HMRC is cracking down on National Minimum Wage (NMW) noncompliance among SMEs. In a recent statement, Azets UK said that SMEs in 11 UK cities and regions – including Belfast, Liverpool, East Anglia, Watford and the North East – are being “specifically targeted”.

Azets Head of National Minimum Wage and ICAEW member Kyle Newton warns that the crackdown is typically adding a new region every few months. In Newton’s assessment, maintaining compliance with NMW is “commonly misunderstood”. Rather than simply hinging on an hourly rate of £11.44, it works across five core pillars.

“It’s a game of dominoes,” Newton says. “If one pillar falls down, the rest go with it. So if you don’t have firm foundations for all of them, you won’t be able to comply.”

The pillars

1) Worker type

There are four worker categories: salaried, time-based, output-based and unmeasured. The category determines how to perform the NMW calculation. For example, with salaried workers, the calculation year is different for each employee and based on when they started working for their employer.

2) Working time

Unlike the other worker types, salaried staff have excess-hours rules. “Take someone who’s on a contract of 40 hours per week,” Newton says. “They’ll do those set hours, but may also work through some of their lunch break, or log on outside office hours.”

Based on the NMW of April 2024, that person would typically need to earn £24,000 per year in order to comply. “But if they work, say, an extra 10 minutes per day, they must receive a top-up in the final month of their calculation year. If we pro rata that, you’ll need to pay them more than £30,000 to avoid breaching NMW rules.”

Employers must also monitor extra hours worked by staff who turn up early – plus any time employees spend changing into uniforms or queuing for the clocking-in machine. “Under NMW, pay is calculated to the second.

3) Entitlement

Some members of staff can qualify as ‘workers’ for NMW purposes, even though they are not strictly ‘employees’ under PAYE. “Let’s say you have a volunteer and instead of simply covering their expenses, you pay them a round sum,” says Newton. “That could make them a worker under NMW. The same applies if you give them an alternative form of payment, such as a voucher, which doesn’t count as NMW pay.”

4) Payments and deductions

Employers are typically well versed in how ‘salary sacrifice’ schemes impact NMW. But beware the risks of launching in-house initiatives that hold back a percentage of after-tax wages to create a benefit that staff can claim at a later date.

The recent Employment Appeal Tribunal case Commissioners For Revenue and Customs v Lees of Scotland Ltd (2024) assessed the confectioner’s use of wage deductions to create a staff holiday fund. While the fund was launched and run entirely in good faith, it failed legal tests because a) the deductions had reduced some employees’ pay below NMW and b) the funds were retained in Lees’ primary trading account, so were available for the employer’s own use and benefit.

Newton says: “The only way to work around that is if the fund is in a completely ringfenced, third-party trust account and staff are free to take their money back out as required.”

5) Record-keeping policies and controls

“If you keep no record of a worker’s output, but the worker says they’ve provided their time, HMRC will use that testimony to calculate arrears,” Newton stresses. “This ties into your policies around time off in lieu and overtime, and your relevant controls: what is an employee required to do to notify you, so that you do pay them? It’s an area in which HMRC has the full support of the courts.”

Reputational risk

To hold SMES to account, Newton explains, HMRC runs a three-stage process. In the first instance, it will send out a ‘nudge letter’ outlining its concerns and asking the company to correct the relevant issue. If the company does so, it will avoid sanctions. In the second stage, HMRC will offer the company a phone call with an official to go over the issue and set out a path to compliance. If, as a result of the company’s subsequent actions, HMRC is satisfied that the issue has been resolved, there will be no sanctions.

However, if the company rejects the offer of the call, HMRC will pursue penalties equivalent to 200% of arrears, plus public naming and shaming on Gov.uk.

“At that point, you’re incurring reputational risk to your business,” Newton says. “That could have a major impact on both recruitment and supplier relationships. So if you’re an SME that’s eager to expand, being named and shamed could seriously harm your growth.”

Setting controls

Turning to steps that accountants must take to help SMEs navigate this terrain, Newton urges them to carry out a worst-case scenario analysis to highlight any shortcomings.

“Work out what sort of controls you must set around key areas of NMW sensitivity,” he says. “How do you need to update your policies? What sort of comms do you need to send out to staff and line managers so they know what to flag with payroll? And is the wording of your contracts properly aligned with the legislation?”

Whether they work as external advisers or are actually based within SMEs, some accountants may struggle to broach this topic with owners if they suspect noncompliance is occurring, or imminent. However, Newton adds: “I always think about the role of internal audit here. Like any other potential threat to the business, noncompliance should go on your risk register. Kick the tyres, do the checks and determine the scale of risk. And keep constant track of how it evolves.”

ICAEW Technical Manager, Tax Faculty, Peter Bickley says: “The problem with current NMW rules is that while HMRC has powers of collection and management on tax, it has no similar powers to exercise discretion on specific circumstances. As such, any employer that wants to help low-paid staff by running a holiday or savings fund – or by providing uniforms, goods or services at concessionary prices – must take extra care to comply with NMW rules. Failure to do so will mean that HMRC as enforcer, and tribunal and court judges on appeal, will have no choice but to find that the employer has broken the law.”

With that in mind, Bickley urges employers to take account of official NMW guidance:

• The National Minimum Wage and Living Wage
• Calculating the minimum wage
• National Minimum Wage information for employers: checks undertaken by HMRC