The Government has today written to the Low Pay Commission (LPC) setting out the remit for their 2011 Report.

As with previous years the LPC will monitor, evaluate and review the National Minimum Wage (NMW) and its impact, and review the levels of each of the different minimum wage rates.

This year the LPC is also asked to pay particular attention to:

• the competitiveness of small firms; and
• the employment prospects of young people, including those in apprenticeships and internships.

The LPC will report to the Prime Minister and the Secretary of State for Business, Innovation and Skills by the end of February 2011, with their recommendations for October 2011.

The Government has also today announced its response to the recommendations in the LPC’s 2010 report and laid regulations to bring these into force.

The new rates, which will come into effect on 1 October 2010 will be:

• £5.93 per hour for low paid workers aged 21 and over, increased from  £5.80;
• £4.92 per hour for 18-20 year olds, increased from £4.83; and
• £3.64 per hour for 16-17 year olds, increased from £3.57.

For the first time there will also be an apprentice minimum wage of £2.50 per hour.  The new rate will apply to those apprentices who are under 19 or those that are aged 19 and over but in the first year of their apprenticeship.

Employment Relations Minister Edward Davey said:

“The increases to the National Minimum Wage this year are appropriate for the economic climate. They will strike a balance between helping the lowest paid whilst at the same time not jeopardising their employment.

“The Low Pay Commission estimates that around 970,000 people stand to benefit from these increases.

“Workers on the National Minimum Wage are disproportionately likely to be employed by small firms and so it is right the Low Pay Commission considers their competitiveness when they make their recommendations for next year. SMEs will be vital to our economic recovery”.

Notes for editors

1. The Low Pay Commission was established following the National Minimum Wage Act 1998 to advise the Government about the National Minimum Wage. Commissioners have backgrounds in business, trades unions and academic labour relations. For more details, and copies of the full report, see http://www.lowpay.gov.uk/

2. When the minimum wage was launched in 1999, the main rate was £3.60.

3. The LPC makes recommendations to the Government in its annual report. In addition to the rate increases, the Government has accepted the recommendations that:

• there should be a single apprentice minimum wage rate of £2.50 per hour for those apprentices currently exempt from the National Minimum Wage;
• there should be specific guidance on the National Minimum Wage for the entertainment sector; and
• that HMRC investigates whether contract and agency cleaners in the hotel sector are receiving their entitlement under the National Minimum Wage for their hours worked.

4. The Government notes the Commission’s recommendation that there should be a commitment, as a minimum, to maintaining current funding in real terms for monitoring and enforcement of the National Minimum Wage until at least March 2014.

5. The accommodation offset will rise from £4.51 per day to £4.61.

6. The Pay and Work Rights helpline number is 0800 917 2368. As well as receiving and investigating complaints about non-payment of the minimum wage, the helpline offers advice and information in more than 100 languages.

7. The Low Pay Commission estimates that just over 950,000 people stand to benefit from the increase.

8. The remit for the Low Pay Commission’s 2011 report is to:

Monitor, evaluate and review the NMW and its impact, with particular reference to:

• the effect on pay, employment and competitiveness in the low paying sectors, with particular reference to the competitiveness of small firms;
• the effect on the pay structures and employment of different groups of workers, including in particular different age groups, women, ethnic minorities, people with disabilities and migrant workers.

Review the labour market position of young people, including those in apprenticeships and internships.

Review the levels of each of the different minimum wage rates and make recommendations for October 2011.

Review the arrangements for the apprentice minimum wage.

Report to the Prime Minister and the Secretary of State for Business, Innovation and Skills by the end of February 2011.

Using trusts & similar entities to reward employees – PAYE (Pay As You Earn) and National Insurance contributions (NICs), Corporation Tax and Inheritance Tax

HMRC is aware that some companies have been seeking to reward employees without operating PAYE/NICs by making payments through trusts and other intermediaries that favour the employees or their families. The arrangements usually seek to secure a Corporation Tax deduction, as if the amounts were earnings at the time they are allocated, and also defer PAYE/NICs or avoid them altogether. Our view is that at the time the funds are allocated to the employee or his/her beneficiaries, those funds become earnings on which PAYE and NICs are due and should be accounted for by the employer.

