HMRC closed its NMW investigation
18. Mr E told us HMRC closed its investigation into underpayments of NMW because he had taken the issues to an ET. Mr E confirms the ET was in relation to separate underpayments not connected to his NMW. He complains because this was a different issue, HMRC should not have closed its investigation.
19. In its complaint responses HMRC told Mr E it had closed his complaint as the ET judgment it had seen said, amongst other things, his employer was in ‘breach of contract’ by failing to pay him his full contractual salary between April 2020 and June 2021. HMRC had taken this to mean the ET addressed any issues with his employer underpaying him, including any NMW issues. As HMRC believed this was the case it told Mr E it was then unable to consider a NMW claim following him making a claim at the ET.
20. When the AO considered this issue it concluded HMRC had followed the relevant guidance when it made its decision to close its investigation.
21. Mr E continued to complain as he had confirmed with the ET judge they did not consider any claim or make judgement in relation to any claim by Mr E in respect of payments from March 2021 onwards. The ET had only considered his breach of contract claim between April 2020 and February 2021. He also confirmed the ET did not address any issues relating to being paid the NMW.
22. As a result of Mr E’s further complaints, including a complaint to his MP, HMRC agreed to review its decision.
23. HMRC confirmed it would review the available evidence, which included clarification from the court as to which matters the ET covered. After reviewing all the evidence available, HMRC confirmed it would re-open the investigation.
24. To decide if HMRC followed the relevant guidance we have considered the HMRC manual ‘NMWM13020 – Issuing Notices of Underpayment: enforcing payment of arrears’. This is the relevant HMRC guidance and sets out that: ‘If a worker takes their own claim to a tribunal or court, HM Revenue & Customs cannot also enforce a complaint on their behalf’. It was on this basis that HMRC originally made the decision to close its investigation.
25. Mr E told HMRC about the ET decision on 15 September 2022. As the caseworker was unsure if this would mean HMRC would not continue with its investigation they asked Mr E to provide a copy of the ET decision notice. Once Mr E provided the ET judgement the caseworker considered what it said when making their decision to close the investigation.
26. The ET Judgement dated 14 September sets out that: ‘The respondent was in breach of contract by failing to pay full contractual salary to the claimant between the period of April 2020 to June 2021’. The decision itself does not mention if the judgement did or did not include any issues related to the NMW.
27. Guidance contained in NMWM 13020 says that if a worker believes they have not been paid the NMW, they may commence proceedings against their employer to recover arrears. It also says if a worker takes their own claim to a tribunal or court HMRC cannot also enforce a complaint. It confirms that a worker can take their own action by making a claim to the ET as an unlawful deduction from wages claim or a breach of contract claim.
28. The guidance goes on to say that a worker who is not taking his own claim may make a complaint to HMRC about their employer not paying them NMW.
29. Mr E had made a breach of contract claim. The ET judgement said its decision was in relation to a claim for a ‘breach of contract’ and that the ET had considered the company failing to pay full contractual salary. HMRC’s caseworker decided this meant HMRC could no longer continue to investigate these matters.
30. Mr E has told us he did make HMRC aware his breach of contract claim did not include the issue that he had not been paid the NMW but related to other matters.
31. We can see other evidence was available to the caseworker, which they considered. Although Mr E had said the NMW matters were not included in his ET case the caseworker believed initially they did not have enough information to make a decision. This is when the caseworker asked Mr E to provide a copy of the ET judgement.
32. The caseworker followed the relevant guidance when they made the decision to close Mr E’s case when they were aware of the ET judgement. This is because they had considered the ET judgement.
33. We know HMRC later reconsidered this decision. It did this considering new information, including further comments from the judge setting out what they did and did not consider. This information was not available to the caseworker when they made the initial decision and was therefore not information they considered when coming to that decision.
34. As such it does not mean the caseworker made the wrong decision originally. We understand this decision must have been frustrating and upsetting for Mr E and are sorry he had to go through this.
