By Waqar Shah, a Partner specialising in Tax Disputes at Kingsley Napley LLP (www.kingsleynapley.co.uk)
HMRC recently fined, named and shamed 200 companies found to have breached National Minimum Wage (NMW) obligations, with Roka, Whitbread, Benugo and others in the hospitality and restaurant sector featuring on the list.
One of the most common misconceptions among employers is the belief that so long as they ‘pay’ the NMW, they can’t have any issues with HMRC. However, HMRC’s draconian approach to interpretation of the rules surrounding the minimum wage can mean employers face penalties irrespective of their intention to comply with the legislation. The lesson from HMRC sanctions in this area in recent years is that they are unforgiving even of technical breaches.
Businesses need to be aware of the potential pitfalls and take proactive measures to avoid similar investigations which may lead to fines and inevitable reputational damage. For restaurant, bar or hotel trade businesses it is especially important to note that tips do not count towards the NMW but that unpaid time before or after shifts (for example security checks, changing into work clothes, cleaning duties, or locking up) might be caught.
Tips on avoiding NMW investigations
To avoid finding themselves subject to an HMRC investigation, businesses should carefully review existing worker contracts and staff handbooks. These documents are often scrutinized for any potential opportunities HMRC could use to challenge NMW compliance. It is crucial to ensure that staff policies, including those concerning uniforms, working times, and any other deductions made by the employer, are in accordance with the NMW regulations.
By conducting regular audits of these policies, businesses can minimise the risk of penalties, both financially (which can be up to 200% of the alleged underpayment depending on the circumstances, going back six years to cover current and former staff) and reputationally (through HMRC’s “naming and shaming” practice).
Companies should be aware that the naming and shaming list does not explain the background to the breach. It is left to the public to guess whether the breach was a technical one based on an unintentional consequence of a certain policy, or something more specific and deliberate by the employer. Without due context the very fact of being on the list can be damaging in the eyes of customers, employees and potential recruits.
Additionally, employers need to understand that HMRC’s investigative process extends beyond reviewing correspondence and documents. They often conduct staff interviews to gain insight into the actual working conditions and practices of employees. Indeed, a significant number of such investigations start on the basis of tip-offs or supposed ‘whistleblowing’ from what may be a disgruntled former worker. Even the fact of an investigation and such a question process taking place can have a detrimental impact on staff morale.
To stay ahead of the game therefore, employers should conduct their own internal assessments to identify any potential issues before HMRC becomes involved. By proactively addressing concerns such as unpaid overtime, deductions for uniforms, or miscalculations in pay among others, businesses can rectify these shortcomings and prevent them from escalating into full-blown investigations.
If an underpayment is identified, it is wise to repay monies to the relevant workers swiftly before HMRC are involved. That helps avoid a Notice of Underpayment and being included on a name and shame list.
Dealing with investigations: resolving and mitigating
If an investigation is commenced, prompt action is essential. HMRC have the authority to look back up to six years and can contact current and past workers. To mitigate potential penalties and reputational harm, it is crucial to act swiftly and take professional advice.
Cooperation is usually advisable. HMRC’s guidance makes it clear that they will not accept reasons to avoid naming and shaming a business on the basis (among others) that there was an inadvertent breach of the rules, that the business relied on advice from a third party, or that the underpayment took place under a previous owner or different trading name. However, it is also wise to ensure HMRC is furnished with all relevant information.
In conclusion, prevention is better than cure. It is essential that employers recognise that paying the NMW alone is not enough to satisfy HMRC requirements. By proactively reviewing staff policies, ensuring compliance with NMW regulations in the broadest sense, and seeking professional advice when needed, businesses can avoid penalty and safeguard their reputation going forward.