In addition our view is that an Inheritance Tax charge may arise on the participators of a close company. Unless the participators are excluded beneficiaries and have not had funds applied for their benefit, such as the receipt of a loan, a charge to Inheritance Tax arises on participators of close companies at the time the funds are paid to the trustee by the close company. Relief is only available to the extent that a deduction is allowable to the company for the year in which the contribution is made. Later payments of earnings out of the trust that may trigger a deduction to the company would not qualify for relief.

Participators affected by this may need to self-assess a liability to Inheritance Tax. There is further technical advice on Inheritance Tax on Contributions to Employee Benefit Trusts on the HMRC Internet site.

Avoidance of Corporation Tax

HMRC is aware of schemes where companies claim a Corporation Tax deduction for employer contributions to an EFRBS scheme on the basis that either (a) the contribution to the EFRBS or (b) a subsequent transfer to a second EFRBS is a ‘qualifying benefit’. This would allow the company to secure a Corporation Tax deduction before any benefits are actually paid by the scheme to the employee. Our view is that neither transaction involves the provision of a ‘qualifying benefit’. Whilst it has been argued that there may be some ambiguity in the law around the meaning of the phrase ‘transfer of assets’ since it does not state to whom the transfer is to be made, in our view the context resolves any ambiguity. The law defines ‘qualifying benefits’ and such benefits are plainly, from the context, benefits that if paid under the terms of an EFRBS might fall within the employment income charge. So in that context, a ‘transfer of assets’ should be interpreted as a transfer that could give rise to such a charge. This will primarily mean a transfer of assets to the employee but also includes a transfer to a member of the employee’s family. Neither an employer contribution to an EFRBS nor a transfer between EFRBS gives rise to a possible employment income tax charge on the employee. So there is no ‘qualifying benefit’ entitling the employer to a deduction.

Avoidance using Gift Aid (6 January 2010)

We are aware of schemes that seek to generate Gift Aid and Gift of Shares tax relief claims. A cash donation to a nominated charity is required and in return shares are received from an unnamed non UK ‘philanthropist’. These shares are claimed to be worth up to eight times the amount of the cash donation and are in companies listed on a stock exchange that is not recognised by HMRC, for example The Open Market of The Frankfurt Stock Exchange. The scheme anticipates that the shares will be donated to the nominated charity.

There is also strong evidence that these schemes have links to share scams such as ‘boiler rooms’. They usually involve a high level of upfront ‘fee’, paid to the scheme promoters, which is concealed within the original cash ‘donation’ given to the charity.

HMRC’s view is that no Gift Aid is due on the cash donation because the donor receives a benefit (the shares) that is in excess of the donation. HMRC also consider that no Gift of Shares relief is due because the requirement that the shares are listed on a stock exchange recognised by HMRC is not met.

Investments to obtain trade loss reliefs (‘sideways loss relief’) (8 February 2010)

HMRC are aware of schemes seeking to exploit sideways loss relief by generating trade losses for individuals. Typically, a large loss is generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure. Often these schemes are funded in part by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC’s view is that these schemes fail to meet the commercial and other fundamental requirements for sideways loss relief so that no relief is available to the participants.

In addition to not meeting the fundamental requirements for sideways loss relief, HMRC’s view is that individuals participating in these schemes also do not meet the requirement that at least ten hours a week are spent personally engaged in commercial activities of the trade carried on with a view to earning profits from those activities. HMRC’s view is that the activities which these schemes claim are sufficient to meet the test, for example reading scripts or medical journals, watching TV or DVDs etc, are not undertaken on a commercial basis with a view to profit with the result that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.

For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability.

Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief HMRC will actively challenge these arrangements and the activities of individual participants and litigate, if necessary. HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases. For further and more detailed information on this “Spotlight” article please go to http://www.hmrc.gov.uk/avoidance/spotlights.htm

Gift Aid with no real gift (29 March 2010)

An avoidance scheme exploiting the Gift Aid provisions has recently been disclosed to us. The scheme seeks to exploit the rules which enable a charity to claim a repayment of tax at the basic rate on a qualifying donation by an individual. The individual may claim relief for the donation on the difference between the higher and basic rates of tax.

The scheme depends upon a circular series of payments. It starts with the charity purchasing, say, gilts of £100,000, which pass through a third party to an individual taxpayer for perhaps £10. The taxpayer is expected to make a sale for £100,000 and pass the money to the charity. There is an option that ensures the gilts will be returned to the charity if it does not receive a cash gift of £100,000 within one or two days.

