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Peter Arrowsmith FCA comments on the NIC Holiday Scheme announced in the Budget on 22 June 2010.

Introduction

At lunchtime of 27 August 2010, HM Revenue and Customs made available more details of the NIC Holiday scheme announced on 22 June. In particular it WILL commence on 6 September (that's a week on Monday). Please accept my apologies for any reduction, in what follows, in the usual high level of spelling and grammatical accuracy.

There will be further guidance and forms made available next week, but today's initial information is available at Regional Employer National Insurance contributions Holiday for New Businesses - Technical Note, Draft Legislation and Explanatory Notes

Key Points

Stand-out points in addition to the basics that we were told in June are as follows -

The legislation is not expected to receive Royal Assent until 'early 2011' so if the coalition falls apart and the NIC Holiday is never, in the end, enacted then any relief already obtained will be repayable as extra Class 1 National Insurance contributions by 19 April 2011.

There are anti-avoidance rules as to the meaning of a new business. A business that is already claiming relief, which is then taken over or sold will cease to be eligible immediately.

Geographical Eligibility

The geographical areas have been confirmed. For example the 'Eastern Region' does not include my own Northamptonshire, but does include Bedfordshire (about two miles down the road as I sit here typing this update). It still surprises me that the remoter parts of Norfolk - to take just one example - are considered to be beneficiaries of government employment - and so excluded - and are considered to be less deserving than, say, Cheshire and Gloucestershire which include some very successful areas even in these difficult times.

Geographical eligibility will depend on where the principal place of business is. Where there is more than one such place, you look at the where the greater part of the business is carried on. If not in an excluded region then all employees - including those working wholly in an excluded region - potentially qualify. But this seemingly generous treatment works to disadvantage in reverse.

Other Factors Affecting Eligibility

Businesses that commenced on and after 22 June 2010 can take the Holiday for up to 12 months' contributions from 6 September 2010, in respect of the first ten employees taken on in the first year beginning from the actual day that trading commenced.

In the case of companies, directors count in the maximum of ten.

Only trading, professional, vocational, etc., organisations (including charities carrying on a trade - but why would they?) qualify. So, for example, householders taking on domestic staff for the first time will not qualify. And public bodies will not qualify.

State Aid

The Holiday is to be administered as 'de minimis' State Aid and so some businesses will have their entitlement reduced. The coal industry is completely excluded. And there will be a reduction on the NIC Holiday relief available where a business has already received some other form of EC de minimis State Aid - this would be difficult to achieve (though not impossible), however, since only new businesses can qualify in the first place. There are financial limits for the agriculture, fisheries, aquaculture and road transport sectors - see page 11 of the abovementioned guidance.

Managed Service Companies / IR35

In addition, managed service companies cannot benefit - nor can IR35 companies as regards 'deemed payments'. Any regular salary paid month-by-month by an IR35 company would, however, be eligible for relief.

Employee Leaves

If an employee leaves, his replacement does not qualify if ten employees are already in place. If the employee is re-employed (whether or not the full ten employees are in place by then) the Holiday for that employee continues up to the original end-date or until the £5,000 maximum relief is obtained for that employee.

Further Points

Where - perhaps unusually for a new business - National Insurance contributions are due at the contracted-out rate, the Holiday entitlement is to a reduction of the full, not contracted-out contributions that would have been due on the same earnings.

The relief applies only to Class 1 contributions - not to Class 1A nor Class 1B.

New businesses in the EU can potentially qualify where they send workers to the UK (and outside the excluded areas) in circumstances where a UK contributions liability exists.

Application and Reporting

Relief is not compulsory and businesses will need to apply (form to be available next week). In addition, records of the employees concerned, their earnings and contributions - amongst other details - will need to be retained. There will be a separate NIC Holiday end-of-year return as at each 5 April. This will enable HM Revenue and Customs to avoid picking up the Holiday relief obtained as what would otherwise appear to be an underpayment on the P35. Given past performance, it remains to be seen of course whether their computers and their application thereof will be successful in meeting this stated objective.

The above is taken from 'NIC Newsletter' (27/08/2010), and is reproduced with the kind permission of Peter Arrowsmith FCA, who retains the copyright.