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Employment Allowance restrictions can be circumvented

By Qdos Contractor

Qdos Contractor

Institute of Taxation warns that excluding PSC’s may not work

As from April of this year the NIC Employment Allowance will be withdrawn for one-person businesses but the Chartered Institute of Taxation (CIOT) has warned that this will be easy to get around.

The rationale for excluding limited companies where the director is the sole employee was that the allowance was to be focused on those businesses that support employment. It is estimated that around 150,000 single director limited companies will be affected by this measure.

The allowance which enables businesses to reduce their employers’ NIC by £2,000 each tax year (£3,000 from 06.04.16) will still be able to be claimed, says the CIOT, by appointing another director, such as a spouse, civil partner, other family member or friend, and paying that person a piecemeal 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.”

Another potential problem envisaged by the CIOT is the way payments are made. A single payment after the director has resigned would appear to permit the company to avoid the exclusion and therefore qualify for the Employment Allowance. The outgoing director could then even have themselves re-appointed as director of the same company.

Published February 2016