National Minimum Wage

National Minimum Wage

A Bitter Pill

RICHARD CURTIS continues to recommend an holistic view to tax questions.

EVERY SO OFTEN there is a query in the Readers' Forum section of Taxation that asks a question nominally about tax, but which then starts one thinking that there may be related, non-tax, issues. A couple of months ago, two queries started me thinking about the national minimum wage.

Pub and grub

The first query was 'Pub and grub' (see Taxation, 10 June 2004 at page 289). There, a publican also had another bed and breakfast (and restaurant) establishment, where a manager lived, with his wife, in free accommodation on the premises.

The querist, 'Red Lion', on behalf of the publican, asked about the tax charge on the accommodation and announced that the manager's wages were £5,000 per annum and that, with the value of food and drink, the manager was still under the £8,500 limit. That limit was known — increasingly laughingly in recent years — as the point at which 'higher-paid' employment commenced. Since April 2003 and the Income Tax (Earnings and Pensions) Act 2003, it is known as the limit for 'lower-paid employment' and this may be more appropriate given that an employee working a 40-hour week and even having four weeks unpaid holiday and being paid the current national minimum wage of £4.50 per hour would earn £8,640 per annum.

This brings us back to our manager on £5,000 per annum and, as the hotel and catering trade is not known for working short hours, one wonders whether he is being paid less than the national minimum wage.

To some extent, the value of accommodation can be taken into account in calculating wages. This is known as the 'accommodation offset', but as shown on the Advisory Conciliation and Arbitration Service website (at www.tiger.gov.uk/nmw/emp/accommod.htm), this is currently limited to a maximum amount of £24.50 per week (£3.50 per day). For a full year this equates to additional wages of £1,274, although the rate will be increased to £26.25 per week from 1 October 2004.

Pages 106 to 107 of the leaflet, A detailed guide to the national minimum wage, confirm that meals do not count towards the minimum wage and thus, at the present time, our manager appears to be being paid at a rate of £6,574 per annum. This could cause a potential problem for 'Red Lion's' publican client if he has a visit from the Inland Revenue, which is the 'enforcer' as far as compliance with the national minimum wage is concerned, or if the manager makes a complaint. 'Red Lion' should also note that, from July 2003, the law in this area was strengthened to close a loophole which prevented former employees claiming arrears in respect of the national minimum wage.

Retired employee's car

The second and possibly more problematic query was 'Retired employee's car'(see Taxation, 1 July 2004 at page 371). In that case, an employee who had retired at 65 was allowed to retain the use of his company car. It seems that, after an initial period away from work, he was at something of a 'loose end' and now assists his previous employer on an informal basis, but without reward other than the car, which appears not to have been dependent upon such consultancy work anyway. Various possibilities regarding the tax treatment of the car were suggested (e.g. as a non-taxable benefit in kind or as part of a retirement package); but again, is there a national minimum wage issue?

The minimum wage only applies to 'workers', so is our car-driving pensioner a worker? A report by the Low Pay Commission found that 'there is confusion over which activities should be defined as work for the purposes of the national minimum wage … The basic principle … must be that an individual should be considered a worker unless the employer can demonstrate otherwise'.

Section 54, National Minimum Wage Act 1998 defines a worker as someone who is an employee, i.e. working under a contract of employment or apprenticeship, or anyone else working under some form of personal contract and who is not self employed. Agency workers, 'casual' workers and those on short term contracts are therefore also included.

The detailed guide to the national minimum wage deals only very briefly with volunteer workers, mainly in the context of charities, voluntary organisations, etc. (paragraph 43), noting that volunteers who provide time and effort completely freely will not have a contract of employment and therefore need not be paid the national minimum wage. However, it then notes that 'some people who consider themselves volunteers could still potentially count as workers because they receive some sort of payment or benefit in kind' and would thus have a contract of employment. In 1999, the Government produced brief additional notes which indicated the facts that a tribunal might take into account in deciding whether there is a contractual relationship.

One of the replies to 'Retired employee's car' suggested that a record of hours worked should be kept and one wonders, in this context, if this is such a good idea. Does this imply an obligation to work for a specific period of time each week in return for which some consideration (e.g. the use of the car) could be given?

