Zooming In On: How To Keep EA And 3k In Your Business

2020’s new tax year is bringing with it a whole host of changes.

Firstly, IR35 is looming on the horizon and now there are proposed changes to Employment Allowance (EA). This could see small businesses and employers lose up to £3,000…

Here’s why, and our advice on how to keep that £3k firmly in your pocket.

But, before we begin, let’s all be mindful that of course, these rules may be subject to change post Brexit.

What are the changes to EA?

New draft legislation recently published suggests that from April 6th 2020 the EA, worth £3,000 per year to small business employers, will now have to be claimed.

If small businesses don’t make the claim online and provide the right information at the right time, then they run the risk of losing this allowance. This, in turn, will have an impact on both your cash flow and profitability

Back to 2014…

To arrive at the solution, we have to go back in time. Let’s look back to April 2014’s regulations surrounding the (EA). From then, until now, employers have been entitled to a maximum of £3,000 off their annual secondary Class 1 NIC bill.

Back to the future

From April 2020, employers will only be eligible for the EA if their total secondary Class 1 liability in the previous tax year was under £100,000.

But it gets furthermore complex because now, several administrative changes are being introduced at the same time as the restriction.

Let’s start with the simple one: The EA will now have to be claimed every year in order to receive it. This is unlike previous years, where relief was carried forward automatically.

The complex bit

From next April, the EA will be classed as “state aid”.

To put this simply, these rules are based around an EU State legislation, which helps to prevent member states from introducing measures which could distort competition within the single market.

These rules surround direct grants or loans, and most importantly to small businesses, tax breaks.

From April 2020 this means that EA will fall under the de minimis state aid rules. As a result, the government no longer has a say in the approval process if a scheme only gives small amounts of aid. There is also a ceiling on how much aid any organisation can receive under the de minimis rules. For most businesses, this ceiling will be £200,000 over a three-year rolling period.

As a result of the EA being classified in this way, employers will have to make sure they have space to accommodate the full £3,000 within their relevant three-year period.

This means that if an employer receives any other form of de minimis state aid, their ability to claim EA may be restricted.

So, what do you have to do?

As well as submitting your EA claim, you must also ensure you have the following info to hand;

  • The sector in which you operate
  • The total amount of de minimis state aid you have received or been allocated in the year of the claim and the previous two tax years
  • Proof that your secondary Class 1 NICs liability for the previous tax year was less than £100k

Looking at all these changes, it’s understandable that smaller companies may bulk at the work and therefore decide that it’s not worth claiming that EA.

But you don’t have to miss out. AEL Markhams are specialist tax advisers to owner-managed businesses, so give us a call and we’ll help you get all the right ticks in the right boxes. After-all £3,000 isn’t small fry when you’re a small business…