Investment Zones could be a headache for payroll

One of the legacies of Liz Truss’ short term in Government could well be “Investment Zones” – areas of the country with a bevy of tax and consenting incentives to attract new business.

Levelling Up Secretary Michael Gove has said he is “reviewing” the policy but his concerns seem to largely concern the consenting incentives, which could harm the environment – not the tax changes.

Given that it’s worth starting to think about how you might handle those tax incentives if these Investment Zones are launched next year, as that is currently the plan.

The tax benefits

The main thing enticing both new businesses and businesses expanding into these areas will be tax benefits, which will generally be offered for ten years.

The current plan is to offer:

– 100% relief on business rates on newly occupied business sites in these areas, and for some businesses expanding in the area.

– 100% capital allowance for ‘qualifying expenditure’ on new plant and machinery in the first year.

– An ability to reduce taxable profits by 20% of their expenditure on new non-residential buildings or structures every year for five years – so essentially an ability to write off 100% of the value of qualifying property investment.

– Full stamp duty relief for land or buildings bought – for residential or business purposes – in the zone.

– Zero-rating of the employer contribution to National Insurance for employee income of up to £50,270 a year, for new employees working on the site for at least 60 per cent of their time.

That last one is likely to cause the most headaches for payroll.

Why you might need several payroll systems

The zero-rating of employer contributions to National Insurance will result in a separate class of employees for most businesses operating in these zones – unless everyone in that business is very well-paid.

Any business that operates both in and out of an investment zone will need two different “types” of employee in their system – as an employee making £40,000 in the zone will have no national insurance paid out by their employer, while one employed somewhere else will need the usual amount.

Even businesses operating entirely inside the zones will likely need to set up two types of employee as well, as some employees could make more than the £50,270 cutoff, or work less than 60% of the time in those zones.

Plus there is also the possibility of a whole third class of employee – those employed in a Freeport, where National Insurance is also zero-rated, but only for employees earning less than £25,001 a year.

Then add in the fact that this is just for England – there is also an intention to set these up in Wales and Scotland too, but with input from the devolved governments. This could mean a whole new level of complexity.

If Gove is looking for a way to make the system simpler in his review – matching the Freeport and Investment Zone rate would go a long way towards this.

Modern cloud-based payroll software like KeyPay will be able to handle this, as there is no chance of it ever being out of date and automation makes this kind of complexity simple. But older software could be seriously challenged.

How to test your system: Freeports

Schemes similar to the new Investment Zones have existed for a while, and can be used to test your systems.

One easy way to check whether your current payroll system is ready for Investment Zones is by looking at if they can handle freeports now.

The National Insurance zero-rating threshold is totally different for Freeports. But the calculations are close enough that software that can handle freeport National Insurance zero-rating will probably be ready for Investment Zones too.

By Suzanne Gallagher, UK product manager for KeyPay

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