HMRC National Minimum Wage enforcement increasing

It is common practice for HMRC to undertake a campaign looking at certain aspects of tax compliance. One high up on the agenda just now is National Minimum Wage (NMW), with HMRC’s latest enforcement strategy involving officers being deployed across a number of geographical areas targeting small to medium sized businesses.

As HMRC enforcement activity increases (their enforcement budget is over £27m), now more than ever a business is likely to be subject to a NMW enquiry – with the additional risk of 200% penalties and public naming and shaming.

HMRC’s three stage approach to tackling perceived non-compliance with NMW

HMRC’s regional enforcement has been in place since November 2022 and has now expanded to at least 10 regional areas with more to be confirmed. The latest is Liverpool, which was confirmed earlier this year.

HMRC selects a regional area based on central data they hold that suggests workers are more likely to be paid below NMW, or due to other intelligence gathered which can include complaints made by workers.

Effectively HMRC floods an area, using a variety of methods to gather intelligence to aid its enforcement, collection of NMW arrears and penalties.

The process can be broadly summarised as follows:

Stage 1

This is a ‘nudge’ letter, which calls for employers to check their compliance.

The letter doesn’t request you to perform any actions by a certain date, nor does it ask you to respond to HMRC on any actions/outcome. Given many of you will have more pressing business needs, this could easily fall to the bottom of your to do list. However, this is just the start of HMRC’s enforcement process.

Stage 2 to 3

The next stage is a letter from HMRC offering to perform a free health-check of your NMW compliance. Failure to take up this offer from HMRC will result in them opening up a formal enquiry, and this was confirmed by HMRC in an employer bulletin in December 2023.

Other HMRC activity

Throughout this process, HMRC also contact workers in the area through a series of letters or social media campaigns encouraging them to check their pay and ‘whistle blow’ if they believe they are paid below NMW.

The 10 regional areas HMRC are active within:

• Bradford
• Belfast
• Birmingham
• Cardiff
• Cumbria
• Cornwall
• East Anglia
• Glasgow
• Liverpool
• Watford

As well as certain areas, sector based targeting has also been part of HMRC’s approach. Sectors in focus include motor retail, accommodation and health & social care.

NMW compliance is more complex than you may think

HMRC’s enforcement activity is so prevalent because of how complex the rules are. Maintaining compliance with NMW is commonly misunderstood, with the calculation made up of many different components: it is NOT just an hourly rate of pay.

Essentially, NMW compliance is made up of five pillars:

• Entitlement
• Worker type
• Working time
• Payments and deductions
• Record keeping, policies and control mechanisms

As an employer, only if you understand each of these and have policies in place to govern and control each, can you mitigate the risk (as far as possible) of a potential NMW underpayment arising.

What action should you take?

From our experience, it is sometimes the case that enforcement is inconsistent with the circumstances of the targeted business, meaning that often HMRC calculations have applied incorrect assumptions. Seeking professional advice throughout the process is often essential to ensure you are not unfairly penalised.

With HMRC enforcement so prevalent and the financial cost of 200% penalties and reputational risk of naming and shaming, many employers should consider taking proactive steps with ensuring that they are complying with NMW regulations. Through taking proactive steps, businesses could avoid the 200% legal penalties, protect their reputation and ensure fair treatment of their employees.

There are many steps to consider, but broadly employers will need to undertake some or all of the following:

• Assess the current state of NMW compliance
• Log what is in place (risk register or otherwise) and identify areas where further investigation is required
• Sample check records and explore whether there are periods where there is a risk of an underpayment
• Based on all data gathering, set a plan of action to make the control environment (including policies and working records) more robust, but also ensuring steps are taken to rectify for the historical period (HMRC can look back 6 years).

Azets are here to help

If you have received any letter from HMRC on NMW or would like to find out more about how your business could take proactive steps to support with any NMW regulatory requirements, please get in touch with your local Azets advisor.