Statutory Maternity Pay: High Salary in Relevant Earnings Period

[minstrel]

I'm investigating maternity pay for Ltd company with 1 female Director.

Director has been employed by her limited for 26 weeks prior to 15th week before baby is due and normally extracts money via low salary (£7kish) plus dividend.

My understanding is this means that she qualifies for Statutory Maternity Pay (SMP) which is 90% of her Average Weekly Earnings (AWE) for first 6 weeks and then £135.45 for remaining 33 weeks.

AWE is calculated as the average weekly pay over 8 weeks prior to 15th week before baby is due.

100% of SMP costs (plus 3% for Employers National Insurance) will be paid by HMRC and can be claimed in advance by Ltd.

What is to stop the Director paying herself a very high amount in the AWE qualifying period e.g. £2k per week and then using that to get a payout from HMRC of (6 * £2k) + (33 * £135.45) = £16.5k?

There will be additional NI and tax to pay on the £32k of salary paid, but this will be covered by the £16.5k refunded by HMRC.

I would have thought there is probably some rule to stop this tactic, but I can't see anything.

Can anyone point me to a reason why this would not work?

[northernladuk]

Any of these help?

maternity pay site:forums.contractoruk.com/accounting-legal - Google Search

[minstrel]

Any of these help?

maternity pay site:forums.contractoruk.com/accounting-legal - Google Search

Thanks NLUK. Apologies for asking something that has been covered a few times already.

I did try using the forum search, but it didn't bring back anything useful. I'll use Google in future.

This post is probably most useful, but it isn't totally clear whether it is allowed or not.

I will be speaking to accountant, but if anyone has any experiences of paying a very high bonus in the qualifying period and subsequently getting reprimanded/fined by HMRC, I'd be interested to hear.

[Clare@InTouch]

This thread has almost exactly the same question, with some interesting answers that you may find useful:

Artificially increasing pay for SMP | AccountingWEB

[northernladuk]

This thread has almost exactly the same question, with some interesting answers that you may find useful:

Artificially increasing pay for SMP | AccountingWEB

Gosh, they get a bit worked up on there as well LOL....

Interesting comment about this being a little obvious now we have RTI though.

It appears no one is arguing that it won't work but is it aggresive avoidance that is going to land you in trouble is the question.

[Clare@InTouch]

Gosh, they get a bit worked up on there as well LOL....

Interesting comment about this being a little obvious now we have RTI though.

It can get a bit handbaggy on there sometimes

Interesting that a few seem to think it's effectively fraud though, and that it's no different to making a false claim for housing benefit. I can see that point of view.

It's worth remembering too that the "extra" will only be the first 6 weeks, the remaining 33 would be paid anyway. So the gain really isn't that much, considering the potential risks of being had for benefit fraud.

[Clare@InTouch]

I think you may be stumped anyway, even if it's not deemed to be fraud. Check out page 47 and 48 here, which not only requires formal minutes to prove the vote on a director's salary, but also requires you to average out the salary over a whole year (page 48). Thus meaning you cannot increase for just a couple of months and get any gain.

http://www.hmrc.gov.uk/helpsheets/e15.pdf

[minstrel]

I think you may be stumped anyway, even if it's not deemed to be fraud. Check out page 47 and 48 here, which not only requires formal minutes to prove the vote on a director's salary, but also requires you to average out the salary over a whole year (page 48). Thus meaning you cannot increase for just a couple of months and get any gain.

http://www.hmrc.gov.uk/helpsheets/e15.pdf

The section you are referring to appears to be for companies incorporated before 1 October 2009 which doesn't apply in my case.

The relevant section for post 1 October 2009 companies is:

Companies incorporated after 1 October 2009
There are new regulations for companies incorporated after 1 October 2009.
They provide new Articles of Association for these companies and will:
• apply by default if other Articles are not adopted. • allow its directors to determine a director’s remuneration — Directors can decide what and when to pay remuneration. There is no need for a resolution of the company’s shareholders at its Annual General Meeting (AGM). — In such cases payment of a director’s fees will be regarded as earnings for the purpose of entitlement to SSP/SMP/SAP/OSPP/ASPP on the date payment was made.

And even if it is a pre 1 October 2009 company, there is nothing to say a formal vote could not be made to award a Director a bonus in a given month which coincides with the relevant period. Or articles could be changed to the post 1 October 2009 version.

[Clare@InTouch]

The section you are referring to appears to be for companies incorporated before 1 October 2009 which doesn't apply in my case.

The relevant section for post 1 October 2009 companies is:



And even if it is a pre 1 October 2009 company, there is nothing to say a formal vote could not be made to award a Director a bonus in a given month which coincides with the relevant period. Or articles could be changed to the post 1 October 2009 version.

Formal vote aside, which doesn't mean a thing for a small one-person company anyway as it's just a paper exercise, it's the calculation on page 48 that matters.

[minstrel]

Formal vote aside, which doesn't mean a thing for a small one-person company anyway as it's just a paper exercise, it's the calculation on page 48 that matters.

Yes and the calculation on page 48 is based on actual money paid in the relevant period which could be disproportionately more than what was paid during the rest of the year.

Paid by a determination of the directors (not a formal vote)
Calculate their AWE by using the checksheet on page 48 for directors paid by a formal vote, but use the date monies were paid instead of the date of the shareholders’ resolution at the Annual General Meeting (AGM).

I agree that it aggressive, but I still can't see anything to say it's not allowed.

I don't understand why the legislation didn't define AWE as the average weekly earnings in the 26 weeks before the qualifying date.

That would seem much fairer and less open to abuse.