35. We find the caseworker followed the relevant guidance when making the original decision to close the case.
HMRC declined to issue a formal NoU
36. Mr E believes the decision not to issue a NoU was because HMRC had previously told his employer it had closed its investigation, and later issuing a NoU would damage its reputation. Mr E does not believe the decision to not issue a NoU was guided by the facts. He is concerned this means he was denied justice while his employer has benefited financially due to having no penalty imposed on it.
35.In response to Mr E’s complaints HMRC told him: ‘HMRC does not disclose details relating to operational decisions. We are however satisfied that our decision not to issue a NoU in this case is consistent with NMW law and Department of Business and Transport enforcement policy’.
37. HMRC told us that an NoU is issued in most cases where arrears are due. However, officers have discretion on whether to issue one. It makes the decision to issue a NoU on a case-by-case basis, and on this occasion the officer decided not to. This was based on their assessment of the facts of this particular case. They considered the arrears payment made by the employer prior to the opening meeting with the NMW compliance officer, which Mr E subsequently returned. HMRC also said it would not usually disclose its decision not to issue a NoU. As in all cases, the employer would still be expected to pay any arrears due. Mr E confirmed to HMRC that he received the arrears due to him.
38. We have considered the HMRC guidance on ‘National Minimum Wage: policy on enforcement, prosecutions and naming employers who break National Minimum Wage law’ when considering if HMRC acted reasonably when it decided not to issue a NoU.
39. This guidance says: ‘HMRC compliance officers have discretion over whether to issue an NoU, based on their assessment of the facts of the particular case. While it is expected that an NoU will be issued in almost all situations where HMRC have become aware of minimum wage arrears, there may be specific circumstances when HMRC officers decide that the employer should not be issued with an NoU, and as such should not be subject to enforcement action, be named or face a financial penalty. Each decision to issue an NoU should be made on a case-by-case basis. Even in those cases where an NOU is not issued, HMRC will still require the employer to pay any arrears owed’.
40. Considering the information set out in the guidance we can see HMRC has discretion in relation to issuing a NoU. In this case it decided not to issue a NoU and has set out briefly why it made that decision. As the use of discretion is set out in the relevant guidance we do not find this to be a failing because HMRC does not have a duty issue a NoU in this case. We can see HMRC used its discretion when making this decision, which it is entitled to do.
41. The guidance explains there is no obligation on HMRC to issue a notice in every case, and it considered if a notice would be appropriate in this case. As this is the case, we have not found failings here.
HMRC undercalculated entitlement to arrears
42. Mr E told us that HMRC did not use the actual hours he worked to calculate the extent of the underpayments. He said he provided HMRC with his employment contract that set out his basic working hours. He believed HMRC had undercalculated what he was owed as he had also provided it with details of the actual hours worked. Mr E does not believe HMRC used this information to calculate the amount he owed.
43. In its complaint response HMRC set out how it calculates arrears and what formula it uses. It told Mr E that it had calculated his employer owed him arrears of £6,725.58.
44. HMRC told us Mr E’s contract outlined an annual salary of £9,100, which it paid him in equal monthly instalments. Mr E’s contracted hours were also detailed to specify the hours for each workday. From the employment contract supplied to us we can see this information is correct.
45. In this case HMRC decided Mr E was performing salaried hours. One condition of salaried hours work is that the worker is entitled to be paid a salary in respect of the number of hours in a year in accordance with their contract.
46. When assessing whether a worker has received the entitled NMW rate, an officer must first determine the type of working performed. HMRC manual ‘NMWM07010 - Types of work: the four types of work’ is the relevant guidance to make this decision. This sets out that the hours for which the minimum wage must be paid depends on the type of work the worker is doing. For NMW purposes there are four different types of work. They are: •salaried hours work •time work •output work •unmeasured work.
47. The type of work the employee performs is determined by examining the way the worker is paid. It is not dependent on other factors, such as the worker's occupation or the way either the employer or the worker describes the work. For NMW purposes, there are different rules and calculations for each type. It is therefore crucial to establish the type of work the employee does before it can be determined whether NMW has been paid. In this case HMRC concluded Mr E was performing salaried hours work.
48. The relevant HMRC guidance for deciding if salaried hours work applies is contained in HMRC manual ‘NMWM07025 Flowchart to decide if salaried hours work applies’. The chart sets out that if you can answer yes to the following four questions the worker is performing salaried hours work.
