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Getting Your Hotel Ready for HMRC?

Diana Szpytma 30 October 2018
Getting Your Hotel Ready for HMRC?

Laura McLellan, director, Labour and Employment Practice, Squire Patton Boggs

The UK’s National Minimum Wage (NMW) was introduced nearly 20 years ago. Rates have steadily increased, although recently they have become overly complicated. There are now five rates: Apprentices, under 18s, 18-20s, 21-24 and over 25s. The rate for over 25-year-olds was rebadged as the “National Living Wage” in 2016. All rates are required to be paid by statute (not to be confused with the voluntary living wage set by the Living Wage foundation). So why is the NMW appearing in the news these days?

HM Revenue & Customs (HMRC) has been tasked with auditing companies to ensure compliance with regulations. It has received increased budget for NMW enforcement and has more than doubled its number of enforcement officers. The result is that more businesses are being audited for compliance. Certain industries are high on HMRC’s list, including hospitality. There have been large-scale investigations of entire hotel chains, and it is likely that most UK chains will be audited.

Press attention has focused on the naming and shaming by the Department for Business, Energy and Industrial Strategy (BEIS) of some well-known hospitality sector businesses that have been fined by HMRC as a result of breaching NMW regulations.

No companies have room for error in their payments. HMRC won’t simply look at whether they pay the correct NMW rate for the correct age bracket per hour of shift. In fact, your employment practices could be causing an unconscious breach of regulations and taking some employees below the NMW.

How are hotels at risk?

There are instances where employers, even when they thought they were compliant, have discovered they were paying their employees below NMW. In running your hotel you should be asking the following questions:

  • Do employees supply any part of their uniform? When employees have to supply their own uniforms (or any part of them, even a white shirt) then the cost of purchasing should be deducted from their pay andthe employee must receive the NMW after that deduction.
  • Is accommodation provided for employees? If so, you can only charge £49 per week as rent. If you charge more than this, the additional amount will count as a deduction from the NMW rate, as will charges for utilities or deposits relating to the accommodation.
  • Do employees keep their tips? Is this over and above their base pay? Any sums received as tips cannot count towards the calculation of NMW pay. (Ie their basic pay must be above NMW, irrelevant of tips they make.)
  • Are employees at work before or after their shift? What are they doing in that time? If there are additional activities, undertaken outside of their shift, this is ‘working time’ for which they must receive NMW. Examples of additional duties might include going through security searches; attending team briefings; getting changed for work on site; taking drug/alcohol tests; preparing a work station or finishing serving a customer. If employees at any time work through an unpaid break, this becomes working time for which they should be paid NMW.
  • Are employees members of a salary sacrifice scheme, including for the payment of pension or childcare vouchers? If so, then they must receive the NMW rate after this deduction has been made.
  • Do employees work varying amounts over the year, eg, longer hours in peak periods such as summer and Christmas? If so, are they paid for each hour worked or are hours averaged out over a year with pay given in equal monthly instalments? If so, you must have a contract which HMRC will classify as a “salaried hours” contract which must contain an “ascertainable” number of hours that the employee is expected to work in the year – expressed in the number of hours expected per month or year. It should not refer to hours per week, as there are 52.14 weeks in a year and HMRC will say that the yearly number in those contracts is not “ascertainable”. If the contract is not truly a salaried hours contract, then any pay should be per hour worked in the relevant pay reference period. It cannot be averaged out over the year.

So what happens with an audit?

An audit by HMRC can arise either following a complaint or simply because you are a target sector and it is “your turn”. In the event of a visit you can expect a number of steps:

  • Initial meeting with HMRC Officer assigned to case

  • Review of your policies and procedures

  • Interviewing of employees

  • HMRC report back findings and communicate any breaches they have identified

  • HMRC will confirm the result of the audit, including any penalty notice containing any of the outcomes below.

Getting it wrong or setting it right?

So what are the consequences for a hotel under investigation by HMRC?

1. “Naming and shaming”. There could be considerable embarrassment and damage to your brand. If HMRC issue a penalty notice with more than £100 of arrears payments due, you will be on the government’s naming and shaming list.

2. HMRC will order the business to make arrears payments to all employees and ex-employees who have been underpaid, going back six years, and a correction of any breaches going forwards.

3. HMRC will impose a penalty of up to 200% of the total underpayment to all workers. This penalty is capped at £20,000 per relevant employee but if your business in the UK is large with a significant number of employees affected over years, this has the potential to become a major fine.

Compliance with NMW regulations is with us to stay. HMRC has wide investigative powers, including the right to interview staff and remove documentation, sometimes without notice. It is therefore something hotel businesses should be proactively looking at now so that they can address any potential problems before HMRC come knocking. An audit of working and pay practices is advisable to identify any issues, so steps can be taken to address problems sooner than later.