Employment Allowance Changes from April 2020 – impact on businesses and R&D Claimants

A major change is being introduced to the Employment Allowance (EA) with effect from April 2020. Our Payroll Manager, Claire Brown, and our R&D Manager, Hollie Thompson, have set out the main changes business owners need to consider.

Background

The EA was introduced in April 2014 for eligible businesses to enable employers to claim a reduction against their employer’s secondary national insurance (NI) bill. The deduction initially started at £2,000, increasing to £3,000 from April 2016.

The allowance is claimed via the payroll and is reported to HMRC via the Employer Payment Submission (FPS) as the liability arises. It is claimed until either the £3,000 allowance has been used or the tax year comes to an end.

There are hundreds of thousands of businesses benefiting from this scheme, but the treasury reports that the relief costs around £2 billion and tighter measures are being enacted from 6 April 2020 to reduce this cost.

EA Administration and Classification

The key administrative changes are as follows:

  • From 6 April 2020, the EA will only be available to smaller businesses who had an employer’s NI bill of £100,000 or less in the previous tax year.
  • The EA will not be automatically carried forward and applied to 6 April 2020 like it has previously if your business qualified – it will have to be specifically claimed via payroll software which will have to include a declaration of what State Aid sector the business falls within.
  • The EA will be classed as de minimis state aid and there is a ceiling on how much aid a business can receive under the de minimis rules (for most businesses this ceiling will be €200,000 over a three year rolling period)
  • Businesses must be able to accommodate the £3,000 EA within their State Aid limit or they will lose their entitlement to it. Please see the following links for further HMRC guidance to State Aid and how to check what counts towards State Aid: https://www.gov.uk/guidance/state-aid.
  • Please note that if the business is in a group of connected companies, only one company can claim the allowance (as is currently the case).

The Government estimates that over 99% of micro-businesses and 93% of small businesses will still be eligible to claim, but the required record keeping in relation to state aid could be difficult.

For more information or help on how to complete the extra checks, please contact Claire Brown on 0191 285 0321 or email claire.brown@taitwalker.co.uk.

Impact on R&D

There are two potential aspects to the impact of the changes of R&D claims.

Firstly, as the EA will be classed as state aid, R&D tax relief under the SME scheme will not be available on the employment costs covered by the EA (matched £1 for £1).

Practically, this is unlikely to be an issue unless a company is claiming R&D tax relief on 100% of its employment costs. Relief would still be available for the £3,000 under the large company scheme (RDEC).

The bigger impact will be on those companies who are making claims under the SME R&D scheme. An annual calculation will need to be made of the difference between the tax relief received under the SME scheme (which is classed as state aid) and what would have been received under RDEC (not state aid) to identify how much aid a company has received.

If this difference exceeds €200,000 in any three year period, then the company should not claim the EA as it will have breached the de minimis limits.

Whilst this calculation does not need to be reported to HMRC, the company will need to retain this on record to show it has been considered.

Given the generosity of the SME scheme for R&D, there is a risk that even modest claims could fall foul of these rules. If your business receives tax relief of more than £50,000 per year from the SME scheme, we would recommend checking the position on an annual basis. The calculation may not be straightforward, so please get in touch with Hollie Thompson if you need further advice on 0191 285 0321 or email hollie.thompson@taitwalker.co.uk.