49. Is the worker entitled under their contract to be paid an annual salary or annual salary and performance bonus or salary premium?
50. Does the worker’s contract provide a basic number of hours per year or are the basic hours per year ascertainable?
51. Is the only payment that a worker is entitled to receive for the basic hours annual salary and performance bonus or salary premium?
52. Is the worker paid either in equal monthly, weekly, two-weekly, or four-weekly instalments or varying monthly instalments resulting in equal quarterly amounts, unless a permitted variation applies.
53. In this case the caseworker examined the employment contract and decided Mr E fitted the criteria for performing salaried work hours. In this case the employer told HMRC the basic annual hours in accordance with the worker’s contract was 1887 per year.
49.The relevant guidance that sets out how HMRC should calculate the arrears owed is set out in HMRC manual ‘NMWM13160 - Issuing Notices of Underpayment: calculating underpayments and arrears on a notice’.
50.This guidance explains HMRC calculates a NMW underpayment for each pay reference period by comparing the amount a worker was actually paid against what they should have been paid at the correct NMW rate. It then adjusts the final amount of arrears owed using a specific formula based on the current NMW rates. It was by doing this that HMRC calculated Mr E’s employer underpaid him by £6,725.58.
51.We know Mr E does not agree with this amount. We can see from the available evidence that Mr E believes HMRC should have used the information he provided to calculate his arrears, rather than using his annualised salary. Mr E believes this would be a more accurate way of establishing how much his employer underpaid him.
54. We find that HMRC followed the relevant guidance when it calculated his arrears. This is because the guidance is clear that if the employer can confirm the number of hours worked HMRC should use the annual salary to calculate arrears in cases where it decides a person is on salaried hours.
55. The relevant guidance clearly sets out that to calculate the arrears HMRC should use a specific formula to carry out a simple calculation. This is what HMRC did in Mr E’s case.
56. We know Mr E believes HMRC should have done more to consider the evidence he sent to support his view that it had undercalculated his underpayments. We have found no guidance that says HMRC should calculate the arrears in the way Mr E thinks it should have.
57. As this is the case, we found no failings in how HMRC calculated what Mr E was owed.
HMEC allowed his employer to incorrectly report the arrears payment
And
HMRC provided a poor level of customer service
58. We have considered these two issues separately but are giving our decision for both issues together. We can see that for both issues HMRC has already acknowledged some mistakes and offered Mr E a consolatory payment in relation to them.
59. Mr E told us that during the process of raising his complaints he encountered issues with HMRC’s customer service. This included issues making complaints on the telephone and HMRC not always acknowledging his complaints.
60. Mr E also said HMRC had allowed his employer to incorrectly report the arrears payment it paid him as earnings in March 2023, when that was not the case. He is concerned this meant he then paid more tax on the arrears payment than he should have.
61. The ‘Income Tax (Earnings and Pensions) Act 2003’ requires employers to report arrears payments differently depending on whether they relate to the current tax year or closed tax years. The core principle is that for tax purposes, arrears should be treated as income of the year in which the employee was entitled to them, not the year they were paid.
62. Employers must allocate arrears to the tax year in which the entitlement arose, and calculate tax using the rates and code from that year. They need to submit an update for each closed year to correct historical records. The update should show the difference from the original reported amount. Employers must also give the employee a letter detailing the revised pay and deductions for each affected year.
59.Mr E’s employer did not follow this procedure and simply reported the arrears as income in the month that it paid the arrears payment to him. As a result, Mr E paid too much tax on this payment.
63. We cannot say HMRC was responsible for this overpayment of tax as it is the employer’s responsibility to follow the correct procedure. Mr E informed HMRC his employer had not followed the correct process for calculating tax owed on the arrears payment. It is not for us to make any findings in relation to the actions of Mr E’s employer..
64. HMRC Manual ‘PAYE70023 - PAYE operation: aspects of PAYE operation - employer: payment of arrears of pay for closed tax years’ sets out what HMRC should do if an employer makes a payment of arrears in a lump sum in the way that happened here.
