Auto-confusion

Auto-enrolment is a subject being raised more and more by professional connections, such as accountants and solicitors. One of the most common queries is about director-only businesses. They're exempt, aren't they? The answer is no, not necessarily. It might be helpful to set out the basic points.

The Pensions Regulator guidance gives the following outlines.

Automatic enrolment duties don't apply when a company or individual are not considered an employer. You won't have any duties if you meet one of the following criteria:

1. You're a sole director company, with no other staff;

2. Your company has a number of directors, none of whom has an employment contract; and

3. Your company has a number of directors, only one of whom has an employment contract.

Automatic enrolment duties will apply if more than one director has a contract of employment.

The first of these three is fairly straightforward. It is the other two definitions that seem to raise questions. As most people will know, a contract of employment can be deemed to exist even where there's no formal written document in place.

That point turns primarily whether the directors are employees or office holders. The gov.uk website gives criteria for being considered a non-employed office holder. These are where:

• There is no contract or service agreement;

• Their duties are minimal and are only those required under the relevant statute, constitution or trust deed;

• They don't get a salary or any other form of regular payment for their services;

• The only payment they get is a voluntary payment (honorarium) regardless of the work they do; and

• They're effectively working as an independent office and are not under the close supervision or control of the appointing body.

If there remains some doubt about a director's employment status, the company would naturally need to take additional advice. In the end however, it may come down to whether it's worth arguing the point with the Pensions Regulator: it may be simpler to just comply with auto-enrolment duties.

Lastly, it's worth pointing out that another 'get-out clause' may not be all it seems either.
Some companies with two or more directors are of the belief they sidestep the rules because they take
a low salary.

However, while they may certainly fall under the threshold for automatic enrolment and contributions, there is more to it than that. The employer would still need to:

• Select a pension scheme (although if no one is being auto-enrolled the company needn't go through with full implementation);

• Register with the Pensions Regulator;

• Formally communicate with company employees;

• Assess employees on the company staging date and every pay reference period thereafter;

• For any staff that elect to join the pension scheme the employer must enrol them in the scheme and collect and forward any employee contributions; and

• Keep appropriate records for up to six years.

I've come across a lot of small businesses (and their business advisers) who think they're too small to be affected. The key message therefore is that almost every company with more than one person involved will need to spend time looking at auto-enrolment. Simply burying your head in the sand won't help, since non-compliance fines could just make it worse.

The good news however is that by speaking to an adviser, most of these companies can sort matters out quite quickly and inexpensively - and then get back to running their business. 

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser