Act in time, or pay the price

Meeting the auto-enrolment deadline was always going to be a tough call for small businesses.

27 June 2016

Meeting the auto-enrolment deadline

Small business owners first had to understand they needed to dedicate time to understanding the issue. Then they had to devise a strategy and stick to it. Finally, but crucially, bosses had to allocate funds to make the pensions payments.

Another factor owners had to consider was that the risk of failing to fulfil their legal duty could inflict another hit to their cash flow in the form of fines. The Pensions Regulator has an arsenal of powers at its disposal to ensure compliance with the new rules. And the regulator has shown that it is not afraid to use them.

The good news is that the regulator’s analysis to date shows a high rate of compliance among small businesses. By the end of March an estimated 95% of small employers that needed to comply had a scheme in place.

However the regulator’s latest compliance and enforcement analysis shows a sharp increase in the number of escalating penalties – a worrying trend given that this year is the final staging deadline for most small businesses.

Escalating penalties: a worrying trend

Escalating penalties are the second level of fine the regulator can levy if an employer has not complied with its new legal duty. Escalating penalty notices are sent to employers who have ignored previous 28-day warning notices and fixed fines. The escalating penalty is based on the number of people in the employer’s PAYE scheme with a daily rate of £50 for businesses with four or fewer employees. It rises to £500 for those with between five and 49 employees. The sting in the tail is that these daily penalties carry on rising until the employer is fully compliant.

In the three months to 31 March 2016, the regulator issued 96 escalating penalty notices. This compares with just 24 in the previous quarter. With staging dates for most companies with less than 30 employees falling this year or early next, there is a growing concern that more and more small business owners will face these fines.

This is especially worrying because small businesses are finding it tougher to adapt to auto-enrolment than larger companies, as they don’t have the same kinds of resources available. Owners are also finding it difficult to pay for.

It’s hard for small businesses to find the cash to pay their part of the contribution, as well as to pay for a payroll service,” says Jay Karia, payroll manager at accountants HW Fisher

Non-compliance on the rise

If employers fail to meet their staging date the Pensions Regulator issues a compliance notice as a “nudge” to encourage bosses to meet their obligations. If that fails, the regulator issues a fixed penalty notice with a £400 fine. Four weeks later if the employer is still not compliant, the regulator sends an escalating penalty notice. This will specify when the employer has to meet with the actions laid out in the compliance notice, and when the escalating penalty will kick in.

If the number of fixed penalty notices is a barometer of what lies ahead, then the future for small employers looks stormy. The number of fixed notices surged in the last quarter of 2015, rising more than eleven-fold. While numbers dropped slightly in the first quarter of 2016, more than 800 fixed penalty notices were issued.

How to curb the worrying trend

No accountant wants their clients to receive these notices or to have to pay fines. So how can accountants help improve compliance? Accounting firms should be alerting their clients a year before their staging date.

Jay Karier says, “You need to tell businesses what they need to do,”. Clients want to understand and meet their staging dates in order to be compliant. “Often when we tell our clients their auto-enrolment date they ask us: is there anything I can do?”

The regulator has said that many businesses fail at the final step of their auto-enrolment process: completing their declaration of compliance because of confusion about the process. Often the business has wrongly assumed that their accountant was doing this for them. The message here is that it’s important for accountants to be clear about the services they offer, and for both accountants and clients to understand who is responsible for completing which auto-enrolment task.

It’s best to give yourself extra time instead of doing it all at the last minute. The Pension Regulator is quite understanding and will give businesses extra time if they need it. So even if the business has reached its staging date it can usually postpone compliance for three months,” Karia says.

On a brighter note, some small business owners are asking to comply earlier than their staging date.

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