61.When Mr E made HMRC aware of the issue it recalculated his tax as the HMRD Manual PAYE70023 says it should. Unfortunately, HMRC did not consider all the information it should have and as a result the tax it calculated he overpaid was not correct.
62.Mr E then had to contact HMRC again to rectify this issue. Following this further contact HMRC reconsidered its position and completed a fresh calculation in July 2023. From the information available to us it appears Mr E accepted this revised overpayment and has not raised a complaint that this was not correct. As this is the case we can see HMRC put right any financial impact by taking action to reconsider its calculation when it initially did not get this correct. As a result, there is nothing to suggest Mr E is still financially worse off.
65. To consider if HMRC has done enough to put right the impact on Mr E we referred to HMRC’s ‘Complaints and Remedy Guidance’. This sets out HMRC’s policy on financial redress and gives details of the rules under which it can make financial redress payments. We can see the impact on Mr E is added frustration and stress that he had to go back to HMRC twice to get his tax position rectified.
66. In relation to financial redress payments the guidance says they are not intended to equate to damages awarded by the courts. It sets out that HMRC looks to comply with the Ombudsman’s Principles for Remedy, while being mindful of the constraints imposed by the fact that payments are funded from the public purse.
67. The AO considered the HMRC complaints and remedy guidance when it offered Mr E £25 in relation to HMRC delaying responding to Mr E’s MP.
68. We have not found there were any unreasonable delays in HMRC dealing with Mr E’s complaint. Considering the whole timeline of events there are no periods where the complaint was not progressing. We understand the issues did take a long time to be fully addressed, and we are sorry to hear this caused Mr E more frustration and added stress.
67.HMRC does not publish details of expected timescales of how quickly it will respond to a customer or how long it will take to resolve a complaint. As this is the case we have no set standards to measure the HMRC’s responses by. We cannot see any undue delays in providing responses, other than the issue the AO highlighted with HMRC not promptly responding to the letter from Mr E’s MP.
69. It is a failing that HMRC did not fully address the issue with Mr E overpaying tax on the first occasion. This is not in line with the HMRC Charter, which says: ‘When you get in touch with us, we’ll make sure that the people you deal with have the right level of expertise. We’ll answer your questions and resolve things first time, or as quickly as we can’.
69.We know HMRC already considered this failure and offered Mr E a further £60 in recognition of the impact of the poor service he received.
70. HMRC has acknowledged it took longer than it should to rectify this issue and the poor customer service. Following the AO recommending a payment of £25, HMRC offered Mr E a further payment of £60. Taking the total it offered Mr E to £85 for the impact of the poor administration.
71. HMRC has already considered the failings we have found in line with its own complaints and remedy guidance.
72. The principle that HMRC used to offer Mr E a financial remedy is reflected in the UK Central Government Complaint Standards which say organisations should offer fair remedies to put things right.
73. Our Principles for Remedy also set out that where maladministration or poor service has led to injustice or hardship, public bodies should try to offer a remedy that returns the complainant to the position they would have been in otherwise. If that is not possible, the remedy should compensate them appropriately. Remedies should also be offered, where appropriate, to others who have suffered injustice or hardship as a result of the same maladministration or poor service. There are no automatic or routine remedies for injustice or hardship resulting from maladministration or poor service. Remedies may be financial or non-financial.
74. In relation to the impact on Mr E, we have not seen a financial impact as HHMRC took action to recalculate the overpayment of tax and put Mr E back in the position he would have been. As this is the case the impact was frustration that Mr E had to approach HMRC again when it did not originally get this right. We are sorry to hear about the impact these issues had on Mr E.
75. Frustration of this kind would be on level two of our severity of injustice scale. Our scale allows us to ensure the recommendations we make are consistent and transparent for everyone who uses our service. A case will generally be level two if we consider the person affected has experienced a relatively low impact injustice such as distress inconvenience or inconvenience. We will usually consider an apology and a small financial remedy payment to be an appropriate remedy for these cases.
76. As HMRC has already provided a financial remedy in line with its own guidance, we found it has already done enough to put right the impact on Mr E.
77. After considering all aspects of Mr E’s complaint we do not uphold his complaint. This concludes our report. We wish Mr E all the best for the future.