Significant Fines Over Failures In National Minimum Wage Compliance

The uptick in enforcement action by the tax authorities over National Minimum Wage (NMW) compliance coincides with their enforcement budget increasing to over £27.8m – more than double the amount in 2015/16.

It also comes following recent announcements from His Majesty’s Revenue and Customs (HMRC) regarding plans to recruit more than 5,000 additional compliance officers to strengthen their enforcement across all areas of tax.

These statistics are taken from a new report by the Department for Business and Trade (DBT) which details HMRC’s enforcement activity during the 2022/23 tax year which saw an increasing number of cases closed and a significant level of arrears identified.

The report includes a focus on HMRC’s newest form of enforcement, the ‘Geographical Compliance Approach’ (GCA) which uses a three tiered method designed to encourage employers to comply with the rules and make payments of NMW arrears due to workers.

The last of these phases is formal enforcement by HMRC, with any arrears identified during this phase subject to 200% penalties and the employer being publicly named for breaching the rules.

Throughout, workers are contacted and encouraged to whistle blow, and the report highlights an increased number of HMRC enforcement cases have been opened due to worker complaint.

During 2024, three further locations have been added to HMRC’s GCA with more expected to be announced in the next 12 months.

Therefore businesses are being urged to review their payroll records, particularly those items listed in letters HMRC commonly sends to employers during the GCA. These are:

1. Deductions taken from pay that reduce pay for NMW purposes.

2. Unpaid working time, such as time before or after a shift, travel, training and on standby.

3. Rates of pay, with the NMW age brackets recently changing in April 2024.

4. Apprentices, with a focus on study time, whether the apprenticeship agreement is in place for the duration and if the individual qualifies for the reduced rate of pay.

5. General records being available for the six-year period required by law.

Other key statistics noted in the report include:

• HMRC closed almost 3,200 cases with more than 900 involving arrears.

• A total of £13.66 million in arrears was identified for more than 108,000 workers and HMRC issued 750 penalties totalling £13.72 million.

• Nearly 12 million workers were reached by targeted communications campaigns. Targeted enforcement continued to be the primary method of identifying arrears, accounting for 74% of closed cases, up from 71% in 2021 to 2022.

The DBT says:

“This government is absolutely clear that anyone entitled to be paid minimum wage should receive it. The enforcement of the minimum wage is therefore essential and we are committed to cracking down on employers who break the law in this area in all sectors across the economy.”

Kyle Newton, Head of National Minimum Wage, at UK top 10 accountancy firm Azets, has welcomed the findings as a stark reminder of how common HMRC enforcement of NMW is and warned businesses to review their records ahead of HMRC issuing a letter to help minimise their financial and reputational risk. He said:

“My key take-aways from this report is the sheer scale of HMRC enforcement. Since 1999, 90,000 investigations have been completed and 1.5 million workers have received NMW arrears.”

“HMRC is very much taking a geographic compliance approach which targets employers in a particular region. In 2022 to 2023, HMRC sent 17,600 letters to employers across three new locations, Belfast, Cornwall and Watford, so more than 5,000 letters a region."

“This approach has bought NMW enforcement to many small businesses who were unaware they were breaching the rules.”

“I am pleased to see the report provides an overview of the three-tiered approach which demonstrates HMRC are still intending to support employers with compliance and minimise penalties as far as possible."

“However, regardless of penalties, any NMW arrears will lead to an unexpected financial cost for the business, not to mention the additional National Insurance employer contributions and pension contributions."

“Landing an unexpected bill will be no mean feat for a business which has to absorb increased NMW rates applying from April 2025. The report also highlights how informed workers are of their rights."

“During 2022 to 2023, 3,489 HMRC enforcement cases were opened due to a worker complaint, of which 89.6% of these were made direct to HMRC.

“This does not come as to much of a surprise given the report highlights that HMRC sent out 550,000 text messages and many will have seen the Check Your Pay campaign."

The NMW rate has been £11.44 since last April, but this report covered the 2022 to 2023 financial year when the rate was between £9.50 and £10.42.

With new NMW rates to be announced in the Autumn Statement and these widely estimated to exceed £12 per hour (effective from April 2025) more workers are expected to come within the scope of HMRC enforcement activity.

The report highlights statistics about workers in the North East, which was one of the regions subject to the Geographic Compliance Approach earlier this year and Kyle has warned that there will be no let-up in HMRC activity in protecting the rights of workers.

This Geographic Compliance now spans 12 locations, with the East Midlands most recently announced, with Liverpool being making up the three locations announced this year.

Previous areas have included Cardiff, Birmingham, Cornwall, Watford, Glasgow and Belfast, with more expected to be announced in 2025.

HMRC usually pursues the civil enforcement route in order that workers receive their arrears quickly, however, for the most serious non-compliance offences HMRC can refer cases for criminal investigation and prosecution.

Kyle added: ”The NMW is made up of several components across five core pillars – it is not just an hourly rate of pay. As an employer, unless you understand these pillars and have policies in place to govern and control each, then you are at risk of non-compliance. It’s like a game of dominos, if one falls down, they all do.

“With HMRC continually ramping up enforcement and the government granting the Low Pay Commission further powers to align NMW rates with real living costs, now more than ever there is a greater probability of businesses facing scrutiny.

“Employers should take proactive steps to ensure compliance before a letter lands on their desk. Reviewing your payroll controls is a must, but reviewing your wider working time practices is essential as often payroll doesn’t hold all the information you require to ensure NMW compliance.”

Kyle has urged any businesses currently being subject to the geographic compliance approach by HMRC, and perhaps have been contacted by letter, to take professional advice at the earliest opportunity.

“Whilst HMRC offers support during phase 2, this is limited to the call discussion and referring the business to review guidance. It doesn’t include a review of records and is reliant on the employer undertaking their own checks."

“NMW is complex and making payment without taking advice could lead to you overpaying, or worse, not fully rectifying the matter, which leads to further HMRC enforcement, such as 200% legal penalties and public naming.”