Yesterday I wrote about the various Government interventions that employers in the UK have had to cope with. My point was that the employer is increasingly being used as the unpaid agent of the welfare state.
Auto-enrolment is one case in point. Employers are expected to comply with detailed rules and threatened with fines for non-compliance. The purpose of the rules is to require employers to pay money on their behalf and on behalf of their staff , into workplace pensions. There is no direct benefit of these pensions to employers, on the face of it , this is an employer tax – an extension of NI.
In his Quinquennial Review of the National Insurance Fund, the Government Actuary made a direct link between the success of auto-enrolment and the strain on Government Finances. He tells us that by 2020, the success of auto-enrolment should allow Government to reduce the benefit of state pensions. So auto-enrolment is a means of reducing public expenditure, a means of taxing people and companies to pay their own pension rather than being dependent on general taxation.
While there is an obvious reason to comply with the auto-enrolment legislation. IT IS THE LAW (as the Pension Regulator is keen to remind us), there is little incentive for an employer to choose the right pension. Unless the business owner is a beneficiary of the auto-enrolment workplace pension , any money spent on ensuring good outcomes from the workplace pension chosen, is altruistic.
Despite this, many employers do choose to spend time and money on getting the right workplace pension for their staff. They should be regarded as heroes by a Government for whom the long-term success of this policy lies not in compliance with auto-enrolment regulations but in the success of the pension schemes in improving living standards.
Put simply, if these workplace pensions don’t work, then national insurance rates will go up.
It would make sense to reward small employers who spend money researching and documenting their research into the workplace pension generations of staff will rely on.
But this voluntary act of due diligence by an employer is not rewarded – it is taxed!
Incredible as it might seem, in the context of the strain being placed on employers, employers are being required to pay VAT on advice and guidance they receive in selecting their workplace pension.
This is despite the purchase of insurance products being zero-rated.
The problem is that whereas advice on pure insurance products (such as fully insured GPPs ) is zero rated, advice on non-insured products including the NEST Master trust, is not exempted.
So any kind of whole of market advice carries a VAT charge of 20%.
For medium sized companies, even for most SMEs, this should not be a problem- they are registered for VAT and can reclaim the VAT they pay. But there are many employers who are recognised as charities who are not able to claim back VAT and many micro and Nano employers whose turnover is below the VAT exempt rate (£68,000) who will have to set up a workplace pension but who will have to pay un reclaimable VAT do it properly.
I have been warning about this problem for some time . The problem is likely to increase as the number of employers being born soars. According to ONS , the number of new businesses borne has exceed those dying each year since 2011, even the ONS cannot get accurate data on how many of the 2.5m business enterprises active last year are VAT registered (they currently have an information request out on this).
This is something that should be addressed by each political party’s election manifesto. We cannot tax small business 20% on an activity which is generating them no money and is effectively subsidising another department of Government (HMRC +DWP).
Each party should consider its position on this and should take steps to ease the business burden of Auto-Enrolment on small and vulnerable employers. This does not mean dumbing AE down (let alone scrapping it for micros as has been mooted in far right circles). It does mean finding a way to let smaller firms buy advice and guidance on their workplace pensions without paying VAT.
I believe that this advice and guidance should be regulated by the Pension Regulator (not at this stage by the FCA) and that the regulation should be proportionate to the needs of this market. That does not mean that SMEs and micros should be regarded as retail consumers, but they should certainly be accepted as a new class of customer which needs a different kind of assistance than the larger employer (for who there is a well established advisory market).
I would be very happy to pick up the phone to any politician or researcher wanting to get help on this. I suspect that if this matter is not looked at now, it will be looked at too late. The rush of employers staging in 2016, need to do their homework in 2015 and we need help on this matter in either the 2015 budget of 2015 autumn statement.
The alternative will be rushed and fudged legislation on the hoof as the problems outlined in this blog hit home.