Not for the first time, I’m very grateful to Kate Upcraft for highlighting a pensions issue that impacts thousands of carers – but appears to be completely off the radar of most pension people.

Kate is a freelance payroll consultant who does work for the ICAEW and is relied upon by thousands of accountants and payroll officers for information on and interpretation of, HMRC rulings on pay.

This article is mainly Kate’s and first appeared in Accounting Web

The Social Care Compliance Scheme

On 1^st November 2017, HMRC launched the Social Care Compliance Scheme (SCCS) so that employers who had not paid for sleep-in shifts at the appropriate hourly rate of national minimum wage could opt-in to the scheme,  limit non-payment penalties and avoid naming and shaming. Those who don’t join the SCCS will face penalties for any non-payment periods from 26^th July 2017 and will be named and shamed if those penalties exceed £100.

HMRC‘s policy on NMW compliance can be found here – section 3.10 refers to the SCCS.

What’s the “sleep-in issue”.

The sleep-in issue is this.  Social care providers had understood from New Minimum Wage (NMW) guidance (pre-2015) that a flat rate could be paid for “sleep-ins” as the employee was not working.

A re-interpretation of the Minimum Wage regulations has led HMRC compliance teams to revisit the social care sector and require that sleep-in hours are paid at national minimum wage (as the individual cannot leave the premises and as such is ‘working’).

Many providers moved to remunerate sleep-ins at NMW rates from April 2017 (and received local authority/personal funding to accommodate this) but the issue is the six years of NMW arrears.

The problem is, sleep-ins were not funded by local authorities at NMW rates and the providers now have to pay these amounts and cannot recover them. Mencap is one of the large care providers who have mounted a legal challenge to the funding of arrears.

Their arrears bill alone is £20m with the sector in total due to pay £400m which is expected to lead to many organisations becoming insolvent.

The Mencap appeal against the decision that arrears must be funded by them was heard in March, but the decision has not yet been published. Despite this, HMRC have now started to write to employers about the implementation of the SCCS.

What does the SCCS cover?

The SCCS covers all social care employers from individuals employing their own carer to large social care businesses. It is understood around 650 employers have joined the scheme, which gives them a year to work with HMRC to identify any arrears. Employers  must make the payments within a three-month period after agreement is reached on the arrears due.

However all arrears must be paid by 31 March 2019 regardless of when an employer joins the SCCS.

The contact from HMRC will explain to employers who have registered for the SCCS how the arrears are to be reported for tax and NI purposes – and crucially the impact on pension contributions (see below).

How are the arrears treated for Tax and NI?

The arrears are treated for tax and Ni differently:

1. For tax the liability on a payment of arrears arises in the tax year that the employee was originally entitled to be paid
2. For National Insurance the liability will depend entirely upon the period when earnings are paid rather than earned

How will the tax arrears be handled?

To handle the tax arrears HMRC have established an Alternative PAYE Arrangement (APA).

The APA for SCCS participants, allows employers to calculate tax at 20% on the arrears, for 2017/18 and any earlier years, without reference to the allowances or tax code for the years concerned

It allows employers to report this on a spreadsheet rather than accurately reporting (or attempting to report!) the arrears via an earlier year update (EYU).

Given the unpredictability of the EYU process – coupled with the fact that many payroll software products don’t support it  (meaning it has to be accessed via Basic PAYE tools) – it makes absolute sense for SCCS participants to use the APA.

Employers who choose not to use the APA should  be mindful that the submission of any EYU will lead to the charging of interest on the underpayment.

To make the tax payment to HMRC a specific reference number will be issued to the employer that should be attached to the payment to direct it to the appropriate spreadsheet derived tax value.

Adjustments to NI’able pay

Adjustments to Ni’able pay (but not taxable pay) and the ensuing employer and employee NI contributions must be reported on a full payment submission (FPS) at the point that the arrears are paid.

As this is pay subject to employer’s national insurance it also incurs apprenticeship levy that will be reported on Employer Payment Summary (EPS) in the same month and also student loan deductions.

Ex-employees who are being set up on the payroll system simply for the purpose of reporting Ni’able pay should be allocated the NI table letter that is appropriate to their current personal circumstances, and allocated tax code NT even though this is regarded as a payment after leaving that would normally trigger tax code 0T/1.

What all this means for employee and ex-employee pensions.

The pack being issued by HMRC also includes a template letter explaining to employees about the payment of arrears and guidance from the Pension Regulator. This is the first time that a large arrears exercise has taken place since auto-enrolment started in July 2012.

This exercise will require employers to consider if the employee would have been an eligible jobholder if the NMW arrears had been paid at the appropriate time. For those employees who were pension scheme members anyway, employers will need to work out  what adjustments to the employer and employee pension contributions  need to be made for every pay period for the last six years!

For individual care and support employers this could even mean establishing a pension scheme for the first time.

It’s fair to say that the auto-enrolment implications of these NMW arrears are incredibly complex, given they are also payable to ex-employees and to current employees who are no longer pension scheme members.

The Regulator has made one concession; it concedes that pension contributions on any sleep-in arrears can be paid at the rates that were applicable at the time the monies should have been paid, not at the current contribution rates.

There won’t even be pension tax relief available for contributions for  ex-employees unless they happen to be with the same pension provider at their new employer as they were at their employer that is paying them the sleep-in arrears.

Kate is a technical writer, editor and lecturer on all aspects of employing people – primarily payroll and HR matters.