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HMRC National Minimum Wage investigations
Prevention is better than cure

Non-compliance with National Minimum Wage can be inadvertent in the care sector, however, the impact can affect your organisations’ reputation. Ian Hyde explores common pitfalls for providers when it comes to underpayment of NMW and advises on how to avoid them.

Her Majesty’s Revenue and Customs’ (HMRC) increasing attention on National Minimum Wage (NMW) compliance means that providers of residential and domiciliary care must be sure their pay accords with relevant NMW requirements. The change in October last year introducing compulsory ‘naming and shaming’ for those who breach NMW requirements creates a serious reputational risk for non-compliant businesses.

It is recognised (for example in the Low Pay Commission Report of March 2014) that public sector funding cuts have put pressure on providers, making it more difficult to ensure NMW is paid to employees. Further, with pay levels close to the NMW mark, and its often complex pay structures, the care sector is more susceptible to inadvertently contravening with the complex and sometimes irrational calculation methods in the NMW legislation.

However, in the world of NMW, funding pressures and complex legislation are not excuses. Indeed, in its November 2013 report, National Minimum Wage compliance in the social care sector, HMRC found, ‘increasing levels of non-compliance’ in the care sector. Of the 183 NMW investigations HMRC conducted and completed in the social care sector over the two year period from 1st April 2011 to 31st March 2013, 48 per cent of businesses had NMW errors but there was 58 per cent non-compliance in 2012/13 compared to 28 per cent in 2008/09. HMRC, therefore, believes the position is getting worse and its targeting of NMW in the care sector can be expected to continue.


All employers know about NMW and most, it is assumed, want to comply. However, non-compliance is often inadvertent, particularly with the increase in the use of zero-hours contracts or agency workers. The problem is that even when inadvertent, whilst such breaches will not trigger a prosecution, a failure to comply will now result in public naming and shaming. It is important then to know the most common ways in which employers inadvertently fail to comply:

  • Travelling time is a particular cause of concern for domiciliary care providers. A recent case has confirmed that travel time between each place of care counts as working time when calculating whether pay is within NMW law.
  • Other unpaid work-related time can breach the NMW regulations, for example, training or team meetings which start just before or after the employee’s paid hours.
  • Employers in this sector should also be careful to ensure that any deductions from workers’ pay are accounted for in determining NMW compliance. If an employer pays the NMW rate but makes deductions from pay, for example for uniforms, training or provided meals, the pay for calculating NMW compliance will be after taking those deductions.
  • Employers also commonly fail to disregard premium rates, for example for weekend working. NMW is calculated only by reference to basic pay rates.
  • Problems also arise on correct application of reduced rates, for example for apprentices, and when NMW rates change.
  • Overnight work is also a common cause of non-compliance. Where a care worker is required to ‘sleep-in’ to provide care, it had been common for some employers to pay only for those hours when the employee was awake or providing care. This is not correct as a recent tribunal case has confirmed. The time when the care worker is asleep should be paid at least at NMW levels.


For exceptional cases HMRC can prosecute. However, this power is reserved for the most serious cases and, in particular, where HMRC wishes to make an example to encourage others to comply. Typical factors that will tend to result in prosecution are repeated failure to comply, falsifying NMW records and obstruction of an NMW enquiry.

What it means for the care sector

If HMRC commences a NMW investigation into a care service provider, the consequences are wide-ranging.

First, the very fact of an HMRC investigation is very disruptive, even if no errors are found. HMRC will not only review records but also interview payroll staff and sample workers. Failure to maintain adequate records, for example for travel time, make it very difficult to demonstrate compliance. In addition, HMRC take a very detailed and technical approach to compliance, for example late payments will trigger a breach in the relevant pay reference period even though over the year wages at the NMW rate have been paid.

If errors are found, the employer must immediately pay the employee the shortfall. As a point of detail, if the current rate is higher than the rate when the pay should have been paid, then the current rate is used. In addition, penalties – increased in March 2014 to a maximum in some circumstances of £20,000 per worker – may be due.

For the future, a non-compliant employer would need to reassess its business model to ensure that its profitability can be protected. It will be necessary for residential care providers, who have inadvertently failed to meet NMW standards, to review pay structures to ensure compliance for the future and consider how the additional cost is passed on to the final consumer.

Importantly, care providers that are investigated by HMRC face significant reputational risks if they are issued with a Notice of Underpayment. For investigations commenced after 1st October 2013 (even if the underpayment relates to earlier periods), once a notice has been issued, if it is not successfully challenged, HMRC is automatically required to pass on the name of the employer to the Government’s Business Innovation and Skills (BIS) department. BIS will automatically ‘name and shame’ employers unless exceptional circumstances apply.

Prevention is better than cure

Automatic naming and shaming, and with it the threat of negative public scrutiny in today’s climate, means that residential and domiciliary care providers should review their pay structures and, vitally, their record-keeping before HMRC issues a notice.

Ian Hyde is Tax Partner at Pinsent Masons LLP. Email:

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