Since the original guidance in this area mentioned above, the Department of Trade and Industry — in conjunction with other Government departments — has produced The national minimum wage and 'therapeutic' work information note (on the Internet at www.dti.gov.uk/er/nmw/therapeutic.pdf). This includes various examples and 'scenario 6' seems to most closely fit our circumstances: 'A client is a volunteer at a local private company and not paid'. The analysis of the situation states that a volunteer in these circumstances 'would almost certainly be outside the scope of the Act as [he does] not get paid for the work, meaning that it is highly unlikely that a worker's contract exists. The only question to pursue would be whether any other form of consideration (other than a monetary payment) is received which could imply a contractual relationship'.

Volunteers

Volunteer workers employed by charities, voluntary organisations, associated fund-raising bodies or statutory bodies do not, subject to certain conditions, qualify for the national minimum wage, and this is confirmed by section 44, National Minimum Wage Act 1998, subject to the conditions (amongst others) that:

It seems that if specific amounts are paid to cover expenses validly incurred by the volunteer, then these would not be seen as consideration. Also, lunch could be provided, but money could not be given to the volunteer to pay for the lunch. 'Round sum' expenses payments could be seen as comprising, at least in part, an element of consideration which could be evidence of a contractual relationship and thus entitlement to the national minimum wage. It is understood that this could extend, for example, to someone who works in a charity shop and receives so-called 'pocket money' or 'gifts' in exchange for the work they do (i.e. not just expenses of the type laid down by the National Minimum Wage Act). In fact, the 'Volunteering England' information sheet on this subject refers to a case where an organisation paying its volunteers a flat rate of £6 per day was held to have created a contract and thus entitlement to the minimum wage. Retaining receipts is therefore a good idea for such organisations to be able to prove that it is only reimbursement that is taking place.

Care should also be taken over other payments or benefits to volunteers working for charities, etc. For example, training for volunteers will not be taken into account if it is relevant to the voluntary work. Conversely, Volunteering England gives an example of volunteer gardeners being sent on a computer training course, where the organisation does not own a computer. This could be seen as payment for work done.

An 'honorarium' can also be problematic. If this is genuinely in the form of a gift with no obligation and is a reasonable amount, then it is unlikely to give minimum wage entitlement. But there could be problems if the volunteers had an expectation that such a payment would be made; for example, after being a volunteer for a certain period or on leaving the organisation. Such expectations could give employee status. Volunteering England suggests that 'it is best to be extremely wary about paying honoraria' and suggests alternatives such as ensuring that all expenses are claimed, investing in the organisation to make volunteering more rewarding and even social events and outings as a 'thank you'.

Volunteer or employee?

So problems can arise when a worker goes back to an employer on a 'volunteer' basis, or receives payment for some of the work undertaken, but not for an element carried out voluntarily. In the 'Retired employee's car' query, it is important that there is evidence to show that the use of the company car was nothing to do with the subsequent voluntary work. If it was seen as consideration, then we are on the way to a contract and minimum wage entitlement.

The potential problem with both of the Readers' Forum scenarios is that whilst both parties may be happy with the arrangements, if entitlement to the national minimum wage is shown to exist then either the Revenue can initiate action on behalf of the employee or, if the working relationship turns sour, the business could find that the worker instigates this. Not only will the business then be liable to pay arrears to the worker, it may also be liable to daily penalties of up to twice the hourly rate of the minimum wage for each day that an employer does not comply with an enforcement notice for each worker (so currently £9.00 per day) and a maximum fine of £5,000 (it is a criminal offence to refuse or wilfully neglect to pay the national minimum wage, fail to keep records, keep false records or obstruct an enforcement officer).

An holistic view

In conclusion, these queries may be examples of the advantage of taking an holistic view to what are apparently tax problems. We do not know the full details of the circumstances outlined in the Readers' Forum queries, but how often is this true when we talk to our clients about their new plans generally? In both of these cases, the tax problem has been dealt with, but is the initial question symptomatic of some other underlying problem, such as non-payment of national minimum wage, which may 'fester' for a few years before being diagnosed by someone else; a Revenue Inspector on a pay-as-you-earn audit, perhaps. In those cases, the 'treatment' that will be required to effect a cure may be extremely distasteful!

Issue: 3974 / Categories: