Could EA exemption be avoided?

The Chartered Institute of Taxation (CIOT) has recently warned that Government plans to exclude one-person businesses from claiming the national insurance Employment Allowance (EA) from April 2016 will be too easy to dodge.

The Institute says that the planned curbs are easily avoided, either by appointing another director, such as a spouse, civil partner, other family member or friend, and paying that person a token wage; or by arranging payments of earnings so that the worker is not a director when at least one of the payments is made. The CIOT suggests that the legislation should include a connected persons test to prevent any limited company where there are two directors who are connected persons, and no other employees, from benefiting from EA.

There is another possible problem with the Government’s proposal, which relates to how payments are made. The CIOT believes 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 Employment Allowance. That former director could then even go as far as getting themselves re-appointed as director of the same company.

No doubt the Government will wish to address these potential issues and further clarification can be expected in due course.

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