One-person company NI relief ban 'open to abuse'

George Osborne’s attempt to block one-person businesses from claiming the National Insurance Employment Allowance is going to be “too easy to dodge,” tax experts warn.

Under the chancellor’s July Budget, limited companies whose sole employee is the director will lose the EA - which has the effect of cutting the company’s NI bill - from April.

But the planned removal will be easily avoided using one of two workarounds. Firstly, by appointing another director, such as a friend or spouse and paying that person a token wage.

Or secondly, by the company arranging payments of earnings so that the worker is not a director when at least one of the payments is made, says the Chartered Institute of Taxation.

The result, regardless of which workaround is put in place, will be an “ineffective [attempt] in significantly reducing Employment Allowance claims,” the institute said, adding.

“[Only] single-director-employee limited companies that are unable to, or do not know that they could, appoint another person as director or employee” will be penalised.

The solution is for a ‘connected persons’ test to be put into the legislation, which threatens to stop 150,000 one-man bands from claiming relief of up to £2,000 (rising to £3,000 this year).

The CIOT says the test would stop a limited company with two directors who are connected (such as a spouse or relative), and no other employees, from benefiting from the EA.

However there is another potential loophole in the government’s proposal and it relates to how payments are made, warns CIOT tax policy director John Cullinane.

“The exclusion is also open to abuse in that making a single payment after the director has resigned would seem to enable the company to escape the exclusion and hence qualify for [the] EA,” he said. “That former director could then even go as far as getting themselves re-appointed as director of the same company.‎”

Editor’s Note: Related Reading –

Summer Budget 2015 hits PSC contractors, hard

National Insurance – a contractor’s guide

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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