George Bull

Written by: George Bull

George Bull

Senior Tax Partner

National Minimum Wage: working smarter and harder pays off for HMRC

The Department for Business, Energy and Industrial Strategy and HMRC together promote and enforce the national living wage and the national minimum wage. Their latest report on compliance and enforcement in 2017/18 shows the departments working smarter to help employers understand their obligations and harder to promote compliance with the law. 

This includes sector-specific guidance and using innovative techniques to nudge employers towards compliance. It is estimated that 341,000 jobs were paid below the relevant national minimum wage rate. With a particular focus on targeting at-risk groups in sectors such as social care, employment agencies, the gig economy, migrant workers and retail/commercial warehouses, more than 1.6 million text messages have been sent to workers, 1.3 million texts sent to working tax credit recipients and 370,000 texts sent to apprentices.

This awareness programme, which also includes a new web-based campaign, is relatively low-cost and seems effective in reaching its intended targets. Beyond this, the government's approach to enforcement encompasses two broad strands: compliance and deterrence.

Encouraging compliance is based on the idea that violations of the law are generally the result of a lack of information and/or incompetence rather than deliberate behaviour on the part of the employer. The main approach, therefore, is to improve the information available to employers on the assumption that they will become compliant with the law once they better understand it.

Employers who do not respond to compliance measures will then be identified and subject to deterrence measures. Deterrence is based on the principle that employers will decide not to underpay their employees because the consequences of doing so are too severe. The aim of enforcement is to alter employers’ behaviour by raising the risk of being caught. This is well illustrated in the slide published by DBEIS:

DBEIS slide

The language used in the report is robust with much made of the 'strike rate', the proportion of closed investigations in which the employer is found to be non-compliant. Other concepts such as 'complaint-led and targeted enforcement' affirm the vigour of the government's approach.

On the face of it, working smarter in the communication phase and working harder in the enforcement phase, is paying off. In 2016/17, 2,775 new cases were opened. 1,134 cases were closed with arrears, a 42 per cent strike rate yielding arrears of almost £11m affecting 98,000 workers. Penalties charged totalled almost £4m.

For 2017/18, the figures show a huge increase. 3,975 cases were opened. While the strike rate remained at 42 per cent, 1,016 cases were closed yielding arrears of more than £15m affecting 201,000 workers. Just under £6m of these arrears were self-corrected by employers. Penalties charged totalled £14m.

The amount recovered from the penalties could be far less than £14m. The report refers to the number and values of penalties 'issued'. If the infringing employer pays the penalty in less than 14 days, the penalty is reduced by 50 per cent. The amount recovered from penalties could therefore be as little as £7m.

While this report demonstrates that the government is serious about enforcing national minimum wage and national living wage, there is clear room for improvement in two areas. First, more than half of all investigations are closed with no additional tax payable. HMRC must improve its targeting processes to reduce the number of employers who are subjected to costly, burdensome and unnecessary investigations. Second, questions remain about value for money. While the deterrent effect of HMRC’s enforcement strategy is likely to be substantial, at around £23.7m the combined arrears (not self-corrected by employers) and penalties (ignoring the possibility of a 50 per cent rebate for prompt payment) are less than HMRC’s costs of £25.3m.

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