HMRC do not accept that the charity is entitled to a repayment of tax or that Gift Aid relief is due to the individual. In our view a gift has not been made to the charity as it is no better off than before entering the arrangements. Therefore Gift Aid is not due. For further and more detailed information on this “Spotlight” article please go to http://www.hmrc.gov.uk/avoidance/spotlights.htm

Stamp Duty Land Tax avoidance (7 June 2010)

Commercial and residential property sales are being carried out in ways intended to avoid Stamp Duty Land Tax (SDLT) by reducing the purchase price below the SDLT band or threshold. In some cases an intermediate sale, often on the same day, is introduced into the arrangements with the sole intention of removing the true purchase price from tax. These arrangements seek to exploit ‘sub sale relief’. This relief is intended to ensure that, where a property transaction happens in stages, SDLT is paid once on the full amount paid for the property by the person who ultimately acquires it and no double charge arises.

HMRC’s view is that these contrived transactions, including those involving sub sales, produce a charge to SDLT on the full amount paid for the property. In some cases there is doubt about whether transactions actually meet the conditions for the sub sale relief. Even if they do, anti-avoidance legislation effective from December 2006 counters any arrangements seeking to depress or avoid the tax on the full amount paid for the property, including those seeking to exploit sub sale relief.

Where HMRC find property sale arrangements that have been artificially structured to avoid paying the correct amount of SDLT these will be actively challenged, through the courts where appropriate.

For further and more detailed information on this “Spotlight” article please go to http://www.hmrc.gov.uk/avoidance/spotlights.htm

Contractors could be set to benefit from forthcoming cuts in the public sector, it has been suggested.

It is thought that the imminent changes could lead many organisations to up their demand for contract and freelance workers.

According to latest JobsOutlook study by the Recruitment and Employment Confederation (REC), flexible working methods could realistically be one of the measures implemented by the public sector to offset spending cuts imposed upon it.

With programmes likely to undergo significant change within the public sector over the coming months, director of research at the REC, Roger Tweedy, points out that contractors could benefit from the situation.

“There are increasingly positive signs of a gradual upturn in employers’ hiring intentions, probably linked to greater post-election stability,” he remarked.

Mr Tweedy added that the coalition government’s pledge to create more jobs is also boosting confidence in the recruitment sector.

It supports recent comments made by Kevin Green, the chief executive of the REC, who noted that contractors will be integral to the delivery of key frontline public services when spending cuts are imposed.

Contractor News, 17th June, 2010

The Recruitment and Employment Confederation (REC) has said the government should be wary of reducing contractors part of spending cuts.

It was recently announced that the government intends to cut spending in the public sector by some £6 million in the coming year.

The plans have been endorsed by the Governor of the Bank of England Mervyn King, who welcomed the move as an ongoing commitment to addressing the national deficit.

However, the REC said contractors and freelance workers are crucial to the current economy and reducing their number could prove damaging.

The group stated that the economy is still in a state of recovery, noting that contractors are an integral part of many companies.

REC’s director of external relations, Tom Hadley, said such workers are hired with careful consideration and should not be dismissed.

“The need to reduce public expenditure is a given, but knee-jerk cuts would result in an unravelling of front line services and put more stress on our fragile jobs market,” he remarked.

Mr Hadley acknowledged that agency budgets will inevitably come under scrutiny, but urged the government to avoid “pre-conceived ideas” about the dispensability of contract and freelance workers.

Contractor News, 31st May, 2010

Contractors are increasingly being called upon to fill gaps created by the economic downturn, according to new research.

Many companies have downsized their permanent workforce in an effort to offset the effects of the recession, which has led to a surge in demand for contractors and freelance workers.

According to the JobsOutlook survey carried out by the Employment Confederation (REC), around 88 per cent of companies are intending to either maintain or increase the number of contract workers they are using.

The figure has risen by two per cent compared to last month, suggesting demand for contractors may continue to rise.

Roger Tweedy, the REC’s director of research, said many companies believe employing contractors is the most effective way to bridge gaps until requirements for permanent staff are decided upon.

“The new government should now be focusing first and foremost on delivering the right economic conditions for employers to continue building their permanent workforces,” he said.

Recent research conducted by YouGov revealed there are now five million people self-employed people in the UK, an increase of 1.2 million over the last two years.

Contractor News, 13th May, 2010