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Minimum fuss

With all the (understandable) talk (among financial advisers and the product providers distributing through advisers) about “moving upmarket”, “wealth creation and management”, “getting into and doing business with the corporate market” and other such laudable aims, it would be very easy to forget something as inconsequential as the national minimum wage provisions.

I was reminded of them recently with the official announcement that the NMW increased from October 1 this year. After having made a note not to let my pocket money earning hoovering, dusting and lawn mowing son see this announcement, I thought that I would take the opportunity to tell you about the change and to look in a little more detail at what NMW can mean to private companies and their owner managers – especially when considering the dividend or salary choice for the current year.

Of course, the choice (dividend or salary) needs to be made on a yearly basis and with the upcoming (2003) changes to National Insurance (especially the 1 per cent surcharge) it will be essential for many businesses to review their strategy in this area. The received wisdom on this subject is that a dividend beats a salary if one is looking to maximise benefit to the recipient by minimising “outflow” to the authorities in the shape of tax.

However, the danger in relying on generalisations is well evidenced in this area when you “do the math” (where did the S go, I wonder) in respect of companies paying a higher rate of corporation tax than the small companies&#39 rate of 19 per cent.

A self-test question for you: What is the new rate for the national minimum wage? £4.20 per hour for those aged 22 or older (up from £4.10) and £3.60 per hour (up from £3.50) for those aged between 18-21. There is no minimum wage for workers under age 18 years of age. So that&#39s me off the hook for one of my sons.

The NMW was introduced on April 1, 1999 at a rate of £3.60 per hour with a lower rate of NMW for 18 to 21-year-olds.

Every individual with a contract of employment (including implied contracts) is within the NMW rules. Directors are able to avoid the rules (see later). Employees of unincorporated businesses are exempt if they reside in the employer´s family home although a spouse has a right to make a claim if they so wish. The pay reference period is one calendar month. Thus a bonus paid at the end of the year equal to 12 months&#39 NMW is illegal. There is no parallel to the working time directive&#39s opt-out clause (where individuals can agree to work longer than the statutory maximum).

The Tax Faculty of the Institute of Chartered Accountants in England and Wales has issued a guidance note, agreed with the Inland Revenue, on problem areas with the NMW. As to the impact of the legislation on directors, the following guidance is given:

“If a person is a director and does not have an explicit employment contract, then he is highly unlikely to be subject to the NMW legislation even when he carries out a wide variety of activities. These might include, for example, working in the company&#39s shop. Such activities can be done in his capacity as an office holder (director) rather than as a worker. If a director has an explicit employment contract, he will be within the NMW in respect of earnings under that contract as he and the company will then have chosen to create a worker/employer relationship alongside the director/company one.

The DTI has told us that if there is no written employment contract or other evidence of an intention to create an emp-loyer/ worker relationship, it will not seek to contend that there is an unwritten or implied employment relationship bet-ween a director and his company. As the Inland Revenue administers the NMW as agents for the DTI, it will adopt this policy also.”

In the case of a group of companies, the guidance note confirms that a director who works intermittently for a subsidiary company is regarded as furthering the interests of the group as a whole and is not therefore within the NMW as a result of that work.

As regards new businesses, loss-making family companies, dormant companies and flat management companies, the principle that directors are outside the scope of the legislation also applies. On the other hand, the guidance note confirms that workers in such companies do have to be paid the national NMW since “the Government&#39s policy is that no United Kingdom company should exist on the basis that it has to pay its workers below the minimum wage.”

This is exceptionally useful guidance on an issue that had caused some consternation. There had been some disagreement between various commentators whether it was possible for company directors to “contract out” of the NMW provisions, with doubts being expressed over the validity of even a formal “contracting out” if substantial duties were performed.

The key seems to be to avoid an explicit employment contract and to carry out activities in the capacity of an “officer”.

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