be changes to the Employment Allowance (EA) which could affect a significant number of businesses currently eligible to claim. 

Although the reforms relate to EU legislation, during the Brexit transition period the UK will mirror the EU and introduce the new rules from April 2020. While there may be further changes later in the year, our advice is to prepare for the changes now as we approach April and the beginning of the new tax year.

What is the Employment Allowance?

First introduced in 2014, the Employment Allowance entitled employers to a reduction of up to £2,000 from their secondary national insurance liability for the tax year. In April 2016 the allowance was raised to £3,000, although a change to the rules restricted single-director companies from claiming.

2020 changes

From April 2020, further restrictions will apply; the allowance will only be available to employers with a secondary Class 1 national insurance contributions liability below £100,000 in the previous tax year.

While the aim of the reform is to ensure that the allowance benefits the employers that need it most, there are also administrative changes being introduced which may prove to be too much of a burden for small employers, and some may therefore find it is not cost effective for them to claim.

One example of these proposed administrative changes is that from April 2020, the Employment Allowance claim will have to be submitted as a formal declaration each tax year, and will not automatically be carried forward from the previous tax year as it has been to date. This means that the £3,000 credit will no longer be processed in April of each year by default.

Reclassification to EU state aid

As the Employment Allowance will be restricted to smaller employers, it will be reclassified as ’EU state aid’ and consequently will fall within the ‘de minimis state aid’ rules for the employer’s particular business sector. As there are limits on how much state aid a business can claim within a three-year period, employers will need to ensure that they have capacity to accommodate the full allowance of £3,000 within the relevant period. If they are receiving or have received any other form of de minimis state aid, their ability to claim the Employment Allowance could be restricted or removed.

How is state aid calculated?

State aid is considered over a rolling three-year period, so where an employer has received state aid before April 2020, they will need to provide details of the total amount of de minimis state aid they have received or been allocated in the year of claim and in the two tax years immediately prior.

For most businesses the ceiling on how much state aid can be claimed is €200,000 over the three years. This can vary across sectors, with some having a much lower limit, so it is vital that employers verify which sector they fall within to ensure the correct figures are taken into account.

Employers who are part of a group of companies will need to ensure that the cumulative value of all the secondary class 1 national insurance or state aid across all of the related companies does not exceed the relevant limits for their sector. As the de minimis state aid is denoted in euros, any amounts relating to the employment allowance receivable must also be converted into euros.

Employers should also be mindful of situations arising whereby they become connected to another company through resources such as staff or premises, as this may affect their eligibility to claim the Employment Allowance. This is a complex area which we would advise seeking guidance on.

Next steps

HMRC has advised that further guidance regarding the changes will be available in the coming months. We are keeping a close eye on developments, so for more information about how these changes might impact you and your business, or to find out what you can do now to prepare for these changes, please contact me or your usual Johnston Carmichael adviser.