Yesterday saw the formal launch of the Regional National Insurance Contribution (NIC) holiday for businesses started between 22 June 2010 and 5 September 2013.
This tax incentive announced in the June 2010 Emergency Budget allows for a 12 month break from paying employer’s national insurance contributions (currently 12.8% going up to 13.8% from 5 April 2011) on the first 10 employees.
The relief is limited to £5,000 per employee (so £50,000 in total) although it is difficult to foresee in practice how the majority of startup businesses will obtain full benefit for this relief given that new recruits would have to be paid approx £45,000 each to trigger a £50,000 employer’s national insurance liability?
It’s a welcome tax saving all the same to encourage new business start-ups (particularly in the North West), although there are plenty of points to watch – here are just a handful:
NIC holiday points to watch:
- You must apply for relief under this scheme – it is not an automatic entitlement. You can apply in paper or online.
- Business start-ups qualify for the first 10 employees recruited during the initial 12 month period. The “initial period” begins on the day the new business commences trading or the date on which the first employee is recruited, whichever is earlier – this cannot be before 22 June 2010.
- Each qualifying new employee receives a 12 month “holiday” provided this period does not cross the 6 September 2013 end date.
- ‘Principal place of business’ determines whether your startup qualifies for the relief. Certain geographical areas do not qualify (mainly London and South East) but you can foresee situations where this may not be clear (even though the guidance suggests otherwise) – there is, however, a Region Finder search tool available to assist. For example, those tech businesses that are primarily online or virtual, HMRC will look to where your books, records and equipment are kept. For those that seem to be split fairly evenly between UK locations, then HMRC will look to where the head office is as a key indicator of location.
- In addition to sole traders, partnerships and companies, property investment businesses and charities are also included as qualifying. Managed service or IR35 income companies do not qualify.
- Employer’s Class 1 national insurance contributions can only be withheld from the date of official launch i.e. 6 September 2010. Businesses started before this date cannot claim relief from employer’s national insurance until post 5 September 2010.
- Those new employees paid less than the employer’s national insurance threshold (currently £110 per week) still count toward the 10 employees even if there is no monetary saving for the new business. Similarly, part-time and casual staff individually count for the 10 employees limit – this provides an opportunity for planning with respect to the order of recruits i.e. ideally recruit senior / management team first (the Business Link guidance specifically states that if more than 10 employees join at once then you are free to choose which ones count toward the 10 employee limit).
- Anti-avoidance legislation is in place to prevent existing businesses from ceasing and restarting substantially the same activities within 6 months to take advantage of the scheme.
- Class 1A NIC on benefits in kind are unaffected as are the normal monthly employee NIC deductions which must be paid over in the normal way.
- You must retain the letter or email from HMRC that authorises you to operate the NIC holiday scheme.
- The NIC holiday scheme is not yet law. The relevant law should be passed around January 2011 so businesses have a choice – either apply now and risk banking the savings (if the law is not passed the employer’s NIC will be due and payable on 19 April 2011) or wait until the law is passed and apply for a refund for the intervening period
HMRC have prepared a flexible form to help calculate and monitor the amount available to withhold under this scheme.
So what appeared to be a straightforward initiative to promote much needed UK startups proves to be a little more tricky in practice although, with a little advance planning, this incentive should provide at least some tax cash savings for new businesses during their tricky first year of trading.
The above information is for educational and entertainment purposes only. It does not constitute professional advice. Please seek advice specific to your circumstances and particular facts. You can contact me if in doubt.