The recent court of appeal decision has overturned the previous Employment Tribunal judgement that for the purposes of the application of the National Minimum Wage (NMW) time spent sleeping in should be paid at an hourly rate rather than as an allowance.
The previous interpretation had been followed by HMRC and they had made available a Social Care Compliance Scheme (SCCS) to which employers could sign up.
This scheme gave employers a year in which to identify what was owed to employees and HMRC in payroll taxes, for a period of up to 6 years.
The effect on providers varies depending on their situation
Some have successfully negotiated increased fees from Local Authority commissioners to pay the new rate and this should mean a better deal for staff going forward.
However, no Local Authority is likely to pay for the back pay, calculated at over £400m for the sector. Some providers have already decided to pay the amount, others were awaiting the outcome of the appeal before deciding.
The court of appeal decision could still be appealed by Unison and so the issue is not yet finalised. However, providers need to know how to deal with the impact of the decision on their accounts. Figure 1 sets out some common issues for providers.
There are three accounting issues that need to be considered and applied to the specific circumstances of the provider.
The first issue is the basis of valuation for the back pay liability. Table 1 sets out the basis for valuation and whether the amount is included in the balance sheet as a provision or noted as a contingent liability. If the amount can be estimated reliably and there is a >50% chance of having to pay, then it should be included in the balance sheet.
|FRS 102 Section 21.4 - 21.11 and SORP Section 7||Should provide if a) there is an
obligation at the report-ing date,
b) it is probable (ie >50% chance) and c) the amount of the obligation can be estimated reliably
|If there is a possible but uncertain obligation which is not probable and/or cannot be estimated reliably then it should be included in the notes as a contingent liability|
Table 1: Basis for Valuation
Up until the outcome of this appeal many, including the HMRC, had taken the view that there was a >50% chance of having to pay. This would mean that accounts have already been filed with this provision in place.
Others have yet to calculate the liability or believe that the probability was less than 50% and so have disclosed a contingent liability in the notes.
The second issue is that for some providers there is a risk that the scale of the liability would push them into potential insolvency. The two tests for insolvency are:
|Insolvency Test One||Inability to pay debts as they become due|
|Insolvency Test Two||
The value of liabilities exceeds the value of assets
The key point is not being able to pay debts as they become due. The SCCS gives some time before payments need to be made so there is not an immediate impact but the provider will need to consider carefully whether it will be able to pay when due.
The third issue is the disclosure of the Going Concern status of the provider. The accounting rules summarised below require that the accounts present the situation in the main report and, if material, in the accounting policy.
Reporting issues if large enough to affect Going Concern Status
- The Going Concern paragraph in the Trustees Annual report (for charities) or Directors report (Companies and others) would need to reference the issue
- The accounting policies ought to disclose the approach to this material uncertainty
- The Auditor has a responsibility to report.
The auditors also have a duty to report independently on going concern matters.
The situation is complex and providers will need to consider carefully their position. Please do contact our expert in this area, Chris Harris, for further information. Alternatively, send us an online enquiry.
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