National Minimum Wage

By Gareth Hills, Chartered Tax Advisor, South West & Wales

We’ve seen that employers are increasingly focusing on the risk around whether or not they comply with the National Minimum (NMW) / National Living Wage (NLW) legislation. This is being prompted by media coverage and increasing HMRC activity.

HMRC, which is responsible for NMW compliance, has significantly stepped up its compliance activity following an increase in their enforcement budget from £13m in 2015/16 to £25.3m in 2017/18.

Alongside this, employees are becoming more aware of their rights under the NMW legislation, reflected by a significant increase in the number of NMW underpayment reports received by HMRC. We are aware of at least one case where a report has led HMRC to launch an NMW compliance review at the employer in question, even though it turned out that the actual complaint was found to have no basis.

In this current climate, as an employer you really need to be clear on what your NMW obligations are and ensure that you are comfortable you are meeting those obligations, so you don’t put yourself at risk and so your employees are not disadvantaged.

The implications of HMRC identifying non-compliance can be significant. In addition to the financial cost of repaying historical underpayments to your employees, the administrative burden of identifying and calculating liabilities dating back six years, and the associated penalties which HMRC can, and do, charge - up to 200% of the underpayment limited to £20,000 per employee - along with perhaps being “named and shamed” for an NMW underpayment could have an adverse impact on your organisation’s reputation.

The Department for Business, Energy & Industrial Strategy (BEIS) periodically publishes a list of organisations with the most significant NMW underpayments - the most recent list was published on 9 March.  We’ve seen that some media outlets have been quick to note some big name employers which have appeared on this s0-called “name and shame” list.

Getting it right

It’s often the case that many employers who fail to meet their NMW obligations do so not because of any malicious intent to underpay their employees, but through misapplication of the complex rules which govern NMW. For example, the legislation is very prescriptive in terms of what can and cannot be included in an employee’s pay that counts towards NMW purposes and what deductions can be taken from employees without impacting their NMW. The legislation often produces some interesting outcomes which can take employers and employees by surprise.

In our experience, HMRC adopts a very strict interpretation of the legislation and so an important first step towards ensuring your organisation is compliant is to make sure that you understand the rules and are completely clear on its practical application to your workforce.

The next step is to ensure your internal controls and processes allow your organisation to effectively meet its obligations. Any remedial action required should be taken as soon as possible.

Undertaking this proactive self-review will give your organisation a much greater level of assurance should HMRC look into your NMW compliance, or should your employees challenge their pay. We believe the recent increase in NMW/NLW rates provides an ideal opportunity to start this self-review.

HMRC’s compliance activity

HMRC’s compliance activity is being carried out across the UK: 260 employers were named on the BEIS list published in December 2017, and 179 further employers were on the most recent list they published in March 2018.

There appears to be greater incidence of identified NMW underpayment in certain sectors as compared to others. For example, half of the employers on the most recent list operated in the hospitality, hairdressing, retail or social care sectors, and around 62% of workers who were underpaid were employed in the hospitality sector.

The South West and Wales are not immune from this with 62 local businesses appearing across the two most recent “name and shame” lists, of which just under a third were Welsh employers.

In our experience, HMRC are also prioritising certain sectors over others in their compliance activity, particularly those with larger populations of lower-paid employees. We’ve already highlighted some pitfalls with NMW compliance for social care organisations. You can read more in our article here.

However, we are also aware of other employers outside of these supposed at-risk industry sectors that have received visits from HMRC. Accordingly, HMRC’s activity is not exclusively focused on certain sectors and any employer can potentially find itself on the receiving end of a review.  That’s why it’s worthwhile reviewing your own organisation’s processes.

How we can help

If you have current concerns about your organisation’s NMW compliance, or you would like the opportunity to discuss this area further, be assured we have specialists that can help. We assist organisations in a variety of ways.  For example, this could include either:

  • Proactive steps, i.e. reviewing NMW compliance processes, undertaking remedial activity etc.; or
  • Reactive steps, i.e. providing you with support in preparing for an upcoming HMRC review, or where HMRC have already started that review.

Please do not hesitate to get in touch with me or, of course, your usual Deloitte contact should you wish to find out more.

Gareth Hills

Gareth Hills, Tax Consultant, South West & Wales

Gareth Hills is a chartered tax advisor working in the Deloitte South West and Wales employment tax team. He has experience advising a large range of organisations, of varying sizes, across the public and private sectors.

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